Milley, the Argentine peso will depreciate by more than 50 percent! Will China lose money in currency swaps with it?

One of the most important economic measures for Argentina's new president, Millay, has finally come out – after repeatedly reiterating that there is "no money", cutting government departments, curtailing new public works projects, planning not to renew labor contracts that have been in force for more than a year, and reducing energy and transportation subsidies.

As part of an emergency measure to help the country's troubled economy, Argentina will devalue the peso by more than 50%. During his presidential campaign, Milley repeatedly criticized the Argentine authorities for indiscriminate banknotes, which led to skyrocketing prices.

Vowed to curb hyperinflation after taking office, promising to abolish the peso and replace it with the dollar in order to get the Argentine economy back on track. But now that he has just taken office, why should he ignore his previous promises and let the Argentine peso depreciate by more than 50% again?

This is because:

Milley and his running mates are planning to "dollarize" the Argentine economy, preparing to demand that Argentine residents, businesses and other entities convert all their holdings of pesos into dollars and give dollar value to all their assets and contracts.

The problem now is that Argentina does not have enough dollars to give up the peso. When everyone is selling pesos and snapping up dollars, the value of the Argentine peso will plummet and the exchange rate will inevitably plummet. Inflation in Argentina is only going to get higher, not suppressed.

Perhaps, in Milley's original scenario, the abandonment of the peso by Argentine residents and businesses would lead to a currency depreciation and a renewed rise in inflation in the short term, but if "the peso is completely replaced by the dollar, the price increase in Argentina may fall to the level of the United States."

I want you to know that after more than a hundred years of decline, we will begin to rebuild Argentina, to redraw the idea of freedom, and although we will have to endure a difficult period, we will continue to move forward – this is what Milley said to the crowd when he was sworn in.

It's a good idea to imagine that Argentina's economic development can't get out of the "middle-income trap" by replacing the increasingly worthless peso with a more stable dollar, and replacing the increasingly worthless peso, and replacing the game that no one cares about in the world?

But the problem is that Argentina is not the United States, and the right to issue dollars belongs to the Federal Reserve, not Argentina. The combined dollar reserves of all the banks in Argentina are not enough for residents to exchange them. This "imbalance between supply and demand" will only cause the game to plummet again, and the decline may be more than 50% of Milley's prediction.

Is the peso expected to plunge again, to the detriment of the mainland?

When the news came out that the Argentine peso might depreciate by more than 50% again, some netizens said worriedly: There will be a significant loss in the currency swap agreement worth 130 billion yuan signed between China and Argentina - the peso we exchanged is worthless.

Nan Sheng can clearly tell everyone that this worry is completely groundless. Currency swaps, which are essentially "credit", can be colloquially understood as "mutual lending".

When the Argentine authorities need the renminbi, they can apply to the central bank of the mainland to implement the agreement. Assuming that it is 10 billion yuan, after the expiration date, the Argentine authorities will return the principal of 10 billion yuan to China, and at the same time pay interest to the mainland.

This is similar to the nature of our Chinese people and enterprises applying for loans from Chinese banks to buy houses. If you borrow RMB, you will end up paying back to the bank, and you will also need to pay interest to the bank – how can this be a loss for the central bank of the mainland?

Second, there is a huge difference between the total amount of agreements signed and the funds actually borrowed. At present, the mainland has signed bilateral currency swap agreements with the central banks or monetary authorities of more than 40 countries and regions, with a total amount of more than 4 trillion yuan.

However, as of the end of September this year, in the currency swap agreement with a total scale of more than 4 trillion yuan, the actual amount of renminbi used by foreign authorities, that is, the total amount of money borrowed by the other party to the mainland, was only 117.1 billion yuan, accounting for less than 3%, and the utilization rate is very low.

The actual proportion of the mainland is even lower, still as of the end of September this year, when the mainland applied to foreign authorities for "borrowed foreign currency, which was converted into only 3.43 billion yuan." The amount is so low that it is beyond the imagination of most netizens.

Why is it that everyone is keen to sign the agreement, but not actively implement it? The reason mentioned above is that the essence of currency swaps is to borrow money, and borrowing money requires paying interest, not without cost.

A currency swap agreement is essentially a temporary financing arrangement for mutual lending. When there is a shortage of foreign exchange in the host country, it is convenient to borrow foreign exchange to meet the needs of national economic development, without being in a hurry and at a loss.

For those countries that are already short of money, especially foreign exchange, they need to be cautious about the eventual interest payments after implementing currency swap agreements. For China, which is not short of foreign exchange, it is enough to borrow symbolically so that the agreement does not become an empty shell. This article is written by Nansheng, please do not reprint or plagiarize without authorization!