The government of Argentina has allowed companies that do not generate export revenues to take out loans in dollars. 

The goal is to take advantage of funds in United States currency that have recently flowed into the banking system, mainly as a result of government measures encouraging Argentines to bring their stashed dollar savings into the formal economy.

To make that possible, President Javier Milei amended a regulation that had been in place since the 2001 crisis, which restricted access to dollar-denominated credit to companies able to demonstrate income in that currency. 

The rule was intended to prevent borrowers from assuming foreign-currency liabilities without a natural hedge against exchange-rate risk.

It was created to avoid another collapse of the Argentine banking system, like the one that took place 25 years ago, sparking one of the worst economic and political crises in the country’s history.

However, the new regulation comes with a caveat: to qualify for these loans, companies must provide the backing of an export company as collateral. In the 1990s, this benefit was available to all companies. 

Until this provision took effect on June 12, the regulations required banks to verify that applicants for dollar-denominated loans had future revenue in that currency and corresponding sales during the previous year. 

This requirement excluded most companies that operate solely in the domestic market.

Putting dollars to work

Iván Cachanosky, chief economist at the right-wing think tank Fundación Libertad y Progreso, told the Herald that the measure’s goal of channeling idle liquidity into productive credit is a “step in the right direction.” 

For economist Christian Buteler, the initiative was not something businesses were necessarily asking for, but rather an idea from the government itself to promote a type of credit with lower interest rates than those offered in pesos.

“Dollar deposits have grown significantly in the financial system, and there is nowhere to channel them,” Buteler said.

Private-sector dollar deposits exceed US$39 billion, their highest level since the peg between the Argentine peso and the dollar, known as “convertibilidad,” which lasted for over a decade, ended in January 2002. 

Loans in dollars, meanwhile, total about US$23.5 billion and are also at record levels.

Increased risk 

Credit rating agency Moody’s warned that, while the measure may help channel more dollars into the economy, the scheme will need to prove its soundness amid greater exchange rate volatility.

“The primary borrower without foreign-currency income is exposed to a deterioration in its repayment capacity in the face of adverse exchange-rate movements, and the credit quality of the transaction becomes dependent on the financial strength of the guarantor exporter,” it explained in its report on the matter. 

Cachanosky said the effectiveness of the measure will depend largely on the quality of the collateral required by banks, arguing that strong guarantees are essential to prevent risks from spilling over into the financial system. 

Without them, he warned, the impact is likely to be limited, particularly given the small size of Argentina’s credit market.

“It is a sensible measure for deepening financial intermediation and is consistent with the objective of making better use of the dollars already in the system,” he said. “But it requires very strong guarantees.”

He added that the main concern is not the regulatory change itself, but the possibility that lending standards could weaken over time.

“The risk is not the regulation, but that banks become less disciplined in assessing who they lend to,” he said.

Ghosts of the 2001 crisis

The decision stirs emotions that go beyond purely economic considerations. The 2001 crisis, which was caused because dollar-denominated loans were handed out to borrowers without dollar income or adequate guarantees, was an economic, political, and social debacle that left its mark on a generation of Argentines. 

During Carlos Menem’s presidency in the early 1990s, Argentina maintained a fixed exchange rate between the dollar and the Argentine peso known as “convertibilidad,” or convertibility.

Although it proved effective in controlling prices — Argentina had just emerged from a period of hyperinflation in the late 1980s — the system began to falter following Mexico’s “Tequila Effect” crisis in 1995 and Brazil’s “Caipirinha Effect” crisis in 1997.

To remain viable, convertibility required a constant flow of dollars to meet local demand.

But as the decade progressed, that inflow of foreign currency slowed because Argentina became increasingly expensive in dollar terms compared to its neighbors, who had devalued their currencies to cope with the international financial crisis, and less attractive to investors. 

As a result, Argentina stopped receiving foreign investment and had to make up for those dollars with debt from multilateral lending institutions, like the International Monetary Fund (IMF) and the World Bank, while also resorting to increasingly unpopular austerity measures. 

By late 2001, during the presidency of Fernando de la Rúa, public discontent had reached a breaking point. At the same time, growing fears that the peso’s one-to-one peg to the U.S. dollar would collapse triggered a run on bank deposits.

Against that backdrop, the government imposed the so-called “corralito” in December 2001, limiting cash withdrawals from bank accounts to 250 pesos per week. 

The measure was followed by a new development that became known as “corralón.” In short, this meant that dollar-denominated deposits were forcibly converted into pesos at an exchange rate well below market value after the collapse of the convertibility regime in January 2002, inflicting heavy losses on savers.

Should we be worried?

Jorge Carrera, an economist and former Central Bank director during the presidency of Alberto Fernández, told the Herald that the Milei administration’s decision does increase risks to the banking system, but only marginally.

“It is a fairly moderate measure,” he said, noting that requiring an exporting company to act as guarantor is “far better” than the framework that prevailed in the 1990s.

Carrera argued that one of the key lessons of the convertibility collapse was the danger posed by currency mismatches. 

“When the major devaluation came at the end of convertibility, the entire financial system was left in disarray,” he said. “Borrowers could no longer repay their loans, and because those loans were not being repaid, banks could not return depositors’ dollars.”

Economist Buteler said the government ultimately appears to be aiming for a system similar to that of the 1990s, in which loans were widely available in either pesos or dollars — a framework he described as “normal in a bimonetary economy.”

“The problem is that it carries the same risk we saw in 2001: a currency mismatch after a sharp depreciation,” he said. In such a scenario, borrowers earning pesos could see the real burden of their dollar-denominated debts surge as the exchange rate rises.

Still, Buteler argued that the risk is lower today because Argentina no longer operates under a fixed exchange-rate regime. “The exchange rate now fluctuates,” he said. “That does not mean there won’t be movements, but they are unlikely to be on the scale seen at the end of convertibility.”