Modern Monetary Theory (MMT) Has An Argentina Problem
Proponents of Modern Monetary Theory emphasize that a country that controls its own currency and borrows in its own currency, like the United States, cannot default on its debt. This is because the central bank can, if necessary, “print” the money needed to pay the government’s creditors… — Econofact
The MMT crowd has some ‘splaining to do after Argentina’s default on local currency Treasury Bills (Lecaps) last week.
We have argued for years with our MMT friends about the dubious assumptions and logic that Modern Monetary Theory is built, most importantly, that a sovereign borrower with an independent central bank and currency, by definition, cannot default. Though the debate has evolved over the years to now what is the true definition of “full monetary sovereignty,” a free floating exchange rate is a big assumption, for example, it would always come down to the case of the 1998 Russian default on ruble Treasury bills known as GKOs. to which the MMT crowd would retort, “special case.” Ironically, the Russians paid their hard currency Eurobonds and defaulted on local currency debt, the complete opposite of what MMT concludes.
Argentina could have monetized the Lecaps last week and let the peso float and collapse as the maturing peso debt would have immediately been converted to dollars. The government chose not to.
We would try to explain to our friends that when a sovereign borrower gets into trouble and experiences “rollover risk” and cannot refinance maturing debt due to a sudden stop of market financing, a policy choice must be made. Either monetize the maturing debt and send the country into hyperinflation as Bulgaria did in late 1996, or default and restructure as Russia did in 1998. We suspect Russia chose the latter because much of their debt was held by foreigners, including hedge funds, such as David Tepper, who said the GKO trade was the worst of his career.
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