What is happening with Argentine gold (or part of it)? This is a question that has resonated a lot in recent weeks in different media. “The mystery of Argentine gold”, “Milei takes out the gold bars” or “Milei withdraws more than a billion dollars from Argentina and refuses to give explanations”. These are some of the headlines in the press regarding the departure of part of Argentine gold abroad. However, these headlines, in addition to creating expectation and mystery, do not show at first glance the real reason for this movement: Javier Milei’s struggle to avoid default (which some analysis houses consider inevitable) without fueling a devastating inflation that has been plaguing the Argentine economy for years.
The Argentine economy is in a very complex situation. Economic activity is contracting due to the austerity imposed by the government to try to balance the accounts, a strategy that is having some budgetary success, since Argentina has already accumulated several surpluses in recent months, in addition to a large external surplus. The problem is that this austerity has led the economy to contract by 3.2% in the first half of the year. GDP is falling and at the same time debt maturities from past excesses are appearing. In other words, the spending that stimulated the economy in the past must be repaid now that the economy is contracting. The refinancing of this debt with new peso issues (which previous governments have done) It would be like running a hamster wheel until the rodent dies of exhaustion.
Without going any further, in 2025 the Government will have to face maturities of 8 billion dollars. This is where the gold of the central bank and Milei’s plan to continue moderating inflation come into play. This gold is sent abroad to be “delivered” as collateral in exchange for a loan that allows Argentina to refinance the next maturities of its debt. The transfer of these bars to a safe jurisdiction increases the possibilities of obtaining this loan at a better “price” (interest rate), thus avoiding a higher cost for Argentines. All this was revealed by Milei himself and his Minister of Economy a few weeks ago, although it seems to have been forgotten.
Gold as REPO collateral
President Javier Milei explained in radio broadcasts in July that he would seek a REPO (repurchase agreement) agreement in which the Argentine central bank would use its gold as collateral or guarantee to refinance the principal of certain debt maturities. The Argentine president explained precisely that The transfer of gold bars abroad was intended to achieve this REPOthat is, a contract in which one party buys a certain asset from the other and simultaneously agrees to the reverse transaction over a certain period of time. In this type of REPO transaction, it is not an actual sale of the pledged asset (gold), but rather the use of this asset as collateral to obtain a loan.
With this deal, Milei can convince private investors to provide the $8 billion it needs without increasing Argentina’s monetary base. Historically, this would have been the solution: the central bank would have issued $8 billion in pesos to refinance that debt, which would have increased the supply of pesos, once again fueling inflationary forces through monetary policy. This time, it appears, will be different. Milei government sought a ruse or a risky financial strategy (gold may be lost) but bold to avoid default without generating further inflation.
Criticism of Milei’s plan
Some critics, such as the former Minister of Economy in the government of Alberto Fernández, Martín Guzmán, used his X account to criticize Milei’s decision to use gold as collateral: “Is this why they are withdrawing gold from the Central Bank of the country, Milei, Caputo and Bausili?” And he added: “Clarification: a pension is like pawning your grandmother’s jewelry. You give the gold in exchange for dollars. Then you have to return the dollars to get the gold back. If you don’t have the dollars, the pawnbroker (in this case, an international bank) keeps the gold.“.
But the truth is that the other options, while attractive in the short term, would continue to aggravate Argentina’s problems in the medium and long term. Today, Argentina does not have those $8 billion, not even accumulating all the budget surpluses accumulated by Milei. The simplest option would be to refinance that debt, that is, to pay those billions of dollars with a new issue of public debt of the same amount. The fact is that Argentina does not have access to markets because with the world’s longest default history. Who would lend money to a country that defaults on what it borrows every few years?
A second solution, explains economist Juan Ramón Rallo on his YouTube channel, would be to pay these 8 billion dollars by extracting assets from the central bank’s reserves. The problem is that if the central bank were to consume its reserves to face a payment of such magnitude, the peso would weaken once again, which would generate a new surge in inflation at the very moment when the monthly CPI has managed to moderate to 4% (a level that is still extremely high, but is already far from the figure that stood at 25% in January).
The third possibility that Javier Milei has, explains Juan Ramón Rallo, is to try in some way to refinance this public debt maturity, that is, to try in some way to get international investors to lend him 8 billion dollars to amortize the maturities of the debt issued so far. To gain the confidence of investors, creditors demand guarantees, especially from a country with a history like Argentina’s.
To gain some credibility, Argentina uses gold as collateralwhich can be physically moved out of Argentina (which reinforces this credibility) to deposit the Argentine gold bars under jurisdiction in London as collateral to obtain international credit. In this way, if in the future the Argentine State does not return the borrowed money, international creditors could keep the gold deposited in London.
Mathias Cormann, secretary general of the Organization for Economic Cooperation and Development (OECD), said Thursday that Javier Milei’s economic plan will help Argentina join the organization, a process that he considers “complicated and extensive,” but fruitful. Beyond fiscal issues, Cormann assured that “the reforms that the government is implementing to improve the currency and unify the exchange rate are a very important and fundamental first step” and that these movements have his support.
