In November 1881, Juan José Dardo Rocha, governor of the Province of Buenos Aires, passed a decree that forbade the use of a widely used torture device called the cepo. The Cambridge Dictionary defines a cepo thus: “formerly a wooden frame in which a criminal was fastened as a punishment.” The Spanish Royal Academy Dictionary goes into greater detail:
Cepo: An instrument made of two thick pieces of wood, which when joined together form round holes in the middle, in which the prisoner’s throat or leg was secured by joining the wood pieces.
So ubiquitous was the cepo in 19th-century Argentina that it features prominently in Gaucho literature, as author Emiliano Tagle notes. Thus, in Juan Moreira (1879), a classic novel about the legendary, gun-slinging outlaw—perhaps the Argentine version of Billy the Kid—author Eduardo González writes that the “inquisitorial instrument” is always found outdoors and beneath a tree. As the prisoner’s neck or legs were exposed, foliage was his “only protection against the sun and frost.” Juan Manuel de Rosas, the much-feared tyrant of Buenos Aires (from 1829 to 1852), would mandate two hours of throat-fastening under the cepo for anyone caught carrying a knife on a religious holiday (so writes the comandante Gregorio Aráoz de Lamadrid).
The inconvenience of carrying the heavy wooden device across long distances led to adaptations of the cepo on military campaigns, Tagle adds. Hence the “rope” cepo, whereby the prisoner’s ankles were tied with a rope, with a half-muzzle at each end tied firmly to a stake; or the so-called “Colombian cepo,” which involved tying a sitting prisoner’s wrists and passing the arms outside his knees, with a stick placed in the space between the back of the knees and the bends of the elbows. Yet another version, the estaqueada, involved forcing the prisoner onto the ground with all four limbs outstretched, and tying each arm and leg to a wooden stake. It features in José Hernández’s epic, Martín Fierro (1872), the most renowned of Gaucho poems.
As nearly a century and a half have elapsed since Dardo Rocha’s humanitarian ban, one would think that the cepo would incite merely antiquarian interest. And yet the word appears prominently in Argentina’s daily economic discussions. Today’s cepo refers not to the 19th-century torture device, but rather to a series of currency and capital controls that severely restrict the flow of US dollars and other hard currencies in and out of the country. Call it the currency clamp.
Indeed, a year into Javier Milei’s presidency, the economic debate in Argentina hinges on when and how the government will end the cepo, as it has committed to doing.
Argentina’s Currency Clamp
At its most basic level, the clamp consists of an official, fixed exchange rate that is held at an artificially low level compared to all others. The government maintains multiple exchange rates although, arguably, the most important dollar rate is that found in the black market. The official rate is used only for direct transactions with the central bank, which are subject to its approval, and is available mostly for the purposes of international trade. The system generally punishes exports (exporters must sell their dollars earned abroad at the official, low rate) and rewards importers (who have privileged access to buy cheap dollars at the official rate).
Last December, President Javier Milei’s newly installed government adjusted the official dollar rate from ARS $400 to $800, announcing a “crawling peg” that devalued the peso by a further 2 percent per month (still well below the monthly inflation rate). At the time of writing, the official rate stands at ARS $1065 per dollar.
But the official rate and the crawling peg are but two of the clamp’s pieces. Its other elements include:
Limits on Dollar Purchases: A $200 limit for individuals on the monthly purchase of US dollars, which are known as “savings dollars” (dólar ahorro) and are only sold at the official rate.
Taxes on Dollar Purchases: All dollar transactions, including the purchase of “savings dollars,” are subject to a withholding of 30 percent on the income tax (ganancias) and personal property or wealth tax (bienes personales), the rates of which vary according to income levels and net worth. Withholdings can be deducted from property or income taxes when applicable. Individuals who are not subject to these taxes can obtain a refund. But because the process can take several months to complete, the exempt individual is still subject to a de facto inflation tax.
Taxes on Credit Card Use Abroad: Argentines who use their local credit card to make payments abroad are subject to the 30 percent withholding on income and personal property tax. This is a means for the government “to discourage Argentine consumers from spending foreign currency overseas,” according to the Cash Management Group.
Repatriation Requirements: Exporters are allowed to make profits abroad in foreign currency, but they are required to repatriate 100 percent of their earnings within a given time to avoid penalties and fines. The government thus gains a share of the exporters’ profits by forcing them to sell their dollars below the market value, at the official exchange rate.
“Financial” Exchange Rates: Argentines can access dollars by buying and selling bonds in domestic and international financial markets. In the domestic market, peso-denominated bonds are bought and then sold in dollars. The rate is the so-called “electronic payments market” dollar or “dólar MEP” (mercado electrónico de pago). If bonds are bought in pesos and then sold in dollars in the international market, then the applicable rate is the so-called “blue-chip swap rate” (dólar contado con liquidación or CCL). As one journalist explains, large numbers of people entered this seemingly complex market due to the strong demand for dollars and the availability of trading apps: “Once relatively obscure terms, ‘MEP’ and ‘blue-chip’ are now mainstream and in the last couple of years, everyone has become a trader.”
Capital Controls: Foreign companies that carry out business in Argentina are not allowed to transfer profits or dividends abroad without the central bank’s permission.
Trapped Dividends: Since the central bank is keen on preventing the outflow of capital, the latter restriction has left around USD $5 billon in trapped dividends in Argentina, according to some estimates. In effect, this amounts to an expropriation, however temporary, of holders of Argentine assets who are abroad.
The currency clamp’s total elimination is required merely to put Argentina on a par with other Latin American countries, let alone to fulfill Milei’s ambitious plan to fully liberalize the Argentine economy. After a year in office, his government has kept the clamp in place, albeit with significant adjustments.
The government scrapped import licenses, which were hard to obtain, slowed the flow of goods into the country, and delayed payments. It also lowered certain tariffs, streamlined some trade operations, and got rid of the “stamping system,” an obsolete means “to control the illegal possession of foreign merchandise” as per Baker McKenzie.
The government allowed the so-called PAIS tax to expire last month. In December 2019, former President Alberto Fernández’s Peronist government introduced this 30 percent levy on the purchase of foreign currency (including “savings dollars”) as well as the purchase of goods and services from abroad by means of credit and debit cards. Online purchases made in foreign currency, including the payment of streaming services, were taxed at 8 percent. Fernández added an additional income and personal property tax withholding of 30 percent for all transactions that fell under the PAIS tax. Subsequently, in July 2023, Fernández broadened the PAIS tax’s scope to include, inter alia, a 7.5 percent levy on imported goods with certain exemptions, such as basic food items and oil industry material.
Upon taking office in December 2023, Milei’s government initially raised the PAIS tax rate on imports to 17.5 percent, but it reinstated the original 7.5 percent rate in September 2024. More recently, in December 2024, the government allowed the PAIS tax to expire (as originally scheduled), but it kept in place the additional, 30 percent withholding on dollar transactions, which include “savings dollars” purchases as well as airfare, holiday packages, and goods and services acquired abroad.
Plus, in recent days, the tax and customs authority announced strict controls, beginning in January 2025, to ensure that Argentines returning from abroad do not exceed the legal limit of a single mobile telephone and tablet computer per person, and up to USD $500 in personal goods bought abroad (with an additional $500 allowed for purchases in duty-free shops). Any excess will be taxed at 50 percent of the exceeded amount. The official rationale, beyond halting the entry of illicit goods, is the protection of the Argentine industry.
Although progress has been made, the clamp’s interference in people’s lives is still inconsistent with free market principles. It is also expensive to keep in place. So why not simply free the exchange rate (arguably the most important price in the market), do away with currency and capital controls, and truly free the economy?
Peso Strength: Interventionist Factors
The government fears that ending the clamp would undo its efforts to lower the spread between the official dollar rate and the black-market, so-called “blue” dollar. The blue dollar rate is considered the closest approximation to a free market rate. And, in an economy that is de facto dollarized, as is the case in Argentina, the clamp has left hard currency readily available only in the parallel, blue dollar market.
Last June, the spread surpassed forty percent when the blue dollar sold for over ARS $1,400. It now sells for ARS $1,220, leaving the spread with the official dollar (at $1055) at 16 percent, a low level by Argentina’s standards. The blue dollar’s steadiness has been matched in the “financial” exchange rate, with the MEP dollar having gained eight percent against the dollar between December 2023, when Milei became president, and November 2024. This is an outlier in global terms since the dollar has strengthened with respect to most currencies since early 2020. It is also a sign of Argentina’s improving fortunes under Milei. Still, the Milei government has maintained currency market interventionism.
The official exchange rate/crawling peg combination has encouraged the carry trade, the practice of borrowing at a low interest rate in one currency to invest at a higher rate in another. Although Finance Minister Luis Caputo has lowered the benchmark interest rate to 32 percent from well over 100 percent in 2023, Argentina’s rate remains high compared to much of the world. And the crawling peg, with its innate predictability, gives speculators confidence that an imminent, drastic devaluation—an event that could make the carry trade unprofitable— is unlikely.
This has spurred the carry trade even among Argentine crop exporters, who have privileged access to dollars thanks to the currency clamp, whose rules to restrict the flow of capital do not apply equally across the board. Thus, as Bloomberg notes, crop exporters “can borrow dollars from their banks, unlike most Argentines hampered by capital controls. They then sell those dollars and invest the pesos they receive in return in high-yield local currency assets.” While current policies remain in place, the carry trade will remain a factor in the peso’s relative strength.
In a more direct form of interventionism, the central bank has used pesos to buy over USD $20 billion in currency markets. As recently as December 19, the central bank intervened in the CCL/blue chip swap rate market, buying over USD $500 million worth of dollar-denominated bonds while selling an equivalent bond amount in pesos. The aim was to halt a sudden spike in the spread between the official rate and the “financial” rate, which had increased from as low as one percent to 16 percent in a matter of days. A similar rise was seen in the official/blue dollar spread.
Much of the total peso amount that the government has deployed to buy dollars was freshly printed, as the year-on-year growth rate of the monetary base grew rapidly during the first half of the year. Despite Milei’s campaign promise to shut down the central bank, its printers were kept busy during the first six months of his presidency.
Peso Strength: Free Market Factors
Beginning in July, though, the central bank has implemented a zero-emission policy, which, as Reuters reported, involves no longer issuing pesos “to pay interest on certain debts.” This has slowed down the year-on-year growth rate of the monetary base and helped to reduce monthly inflation from 25 percent last December 2023 to 2.4 percent in November 2024, an achievement that, though commendable, would still leave annual inflation for 2025 well into double digits.
Markets do expect a further fall in inflation, however, with bond prices rising over 150 percent and country risk falling to below 600 from nearly 3,000 in 2022. Argentina’s economy exited recession in the third quarter of 2024 (with an impressive growth rate of nearly 4 percent) amid a cascade of bullish signals from global players. In recent weeks, Fitch upgraded Argentina’s debt to CCC (still the lowest junk bond category), J.P. Morgan predicted 8.5 percent growth in 2025 (as industrial activity picks up), and The Economist referred to the country’s “economic miracle” under Milei.
The zero-emission policy also helps explain the local currency’s recent strength. The dollar’s past premium to the peso arose from uneven competition between a monetary base that increased boundlessly and one with carefully restricted growth by comparison. The abrupt stop in the growth of the monetary base suddenly made the currency competitive even against the dollar and other strong, developed-world currencies, especially insofar as market participants expect that the policy has staying power.
Other factors stem from Milei’s free-market reforms. For the first time since 2008, there is a primary fiscal surplus after an impressive 30 percent cut in government spending. The government is also carrying out a vigorous deregulation campaign, which has delivered terrific results. For example, the abolition of rent controls led to a drastic increase in the supply of apartments and a corresponding drop of nearly 50 percent in the price of rent in Buenos Aires. And this was before Milei created the Ministry of Deregulation and State Transformation, a team—led by economist Federico Sturzenegger— in charge of undoing the heaps of bureaucratic clutter that made Argentina one of the world’s most regulated economies.
A tax amnesty, which the government announced earlier this year, has also bolstered the peso. Individuals and businesses were allowed to deposit up to USD $100,000 in undeclared funds free of tax or penalties, with a 5 percent surcharge for sums above that amount. The result was an influx of USD $18 billion in amnestied funds, this despite the government’s own claims in January that Argentina did not have enough dollars to dollarize.
As I mentioned at the time along with my colleague, Gabriela Calderón de Burgos, Argentine individuals and businesses hold substantial amounts of dollars outside the formal banking system: $277 billion—over 50 percent of GDP—in the first quarter of 2024, according to official data. Under the right conditions, we argued, much of that money would be deposited in Argentine banks.
The tax amnesty was overly restrictive in our view: why the $100,000 limit, or the tax on sums above that amount? Yet its results only confirm that Argentines have plenty of dollars even if the Argentine state is customarily strapped for cash. As a result, the tax amnesty, together with the fiscal and deregulation factors, has strengthened Argentina’s currency under broadly free market conditions.