Debt, be not proud – President Javier Milei has reduced the dimensions of this problem from the multi-billion-dollar sums of foreign debt to the average bank arrears of three million or so pesos owed by some six million insolvent households. A country historically living beyond its means is now a question of some of its families living beyond their means.

Or so President Milei would like to see it. Why have bank arrears only come to attention in this year? There are two major causes, both of which can be laid at Milei’s door. When he wasted no time replacing populist economics with market orthodoxy, the burst of confidence included a credit boom which did not ask too many questions. Not coming home to roost until the bottom seemed knocked out of that market confidence by the looming midterm defeat apparently presaged at Buenos Aires provincial level last September, prompting three-digit interest rates at times in a frantic bid to slow down the run on the currency. Thanks to Donald Trump’s bailout, there was neither midterm defeat nor any immediate crash but the consequences of those astronomic interest rates have made themselves felt this year with that six-month time lag so beloved by monetarist theorists. Market economists like to insist on the need for stable ground rules but the goal-posts were brutally moved on those debtors.

Yet beyond these specific factors there is an underlying change of model dictating surplus beyond the fiscal level of balanced budgets – this penalises not only irresponsibly incurred debts but also the credit which is the mainstay of a dynamic economy. An economy geared to the public-sector borrowing requirement also smiles on the private borrower. Kirchnerite economics was a win-win situation for both because chronic deficit financing to fuel populism was funded by printing money, which obviously leads to inflation – that inflation eased the deficit financing with taxes collected in real time while the bills for spending were kicked down the road but this also favoured the private debtor by liquefying liabilities. Thus from seeing inflation as public enemy number one whose defeat gave Milei long months of considerable popularity despite his appalling manners, many of these debtors might even start wanting it back. The nominal wage increases and shrinking debts of the old inflationary economics at least created illusory hopes for the future whereas Milei only offers continuation of a grim reality.

This green light for reckless spending was also central for fostering a model of consumer-led growth but the libertarian government’s model of export-led growth replacing consumer-led completely reverses these premises. That model is geared to solvent producers rather than the last of the big-time spenders who are cut no slack by tight money curbing the inflation to erode their debts, thus suddenly making life much harder – a rug pull, to use the cryptocurrency term.

Milei is seeking an end to an old régime favouring public and private debtors at the expense of savers (of which the Eduardo Duhalde caretaker administration’s corralón of 2002 was perhaps the supreme example) yet saving is not so much an end in itself as a means towards credit and investment, which is not happening due to a missing link somewhere along the banking chain (not least in reaction to the excesses of confidence earlier in this administration) – incredibly, there was less investment last year than in a crisis-ridden 2023, despite the scores of billions pledged under the RIGI incentive scheme for major investments but still in the pipeline. Meanwhile credit is expanding in dollars for the exporters earning the greenbacks for repayment but not in pesos amid a stagnant domestic market – credit has trebled in just two years of the Javier Milei administration to 12 percent of Gross Domestic Product but is still way behind the 76 percent of Brazil or Chile’s 103 percent.

Yet a prime reason why investors are holding back is uncertainty as to whether pro-market policies will be continuing beyond next year’s elections and here Milei’s adamant attitude towards family debts is playing with fire politically. Their own stupid fault, is Milei’s considered opinion on the plight of debtors (isolating it from any macro-economic context), arguing that nobody is putting a pistol to the heads of these families forcing them to go into the red – if he can transform Argentina’s historically deficit-ridden budget into surplus, then so can anybody at household level. Yet in laying the blame squarely at the door of the citizen in debt instead of externalising it to some “caste,” Milei is risking millions of votes in an already disenchanted electorate when opinion polls show him well short of the 40 percent needed to avert an uphill runoff – “country risk” is not the only one.

Milei’s best hope lies in this current surge of bank arrears being mostly rooted in last spring’s pre-electoral colossal interest rates so that private solvency will return with interest rates falling to less than half their previous peaks. The arrears did dip fractionally in June but still hit one family in every eight or millions of people. And since debt for one man is credit for another, this slight dip also signifies less credit for an economy yet to take off (even if the International Monetary Fund continues to forecast 3.5 percent growth this year).

While the Central Bank reform limits government responsibilities to preserving the value of the currency, analysis of these banking debts (of which around two-thirds correspond to digital wallets with over half of lenders falling behind) shows that two-thirds are simply unable to repay rather than running up new debts. As Economy Minister Luis Caputo himself said, if money is lent at a monthly 10 percent while wages go up two percent in line with inflation, repayment becomes improbable – there will be blood. An industrial policy which is not the import substitution of almost a century ago needs to be found to address the wage lag, harnessing technology alongside a tertiary sector which is not parasitic. Monetarism cannot be everything – somebody needs to tell the government: “It’s the economy, stupid!”