Cavallo’s warning about the economic plan that bothers the Government

Yesterday, in his speech before Congress, Javier Milei assured that the Lowering rates will depend on holding two anchors: fiscal balance and a restrictive monetary policy. The President said that he will defend “with teeth and nails” the surplus because that “will allow the country risk to continue lowering” and, in that way, “the dollar rate.” And he added that maintaining monetary restriction will make “the nominal rate in pesos goes down” as inflation subsides and relative prices are ordered, which – as he proposed – will lead to “an endogenous drop in the interest rate”, with more investment, productivity and better salaries.

Although from different places, Milei and Cavallo agree that The interest rate is a decisive variable for the success of the economic program. The President maintains that, maintaining fiscal balance and a restrictive monetary policy, country risk and inflation will decrease, which will allow a reduction in rates as a natural consequence of the macroeconomic order. Cavallo, on the other hand, warns that this loss should not be left solely to this process and demands accelerate deeper monetary reform, without gradualismto more quickly reduce the real rate and thus facilitate fiscal adjustment and economic opening.

In his blog, Cavallo also highlighted that in the last week of February, “good decisions on public debt management and reserve accumulation,” among them, dispensing with the issuance of debt in pesos at a fixed rate, covering maturities with bonds adjustable by CER and dollar link, and issuing BONAR in dollars under Argentine law. According to him, these measures “They are going in the direction of a good monetary, exchange and financial reform.”

The former official maintained that the impact was immediate: “These decisions meant a drop in the BADLAR rate and the real rate on UVA loans.” Besides, He noted that the slight increase in the dollar sent “the signal that the incentive to carry trade may be reduced.”

However, he stated that The Government should move faster. “Hopefully this movement will convince the Minister of Economy and President Milei that it is worth moving quickly towards a monetary reform like the one I have been preaching in my previous reports,” he wrote. And he was categorical: “In this matter, gradualism is not advisable. Clear and permanent rules must be defined.”

At that point, he recalled that Javier Milei himself, during the campaign, had indicated that the first area where he should advance was monetary, exchange and financial. “These markets adapt to liberal rules with practically no frictional cost”he stated, in contrast to the costs generated by trade opening in the real economy.

One of the central axes of Cavallo’s approach is the relationship between interest rate and fiscal deficit, a link that, he argued, is often underestimated. “The experience of monetary reforms demonstrates the importance of the reform achieving “lower the real interest rate to achieve the necessary fiscal adjustment”he explained.

As an example, he cited the case of Italy after the adoption of the euro. With a debt of 120% of GDP and rates higher than 10%, the financial cost was equivalent to 12% of the product. Entering the euro reduced the rate to 5% and practically eliminated a deficit greater than 6% of GDP.

In the Argentine case, he pointed out that as of December 31, 2025, public debt is equivalent to 70% of GDP. “If a reduction of 100 basis points in the real rate is achieved, the expense public is going to be reduced by 0.7% of GDP”he calculated. And he added: “I am sure that A monetary reform like the one I have been proposing could easily lower the real rate by 300 basis points”, which would imply savings of more than 2% of GDP.

According to Cavallo, That margin would allow reducing taxes, financing public investment or combining both measures.

The former minister also linked the real rate with economic activity. He argued that a reduction in financial costs is “key to reactivation” and to facilitate the adaptation of companies to a context of greater competition, both internal and external.

“Understanding the great benefits of a monetary reform that manages to significantly lower the level of the economy’s real interest rate is key to solving stagflation,” he stated.

In relation to trade opening, warned that a high level of the real rate can complicate the transition. Although he recognized that external competition—including imports from China—can drive positive productive restructuring in the long term, he warned that in the short term it requires accessible financing.

“Opening induces a productive restructuring that can be very burdensome if the private sector does not obtain financing for investments in physical and human capital,” he noted.

Para Horse, monetary reform would not only facilitate access to credit and the development of the capital marketbut it would also allow the exchange rate finds a balance with genuine accumulation of reserves and a significant reduction in country risk.

“The real interest rate, both internal and external, will not drop sufficiently if the exchange market operates with exchange restrictions that do not allow reversing the practice of making it operate with negative net reserves of the Central Bank,” he concluded.