Argentina can dollarize without dollars, says economist who made the switch before

• Argentina's dollar scarcity shouldn't stop it from dollarizing, Francisco Zalles told Bloomberg.
• The economist previously helped Ecuador dollarize in 2000.
• "For Milei's plan to work, he needs nothing," Zalles said. "He just needs to dollarize."

Argentina's lack of greenbacks shouldn't stop the country from ditching the peso and adopting the dollar, according to an economist with experience on the matter.

Francisco Zalles, an economist who helped Ecuador dollarize in 2000, told Bloomberg that dollars would flow back into Argentina as soon as it makes the switch.

Dollarization is key issue in Argentina's presidential race as frontrunner Javier Milei has touted the idea to help combat hyperinflation and economic turmoil. 

"For Milei's plan to work, he needs nothing," Zalles said. "He just needs to dollarize."

Currently, Argentina's central bank holds a negative $10 billion in net international reserves, according to Bloomberg. At times, the lack of greenbacks has even forced Argentina to use Chinese yuan.

Other commentators have warned that adopting the dollar without ample reserves would be catastrophic. That's because an abrupt peso-to-dollar transition would immediately shrink the money supply, said Monica de Bolle, from the Peterson Institute for International Economics.

"The moment you dollarize, you go through a massive recession, if you're in crisis in the way that Argentina is," she previously told Insider. And by adopting dollars, the nation would no longer be able to implement monetary policy solutions.

But Zalles pointed out that other dollar sources already exist in Argentina that would lower this impact. Given the peso's wild swings, Argentines are already transacting in the dollar, and hold up to $200 billion outside of the banking system. Added to that, $250 billion dollars are stored in overseas accounts.

To be sure, Zalles' advice comes with key caveats. Unlike Argentina, Ecuador's central bank had about $870 million in dollar reserves at the time of its transition, and could rely on political consensus around dollarization. 

Meanwhile, a Milei presidency wouldn't guarantee anything. With few allies in Congress, political support may be dollarization's largest challenge.

De Bolle also pointed out that Ecuador's dollarization was aided by the International Monetary Fund, something Argentina couldn't rely on. 

"In the case of Argentina — much bigger economy. The fund can't lend into this situation, even if it wanted to, because it's too big," de Bolle said.

Zalles also acknowledged that Argentina can't rely solely on dollarization to fix its economy. Capital controls would have to go, while subsidies and state aid would have to come down as well to lower spending.

"The challenge for Argentina will be whether it's able to cut deeply into the fiscal budget," he told Bloomberg. "If Milei does that, dollarization will be a good measure that will bring the deficit under control through growth."