Looking for Dollars

Argentina – Another Peso Devaluation Imminent?

The Argentine Peso vs. the US dollar over the past decade, official rate

By Pater Tenebrarum

Argentina famously employs 'dollar-sniffing' dogs at its borders to keep its citizens from getting their savings out of the hands of the domestic kleptocracy to a safe haven. After years of soaring inflation, the black market rate of the peso has fallen to about half the official rate. As a result, rumors of an imminent devaluation are growing more pronounced of late.

In a new gambit to get hold of more foreign exchange, Argentina's government is offering people who bring undeclared dollars home an amnesty. This is almost like saying: 'please bring the stuff back for us to steal'. It probably won't work. 

In fact, given the strenuous denials by the government, which insists that there will never – honest injun! – be a devaluation of the peso, it is almost certain that it will be devalued, based on the 'never believe anything until it's been officially denied' principle. In typical government fashion, fingers are wagged in the direction of 'those who want to profit from a devaluation', i.e., it's all the fault of evil speculators.

Meanwhile, president Fernandez-Kirchner has become tainted by a growing scandal over a close friend of her family who apparently shipped dollars out of Argentina by the plane load. As a result, her government is threatened by new political competition from the left (just what Argentina urgently needs: more socialism!).

Here are excerpts from a recent article describing the situation: 

“Argentina's government announced new measures on Tuesday intended to suck up undeclared dollars in response to growing pressure to abruptly devalue the nation's currency.

Economy Minister Hernan Lorenzino said the new tax-free bonds and certificates of deposit will pull into the banking system the foreign currencies that Argentines have hidden under mattresses and spirited out to illegal tax havens. Both measures are being sent to congress for approval, presumably because enabling people to declare cash without paying criminal penalties requires the force of law.

Argentines will need to deposit these undeclared dollars at the Central Bank, which will issue CDs for the entire amounts, Central Bank President Mercedes Marco del Pont said. The bonds will pay 4 percent interest through 2017, Lorenzino said.

The money will be used to finance energy and home construction projects, generating jobs and stimulating the economy. Both sectors have stalled, in part because speculation about future inflation and a possible devaluation has made long-term investments in Argentina too risky. […]

A closely watched sign of the country's economic future is the illegal currency market, where Argentines are increasingly desperate to ditch their pesos as inflation climbs above 25 percent a year. Amid fears of a potential currency shock, they're now trading nearly 10 pesos for each dollar — close to half the official value of 5.2.

This "blue dollar" trading remains marginal compared to the overall economy, but it's a free market, stubbornly beyond the government's control, and as such, it's increasingly being looked at by Argentines trying to protect their pocketbooks. The central bank periodically releases dollars to rein it in, but that's risky as well, now that Argentina's reserves have dropped by more than 20 percent, to $39.75 billion. […]

Fernandez waved away the trouble in a speech at the Casa Rosada government house Monday night. "Those who want to make money at the cost of a devaluation that the people will have to pay for will have to wait for another government," she declared. (emphasis added)

It should be noted that the energy sector has also 'stalled' because the government nationalized YPF Repsol, staffing it with its cronies.

Meanwhile, the growing scandal around businessman Lazaro Baez is proving very uncomfortable for Fernandez-Kirchner. While her popularity dwindles, the prosecutor of the case is receiving death threats: 

"They're raising this idea again because an election period is approaching," she added. "Every time there's an election, on side there's the economy and on the other, the scandals. It's typical of every election."

That brief reference to scandals was her first comment yet about allegations that Baez had used his access to the presidential couple to make huge profits that he laundered by having aides fly the cash out of the country in mysterious trips on private planes. The allegations, made by former Baez associates in televised interviews with investigative journalist Jorge Lanata, have made for sensational television in Argentina, and a judge agreed to open a formal investigation of Baez and his associates.

Lanata struck closer still to the president on Sunday night, interviewing Kirchner's former secretary, Miriam Quiroga, who described bags full of cash in the Casa Rosada. She said they were delivered to the southern province of Santa Cruz, where Baez based his business empire and the Kirchners have several homes. Quiroga also alleged that the Kirchners had vaults built to hold the cash.

Judge Julian Ercolini subpoenaed Quiroga to testify in the widening criminal investigation by prosecutor Guillermo Marijuan, and Attorney General Alejandra Gils Carbo ordered additional police protection for the prosecutor, who reported receiving at least two threats that his young daughters will be killed if he doesn't drop the probe.” (emphasis added)

Meanwhile, former Kirchner ally, union leader Hugo Moyano, has become a big critic of the president and has founded a new leftist party to challenge her. Argentina's unions are quite powerful – they have regularly demanded and received huge wage increases that indirectly confirm that the country's inflation rate is far higher than officially reported. 

Conclusion:

Argentina was once the 5^th richest country on earth in terms of per capita GDP. It is richly endowed with natural resources, but things have been going wrong for quite some time now. Looking at Mrs. Fernandez-Kirchner's opposition, that seems unlikely to change. Under Fernandez-Kirchner's rule, with the able assistance of her Yale-educated central bank chief Mercedes dela Pont (who once opined that her money printing was not to blame for soaring prices in Argentina), the peso has been in free-fall anyway, so 'those waiting for devaluation' probably won't have very long to wait (timing-wise, the day after the coming election can be tentatively penciled in for the next big lurch lower).