by A.M. Freyed
April 25, 2012
If you hold Argentine pesos, watch out.
Argentina to Devalue as
President Slams Free Market
Argentina’s new President
Eduardo Duhalde, blaming free market policies of the last decade
for creating social chaos, asked Congress on Friday to rescue
the economy by allowing a traumatic currency devaluation…
Congress, controlled by
Duhalde’s Peronist party, will almost certainly pass the bill,
which also gives the president powers to reform the foreign
exchange and banking systems, regulate prices of goods and
services, safeguard the value of savers’ bank deposits and
ensure debtors do not go bankrupt.
While Congress prepared to
act this weekend, Argentines huddled in pouring rain outside
banks wondering if they would ever recover their deposits. Drug
stores ran out of medicines like insulin, and shops raised
prices to hedge against a devaluation that will be an effective
income cut for millions.
It hasn’t reached the Western media yet, but all
hell may break out in the Southern half of South America as people brace for
an Argentine devaluation.
A realistic possibility? It’s not as if it
hasn’t happened before.
Last time it took place was more than ten years ago, around the turn of the
century. It wasn’t pretty then and it won’t be pretty now. It could cause
significant political as well as monetary damage.
And it well may take place. The
confiscation of Repsol’s YPF was much more
than just a populist action by a politically savvy president. It was a
calculated economic action. And that’s what a devaluation will be as well.
But this how one deals with monetary mismanagement (if one is not trapped in
the EU). One declares that one’s currency is worth less today than it was
yesterday. If you lost money, well… too bad. In devaluations, everyone
basically takes it on the chin.
So, if you hold Argentine pesos, watch out. Argentina is no small country
and, in fact, once it was one of the richest around. But that was then.
For the past decade it’s staggered from one
political and economic crisis to the next.
“First comes inflation - which Argentina
already has,” one source explains, “and then comes devaluation, which
will be terrible for Argentina and surrounding countries. It’s going to
be a big mess but it’s not being mentioned abroad. So far it’s just for
the newspapers, magazines and commentators down here.”
Inflation in Argentina is claimed to be between
five percent and 12 percent according to government statistics.
But these statistics are disputed considerably
and the Economist Magazine recently stopped using Argentine numbers, calling
them misleading. There already is significant price inflation - serious
price inflation. The Argentine peso is again not well thought of and people
would trade them for dollars if they could.
But there are few dollars in Argentina.
President Cristina Fernández de Kirchner’s
decision to nationalize Argentina’s biggest oil company has been reported on
as populist move, but it had more to do with a desperate need for dollars.
“Argentina is dollar poor in a world that
needs dollars for almost part of its functioning… The world may not NEED
dollars, but that is what it has.”
Argentina doesn’t have much gold, either. That
was looted by previous governments.
Countries stockpile dollars to purchase oil and other commodities. While
Argentina doesn’t have dollars, it’s got oil and oil is good as dollars
since one can be purchased for the other.
If Argentina’s officials want dollars now, they
just have to sell oil.
But it won’t be enough. What’s going on apparently is wholesale looting. The
administration is dedicated to buying votes with government favors and then
printing money to pay for them. It negated negative domestic coverage by
literally taking over pulp and paper supplies. No paper, no criticism.
The administration has also raised taxes to increase revenue to a cash
starved central government.
Those in Argentina and the surroundings have seen this before. Sooner or
later, Argentina may devalue the peso formally. The last time round, the
devaluation cut Argentine savings by half to begin with and the damage just
kept growing from there.
There was also a good deal of tension with the IMF. And now there is again.
The IMF recently closed its offices in Argentina, either as a protest or out
of worry that sooner or later the economic crisis would express itself more
chaotically via, say, rioting. Argentina cancelled it’s IMF debts along with
Brazil in 2005.
Argentina wasn’t exactly a success story in the 2000s, but it did return
from the worst of its 2000 monetary disasters. The sad thing is that the
lessons learned haven’t stuck.
The populism that began with Peronism remains in evidence. This provides
cultural entrée for looting, and that’s what successive regimes have done.
In Argentina, sometimes, history really does
Will Shake the World?
As soon as devaluation was considered
possible, a persistent bank run took place in Argentina.
It lasted for over a year and consumed
two-thirds of the country’s foreign-exchange reserves… It had vast
Many Argentinean contracts had continued
to be denominated in pesos, since the currency board did not
eliminate the local currency…
The end of Argentina’s currency board
was harrowing. It led to endless violations of contracts that left
an enduring stain on the investment environment.
It is only logical that the final scene of the
Argentine devaluation will be played out with a devaluation, and it is one
that may shake the world.
This is not something that is being reported
widely yet, certainly not in the Western press, but it will be, certainly if
a devaluation starts to look imminent.
Argentina last devalued its currency over a decade ago and in the process
took down the economies of most of Latin America, including giant Brazil.
Today, it is fashionable to say that Argentina is a far less powerful
country and that the ramifications will be less onerous than they were.
Brazil is said to be delinked from the Argentine economy and next door
neighbor Chile has a slew of Western trading partners.
But this may not be so. For one thing, Argentines have placed their money in
Uruguayan banks over the past decade, preferring to avoid the ones in their
home country. They also hold dollars abroad rather than the unreliable
Last time Argentina devalued, the first wave of injuries involved the
savings accounts of average Argentines.
The middle class was hit hard, first by a
freezing of said accounts and then by a forced conversion to pesos (if they
held dollars in these accounts). Once the conversion was implemented, the
peso was devalued by about half.
Adding insult to injury, withdrawal strictures were placed on the accounts.
This meant that people could only take out fairly paltry amounts of money at
a time. Those that kept significant sums for retirement basically found that
their savings were basically useless.
And so, over time, money migrated to Uruguayan banks.
Uruguay is the “Switzerland of South America.”
If there is a devaluation, Argentine saver would seek to repatriate their
dollars and this surely would shake the Uruguayan banking system. In turn,
this would have an effect on other depositors from around South America that
have also placed significant sums in Uruguay, especially Brazilians and
Chile would not be directly affected, but there is always tension between
Chile and Argentina over Patagonia border issues. With economic tension
often comes military tension, and such tensions are rarely good for
investors or economies.
Price inflation is high in both Uruguay and Brazil. A devaluation in
Argentina would likely have the effect of puncturing the real estate bubble
that both countries now support. In Uruguay land prices have positively
exploded. Once the bubble pops, the economies themselves would subside.
Uruguay is a small country and of itself a subsiding of the economy will
mean little. But Brazil is a top BRIC country and one of China’s closet and
biggest trading partners.
If Brazil’s current economic boom is punctured, the consequences for China
might be grave.
Having lost Europe and America as consumer
destinations, China’s massive industrial infrastructure has been kept afloat
partly by trade with the BRICS and with South America generally, where
economies are still doing fairly well.
But China itself is undergoing various political strains because and piling
economic strains on top of them will only increase the difficulties that
giant state has in continuing to make economic gains. It is quite likely,
that China’s economy would be caught up in the same downward chain reaction
that would affect South America itself.
China has been resistant to the economic downdraft sweeping the world. But
if China staggers, along with South America, the sweep of the world’s large
economies will be complete. China, Europe and the US were the three legs of
the stool on which the world’s economy sat.
An Argentine default can remove the final leg of
This scenario is surely disastrous for most but not for
top elites that are likely trying to create a more expansive
world government. The powers-that-be that seek further
centralization might welcome the kind of rolling economic catastrophe
currently taking shape. In fact, elite connivance may have helped cause it.
Certainly, the world’s central bank economies are conducive to this kind of
boom-and-bust. And with every bust, the world grows closer still and power
and wealth are further centralized.
The world generally is deleveraging now after
the 20th century’s sustained boom. The bust still has a ways to
An Argentine devaluation could be the next step
in such a deleveraging scenario.
Devaluation Fears Boost Capital Flight
by OxResearch Daily Brief Service
Jun 02, 2011
The pre-election increase in capital
Despite record terms of trade, capital flight
increased in the first five months of 2011, reflecting growing fears of a
devaluation after a new administration takes office in December.
In recent years government intervention has led
to increasing distortions that put both fiscal and external surpluses at
In the first four months of 2011
capital flight reached around half the full-year 2010 record, and may
rise pre-election. Argentina has failed to capitalize on record terms of
trade to strengthen fiscal sustainability and consolidate the external
Growing macroeconomic imbalances raise fears of a sharp devaluation in
During the first quarter of 2011 net foreign
assets formation for the nonfinancial private sector reached 3.7 billion
dollars, a quarter-on-quarter rise of 64.1%, and just 4.6% below the
record of the same period of 2010, when the dismissal of former Central
Bank (BCRA) President Martin Redrado boosted demand for foreign
ARGENTINA: Reserves moves become political
boomerang - January 18, 2010).
Residents' net purchases of foreign exchange
reached 2.9 billion dollars, an increase of more than 1.0 billion over
the fourth quarter of 2010. Between 200710 net foreign assets formation
for the nonfinancial private sector reached 57.5 billion dollars,
exceeding the BCRA's current stock of international reserves (52.0
According to private estimates, in the first
four months of 2011 capital flight reached nearly 5.3 billion dollars,
half the record set in full-year 2010. Capital flight is expected to
accelerate in the second half of the year due to the October
Record terms of trade .
Paradoxically, in the first quarter growing capital flight growth
coincided with a new record in Argentina's terms of trade, illustrating
the obstacles that poor credibility poses for potential economic growth:
In the first quarter export prices rose 17.6%, in comparison with 9.4%
for import prices. As a result, the terms of trade expanded by 7.4%, a
new peak that exceeded the previous record set in the first decade of
the 20th century.
At present the terms of trade are more than 50% higher than the average
of the 1990s, and 27% higher than the average for the past decade, a
period characterized by favorable terms of trade for developing
Since 2002 the gains from terms of trade reached 70.0 billion dollars,
around 35% higher than the current stock of international reserves, and
have been a major driver of the trade surplus, one of the pillars of
macroeconomic stability in the last decade. Measured in 2001 prices, the
first quarter trade surplus (1.8 billion dollars) would become a deficit
of 2.7 billion.
This highlights the economy's vulnerability
to a sudden change in international commodities prices.
Slow reserves growth.
Despite the large trade surplus, since the beginning of 2010 the
increase in the BCRA's international reserves has been meager: between
January 2010 and April 2011 the accumulated trade surplus reached 14.7
billion dollars, while reserves rose by just 3.9 billion (8.2%). Thus,
the trade surplus has mostly fed capital flight.
More recently, growing capital flight has
been reflected in the increasing gap between the official and black
market exchange rates: by mid-May 2011 the black market rate had reached
4.34 pesos to the dollar, against 4.08 in the formal market (a
differential of 6.4%). One year earlier, the gap was just 0.8%.
The increase is more worrisome because it
takes place in the second quarter, when seasonal foreign exchange is
abundant, due to the oil seeds harvest.
On the other hand, the real appreciation of the peso mostly driven by an
inflation rate that, since 2007, has ranged between 1525% annually has
worsened growing competitiveness problems, reflected in the steady fall
in the trade surplus (see
ARGENTINA: Shrinking surplus renews economic
concerns - April 18, 2011):
Labour costs have increased in dollars:
between January 2010 and March 2011 the
wage index expanded by around 30%, while the nominal exchange rate
weakened by less than 7% (see
ARGENTINA: Inflation pressures boost wage
demands - February 22, 2011).
Competitiveness problems boost fears of a
sharp exchange rate adjustment next year, as the new administration
adopts adjustment measures during its first year.
The pace of currency depreciation has accelerated in recent months:
while the nominal exchange rate had fallen by just 4.7% in 2010
(compared to a rise of around 25.0% in the consumer price index), in the
first five months of 2011 it fell by 2.8%.
However, a moderate depreciation may not be
enough to correct the growing macroeconomic imbalances (both fiscal and
external), even if the international economic scenario remains as benign
for developing countries as it is at present.
Although the fiscal accounts still appear strong, this is mainly the
result of extraordinary revenues, such as profit transfers from the BCRA
and social security agency ANSES, and transitory lending from the
Excluding these revenues, the primary
surplus, which in the first quarter reached 4.8 billion pesos, would
fall to just 1.5 billion, while the global deficit of around 350
million pesos would rise to 3.7 billion.
The deterioration of the fiscal position has
been driven by the notable expansion of public expenditure, which in the
last five quarters expanded at rates that ranged between 3045%, mainly
driven by transfers to the energy sector as transport and energy tariffs
Given that part of tax revenues are dollarized (due to taxes on foreign
trade), and that most public debt is currently denominated in pesos, the
next government would have some incentive to encourage a sharp
devaluation to restore fiscal sustainability.
Competitiveness problems boost trade
The government's new measures to preserve the stock of international
reserves to maintain macroeconomic stability has led to new disputes
with Argentina's main trading partners.
In particular, the implementation of new
import licenses last February has worsened bilateral relations with
Brazil, Argentina's main trading partner.
In mid-May the Brazilian government blocked
car imports of all origins, but the measure especially affected
Argentina, as car exports to that country are, after grains and their
derivatives, its main export product.
The Brazilian restriction was thus seen as a
retaliatory measure. In addition, the car industry is the main driver of
the manufacturing sector, with growth rates that largely exceed those of
industry as a whole, so import bans in Brazil will affect the expansion
of the manufacturing sector and thus economic growth.
The dispute has not been settled yet indeed,
Brazil has threatened new import bans.
The favorable impact of a devaluation on
dollar-denominated fiscal revenues and on waning competitiveness is likely
to make such a measure increasingly attractive to the incoming government in
the face of rising macroeconomic imbalances.
Concerns over this prospect may boost capital
flight in the coming months.