There is a saying repeated daily on the streets of Buenos Aires: “Every ten years there is a crisis in Argentina.” Today’s economic climate is nothing like that during the last meltdown, in 2001-2 but for some, the strict currency controls imposed by the government look like the new beginning of an all-too-familiar ending,
Barely a week after President Cristina Fernández de Kirchner’s emphatic re-election in October 2011, the government introduced new measures regulating foreign exchange, ruling that all purchases of foreign currency must first be approved by the tax office, AFIP.
Amid confusion and mounting criticism, then economy minister and vice-president elect Amado Boudou declared that the purpose was simply to clamp down on money laundering and tax evasion, particularly by large banks and businesses. It was the origin of the funds in question that needed to be justified, said Boudou, not how they were used. “Only those in the black informal economy should be nervous,” he added.
However, eight months later, anxiety has spread as everyone finds changing pesos – typically into dollars – increasingly difficult. Since 29th May, those travelling abroad have had to provide details about where they are going, when, and what for. And on 15th June, AFIP changed its online petition form, contradicting Boudou and forcing people to specify the goods or services for which they require dollars.
With legitimate channels blocked, demand at unofficial change houses, known locally as “cuevas” (caves), soared, sending the parallel exchange rate (“dolar blue”) to over $6, a premium of 40% over the official exchange rate. Jittery investors have withdrawn some $5bn, around a third of all private-sector deposits, from their dollar-denominated bank accounts.
Meanwhile, the real estate market, which operates in dollars, is practically paralysed. “People who have dollars are keeping hold of them after seeing how difficult it is to obtain more,” says José Diaz Ortiz, architect and real estate developer in Buenos Aires. “Only people really desperate to sell are moving in the market.”
This level of panic might seem strange in an economy riding on the back of an unprecedented decade-long boom, and one in which, according to Central Bank data, only 11% of the population actually buys dollars.
However, Argentines have a special relationship with the dollar, which is seen as a safe haven after decades of economic instability. For a decade after 1991, the dollar was legal tender and used interchangeably with pesos, and even after the mega devaluation in 2002, estimates today suggest Argentina still has one of the highest number of bills in circulation outside of the US.
For some, the affiliation with the dollar in Argentina extends beyond economic logic. As economist Ricardo Aronskind writes in Página 12: “[since 1975] the dollar has become not only an easy to access asset that maintains its buying power, but something more sociologically meaningful: a secure oasis in a country where there were no guarantees on the political or economic horizon.”
In this context, the reflex response to any sign of economic uncertainty is to stockpile dollars. The country’s economic fundamentals are more solid today than they have been for many years, but growth is now slowing and warning signs are evident. Import restrictions and the phased withdrawal of energy subsidies are measures designed to protect shrinking trade and budget surpluses, respectively. The Central Bank’s dollar reserves are substantial, at over US$46bn, but they are down 10% since peaking at last year, and another US$5.6bn are earmarked in the budget to write down debt in 2012. Almost half of that is due in August, as the government pays holders of the BODEN2012 state bond, issued, ironically enough, ten years earlier in the aftermath of the crisis.
However, at the core of the problem is inflation, which has been running at 20-25% for several years, according to private estimates (official figures are lower but widely discredited). Conventional economic wisdom dictates that a rapid rise in domestic prices make it harder for local businesses to export goods and services. The orthodox counterbalance is currency devaluation, something those now chasing dollars are speculating on but which would generate more inflation, make dollar debt payments more expensive, and hurt those who rely on imported goods.
The government says powerful minority groups with vested interests are trying to force a devaluation by moving money abroad or stockpiling goods meant for export, thereby reducing the supply of dollars in the local market and putting pressure on the peso. These groups, says the government, play on the fears of ordinary savers by spreading doomsday predictions with the help of opposition media.
Its response has been to toughen currency controls and clamp down on black market operations. Illegal currency exchange houses in the centre have been shut down, and sniffer dogs have been deployed at border points to prevent excessive sums of dollar bills leaving the country.
At the same time, officials are appealing on the public to support the country’s “monetary sovereignty”, with President Fernández de Kirchner declaring that she would set an example and convert her dollar savings into pesos. Cabinet Chief Juan Miguel Abal Medina expressed the government’s new official line in his progress report to the Senate: “We need to start thinking in pesos and begin a process of de-dollarisation in the economy.”
Another economist and journalist, Alfredo Zaiat, supports the government’s efforts to crack down on speculation, though says the use of “shock therapy” against what he calls a nation’s obsessive compulsive disorder with the dollar is counterproductive.
Zaiat writes: “When treating alcoholics, the therapy is gradual to avoid fits of desperation caused by total abstinence. Tackling the ‘dollar addicts’ with the same shock treatment has created an exaggerated climate of economic uncertainty.”
Though the tough policy has reduced capital flight and stablised Central Bank reserves, a lack of coordination and transparency have only increased public suspicion and concern, which adds more pressure for devaluation.
And government reassurances have only a limited impact on those who remember similar promises from previous administrations. Though today’s political and economic circumstances are vastly different, hard lessons learnt are not forgotten, and when high-ranking government officials talk about “thinking in pesos”, the reflex response of many is still to bet on the greenback.
As Zaiat concludes: “The immense task of increasing monetary sovereignty requires precise and calm information, regulations over currency exchange that are respected, and explications over the availability of currencies, debt commitments, and local and international economic conditions.”
The dream of monetary sovereignty is shared by many, but imposing it by force looks liable to backfire. And though Argentina´s economic conditions are not indicative of an inevitable crisis, if enough panic is generated, the “every ten years…” prophecy can yet become self-fulfilling.
“Argentina has a special love for the dollar, which would be good to eradicate,” says Diaz Ortiz. “But this will be impossible to change while there is inflation and no confidence in the local currency.”