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Green Fury: Sizing Up The Dollar Debate

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Tax Office AFIP (Photo: Maia Worsnop)

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 Jittery investors have withdrawn some $5bn, around a third of all private-sector deposits, from their dollar-denominated bank accounts.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.”

Dollar Addiction

Exchange Rates as of the week of June 25, 2012 (Photo: Maia Worsnop)

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.”

Exchange House Metropolis (Photo: Maia Worsnop)

Shock Therapy

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.”

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3 Responses to “Green Fury: Sizing Up The Dollar Debate”

  1. Werner Almesberger says:

    I wouldn’t be so sure about the state of the economy. First of all, while it’s true that Argentina has a record income from the recent agricultural boom, we also have to consider that very little of this ended up in investments that provide a lasting value.

    Furthermore, public spending has increased at a much higher rate than earnings. Here is an interesting article that shows the mismatch, and also illustrates what happened in the last few decades each time such a mismatch occurred:

    http://www.lanacion.com.ar/1485291-condicionantes-fiscales-para-un-gasto-publico-sustentable

    I wouldn’t quite trust the supposedly vast reserves of the Central Bank (BCRA). Some of these billions may just be paper value. Note that the government has already demonstrates several times that it is fairly creative when it comes to cloaking inconvenient facts with a friendly but misleading truth.

    For example, when everyone was worried about the upcoming increase of the cost of utilities (electricity, gas, water), the government issued a statement that the tariffs wouldn’t increase. They kept their word. What they did was to remove the subsidiaries. To add insult to injury, the price difference is also subject to taxation. And they also invented a new surcharge for energy imports.

    Another example is the evolution of the value of the peso in relation to the dollar. Anibal Fernandez explained a few weeks ago that anyone who saved in pesos since the last crisis did better than those saving in dollars. And he’s right: there was a brief moment in which the peso was heavily undervalued and interest rates were sky-high. If you bought pesos just at that time and made a long-term deposit at those rates, the inflation of all the years that followed still wouldn’t quite have eaten that advantage. Of course, a few months later, the whole scenario changed, and anyone saving in pesos from then on experienced loss compared to dollars.

    We can look at this from a different angle: if the reserves were as healthy as they say they are, why would the government even bother with all these draconian restrictions ? Particularly, why impose restrictions that hit the common people, who generally don’t move large sums abroad or engage in high-risk speculation ?

    - Werner

  2. Werner Almesberger says:

    Regarding the “Dollar Addiction”. Of course it’s true that many people are used to the dollar being the only thing they can trust in times of trouble, and that may make them escape into dollars even when there’s no reason for doing this.

    However, in the present scenario, there is a very good reason for choosing dollars over pesos: it’s the large difference between the official and the real inflation. The official inflation (some 10% p.a.) determines the interest rates you get at a bank. Fixed deposits are the most popular choice for long-term savings. So the banks give you some 12-13% of interest on a long-term deposit in pesos.

    Meanwhile, the inflation marches on at 20-25% or more. This means that, each year, your savings lose at least 10% of their purchase power.

    If you save in dollars instead, even if you don’t trust banks and keep them in a drawer at home, the annual inflation loss is nearly zero, because Argentina’s overall inflation is almost entirely in pesos but not in dollars. I.e., a bundle of dollars, converted at international market rates, buys you roughly the same amount of goods at a supermarket today than it did a few years ago. But you have to spend a lot more pesos.

    And this assumes that not much changes in the next few years. If inflation accelerates or if here is a devaluation step, then things would look even better for those saving in dollars.

    Savings in pesos would win if the inflation suddenly stopped. But, given the large fiscal deficit, this seems unlikely.

    - Werner

  3. Werner Almesberger says:

    There is a saying that one shouldn’t try to see malice in what can be adequately explained by incompetence. But what if the government’s meddling in finances and economy with all its consequences isn’t just guided by incompetence ?

    First, the apparently unintended bad consequences:

    After a “purge” in 2007, the statistics institute INDEC started to publish inflation figures of only about half the real inflation. This in turn affected the dollar exchange rate and the interests paid on savings. Interests substantially below inflation in turn cause people to rush into assets perceived as stable, such as dollars.

    The government maintains an “official” exchange rate for the dollar. It increasingly diverged from the exchange rate in the free international markets, implying a government subsidiary on the purchase of dollars and a tax on the purchase of pesos. This made saving in dollars even more attractive. Perhaps the cost of this “subsidiary” was one of the reasons why the government started to restrict the purchase of dollars. The restrictions in turn led to the panicked purchases mentioned in the article and drove the price of the free market dollar sky-high.

    The large difference between the free market dollar and the official exchange rate means that anyone who converts foreign currencies to pesos at the official rate loses about 30% of purchase power. Such a conversion happens compulsorily if you make a wire transfer. The loss of purchase power affects foreign tourists, people who have income from abroad, and also retirees who receive a pension from abroad.

    If you look at how things evolved over the last months, the restrictions only got worse, step by step. So it’s reasonable for people to suspect that they haven’t seen the end of it yet. A common fear is that dollar deposits will be forcibly converted to pesos, like it happened in 2002. This is why people withdraw their dollar savings from bank accounts. Some will put their dollars in safe deposit boxes, where the government doesn’t know what’s inside. Demand for safe deposit boxes is very high and exceeds supply, so some may have to keep their cash dollars elsewhere. And some may simply distrust the government to respect the privacy of their safe deposit boxes.

    The bottom line is that there’s probably a large number of people who hoard substantial amounts of money at home. Furthermore, when using this money that’s outside the bank system, the transactions will have to be in cash, i.e., people move around carrying a lot of money. Now, although press perception is highly selective and thus quite possibly misleading, it seems that the number of robberies is booming. Coincidence ?

    This much about consequences. Now, besides genius far beyond the comprehension of mere mortals such as myself, or ineptitude, what else could make the government act the way it does ?

    One common effect of all these measures is that they weaken the middle class. The ability to have savings and thus enjoy a certain amount of independence is one of the key characteristics of the middle class. The government’s “war on the dollar” (which really is a war on savings that preserve their value) can thus be seen as a direct attack right at the heart of the middle class.

    The government has already professed its disdain for the middle class, e.g., when justifying the pesification or when removing subsidiaries on utilities in the wealthier parts of town. The implied message is always that middle class people have more money than they deserve, enjoy an ostentatious lifestyle, and have come to all this by unethical means.

    While this probably sounds good to many of the followers of Peronism, I doubt any of the leaders of this country harbor much of a disdain for wealth and privilege, at least not when it applies to themselves.

    However, if the government does obsess about one thing, then it’s power. It even starts with the name of the ruling party, “front for the victory”, and is reflected in numerous other actions of the government.

    The middle class is an inconvenience where power is concerned. First of all, Peronism is not very popular in the middle class (and Cristina Kirchner style Peronism even less), so they cast the “wrong” votes. Second, the middle class enjoys a certain economical independence, making it disinterested in populist trinkets, and making it difficult to domineer it through existential pressure. Third, an educated middle class can also analyze the government’s work, detect inconsistencies, and articulate criticism. Fourth, the individualistic nature of the middle class implies that, to subdue it, control needs to be exercised at many points. It’s much easier to control, say, a worker’s union, because there are very few heads that make the decisions for a very large number of bodies.

    Now, I’d be more than happy to dismiss all such thoughts about sinister plans as exaggerated and silly paranoia. I hope I will be given reason to do so.

    - Werner

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