Adeptly managed by the central bank and the government, the Argentine peso has been plunging in perfect form, an activity it is very, very good at.
Adeptly managed by the central bank and the government, the Argentine peso has been plunging in perfect form, an activity it is very, very good at. And so on Thursday, it plunged 4.1% on the black market, hitting 14 ARS/USD for the first time. With the official rate at 8.39 ARS/USD, the gap between the two soared to a record of 5.61 pesos. A sign that any remaining trace-amounts of confidence in the peso were evaporating.
It was the steepest plunge since January 24, when the central bank devalued the peso by 15%.
“Expect the government to take action to bring this rate down – fast,” wrote Bianca Fernet, stilettos-on-the-ground American economist in Buenos Aires and contributor to Wolf Street. This “Argentine monetary policy,” as she explained in The Bubble, would include:
- Forcing state-owned agencies to sell dollar bonds locally
- Closing the cambios and other currency dealers for a few days
- Raising interbank lending rates, forcing banks to sell assets locally.
On Friday, the peso recovered a smidgen, and the reported “blue dollar” rate dipped below 14 ARS/USD, after the central bank had reportedly blown $10 million of its foreign exchange reserves to prop it up. But it desperately needs those reserves - now below $29 billion - to service its foreign-currency debt, part of which it defaulted on once again on July 31.
“They are reporting a lower rate than the real rate; reporting a rate above 14 is evidently not permitted,” Bianca told me, perhaps tongue in cheek because that’s the only way to take Argentina. Then she added, “The brokers are trading at 14.35 right now.”
On Monday, brokers were selling the dollar at 14.1 ARS/USD, illegal and un-permitted as that may be.
In September 2012, less than two years ago, when the black-market rate dropped to 6.4 ARS/USD (the official rate was 4.66 ARS/USD), Argentina imposed a new set of capital controls to stem the bleeding. How effective were they? By late 2013, the peso had dropped another 36% on the black market to 10 ARS/USD. In the ten months since, it has dropped an additional 30%. A few of those plunges here and there, and pretty soon, you’re talking real money.
In 2001, the peso was still convertible into the US dollar at a rate of one to one. That system began to fall apart in December that year, eventually leading to a “bank holiday” when dollar bank accounts were converted to pesos, and these unwanted pesos were then devalued. Chaos followed. People lost 40% of their savings. They were furious and made their fury known.
Thus ended a unique phase in Argentina that had lasted a little over a decade: a “stable” currency, meaning a currency that loses its value only “gradually,” at the same speed with which the US dollar loses its value. Before that brief interregnum of “stability,” the currency lost its value faster than anyone could count (chart). And in the 13 years since, it once again lost 93% of its value against the dollar.
While Argentines were banging on pots and pans in the streets in 2002, when they lost the first chunk of their money, they now take the continued rape of their currency with a communal shrug, though they might burst into rioting and looting from time to time for other reasons [for example, in December 2013.... What the Hell Just Happened in Córdoba?].
They’ve devised ways of protecting their wealth, including not hanging on to pesos for any longer than they absolutely have to. They’ve become expert at evading the capital controls their government has imposed on them. And their trust in that regime’s ability to handle its finances and the currency is zero.
With the peso spiraling into nothingness and inflation soaring at annual rates of more than 20%, GDP, which is measured in pesos and adjusted for inflation, is no longer measurable with any pretense of accuracy. And that ballyhooed economic growth of prior years may well have been another artful figment of the government’s economic imagination.
Lightning-fast currency devaluation and dizzying bouts of inflation don’t happen accidentally. They’re the result of premeditated policies and actions by the more or less democratically elected government and its central bank. They amount to a (rapidly) creeping and willful default.
The other form of default is how the government deals with its foreign-currency debt – which it cannot devalue. When on July 31, Argentina defaulted on its foreign currency debt for the second time in 13 years, and the sixth time since 1950, it was another expression of its unwillingness to ever pay back any of its debts the honest way. And as we have seen, it doesn’t matter which government is in power.
But the devaluation of the peso against the dollar is even worse in reality: Since 2001, the dollar itself has lost 26% of its buying power, thanks to its adroit management by the Fed. But there is one difference between the rogue government of Argentina and the financial management of the US: the first devalued the peso by 93% in 13 years; the second devalued the dollar by about the same in 100 years.
The report was a zinger: US net capital outflows soared to $153.5 billion, the largest ever recorded in a single month. Read….. Foreigners Dump Record Amount of US Securities, But Who the Heck Is Still Buying?