Argentines are flocking to buy US dollars, nervous over the government’s latest debt default and pressure from the business community to devalue the Argentine peso for the second time this year.
Officially, US$1 is worth 8.42 pesos. However, it takes 14.26 pesos to buy US$1 on the black market, a gap that shows signs of widening. Argentine President Cristina Kirchner has tried to convince Argentines to stop hoarding greenbacks and spend their pesos instead.
“You have to invest in things you can touch and see. The rest is just fairy tales,” she said recently.
However, her appeals have largely fallen on deaf ears in a country that still bears the scars of its 2001 financial crisis, when the government froze US$70 billion in deposits in a bid to stop a run on the banks. Limited to withdrawals of US$250 a day, Argentines flooded the streets, venting their wrath by banging pots and pans.
Instead of retreating, the memory has grown more raw in recent months as the government again defaulted on the debt it restructured after the crisis. Despite persuading the vast majority of its creditors to accept 70 percent losses on the face value of their bonds, Argentina lost a court battle against two US hedge funds demanding full payment.
A US federal judge barred the country from paying its restructured debt until it settles the US$1.3 billion row, forcing it into a new default on July 30. After the 2001 default — the largest in history at the time — US$100 billion — Argentina shut itself out of global capital markets.
With annual inflation of more than 30 percent and exports sagging, businesses are pressuring Kirchner’s administration to devalue the peso again, after an 18 percent devaluation in January.
“We can’t even export a piece of candy. Argentina is not competitive today,” Argentine Industrial Union president Hector Mendez said.
Consumers are also suffering, cutting back purchases by 1.3 percent in the first half of the year as inflation cut into their salaries. The economy shrank 0.2 percent in the first quarter and shows no signs of recovering. The plethora of woes has put the central bank between a rock and a hard place.
“If it raises the interest rate, it will deepen the recession. If it doesn’t, it will add fuel to the fire of exchange-rate pressure and inflation,” consultancy Abeceb.com economist Belen Olaiz said.
The central bank’s reserves currently stand at US$28 billion, down 45 percent from 2011.
The agriculture sector, traditionally a key source of foreign currency, has been hit by a 15 percent drop in soy prices. Grain farmers are cashing in just US$60 million a day at the central bank, down from US$150 million in July. Analysts say farmers are holding back their soy crops hoping for higher prices.
They say a law designed to restructure Argentina’s debt could be difficult to apply and damage the country’s frail economy. The Argentine Congress approved the bill on Thursday last week and Fernandez formally enacted it later in the day, calling it an “historic event.”
The law would let Argentina pay bondholders locally to skirt the US financial system. The measure also allows creditors abroad to exchange their bonds for new ones not bound by US rules, and it encourages investors to move their Argentine debt from the US to Argentina or France through a debt swap.
“This law will have many difficulties in being applied effectively,” Buenos Aires-based Management & Fit economist Matias Carugati said. “It will be up to the bondholders, who will have to change the jurisdiction of their debt from the US to Argentina or France.”
Abeceb.com economist Dante Sica said it would be difficult for some bondholders to act under the part of the law that lets a unit of Argentina’s Banco Nacion replace the Bank of New York Mellon as the agent for payments.
Sica said there are several “institutional funds that would have legal problems” in accepting this.
Additional reporting by AP
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