Fear of Big Crash: Argentina doesn’t know what to do with its money

Fear of a major accident
Argentina doesn’t know what to do with its money

Van Roland Peters, Buenos Aires
4/29/2023, 4:04 PM

Argentina has been suffering from high inflation for years, and real wages have been falling dramatically. A flight of capital now raises fears of national bankruptcy with unintended consequences. At the same time, the banks are sounding the alarm: their vaults are overflowing.

Argentina trembles before financial collapse. In recent days the Argentine peso has temporarily lost more than a quarter of its value against the U.S. dollar — including the main street exchange rate, where most private barter transactions are carried out. The peso has not been denominated since the turn of the century, and now the largest note is worth more than US$2. This has consequences for the population, the economy – and logistical problems for banks and money supply. More notes require more space.

Argentina reported March inflation at 104.3 percent year-on-year, one of the highest in the world. Historically, the South American country has continued to struggle with currency devaluation, except for a few quiet periods, but in recent times the depreciation against the dollar has accelerated even by Argentine standards.

With demand for the dollar exploding since 2018, there hasn’t been a capital flight from the peso like last week. The Ministry of Economic Affairs and the Central Bank initially contained them with different functions. If they don’t get the problem under control and the International Monetary Fund refuses to help, Argentina will go bankrupt. The consequences are unexpected.

The reasons are different. The economy needs dollars for constant imports. However, the central bank’s foreign exchange reserves are very thin. Among other things, she feels the effects of drought affecting the important agricultural sector. Export taxes on its exports otherwise fill dollar stores, but the harvest is poor. Additionally, people don’t trust their own currency anyway due to historical experiences and constant inflation. If you want to save or go abroad, you can’t do without dollars or euros. Meanwhile, companies focus on the street price, called Dólar Blue, and adjust their consumer prices accordingly.

Next president, please

The social consequences of sustained devaluation and price growth are serious. The economy is growing and poverty is increasing. In March, nearly 40 percent of the population fell below the poverty line. Wages have not kept up with inflation for years, and Argentines have lost 25 percent of their purchasing power in recent years. The political forecast for the presidential election in October is similar: incumbent President Alberto Fernández bid farewell via video a few days ago. Peronist will not run again. His chance of success is slim to slim.

Fernández’s tenure began during a crisis, as his predecessor, Mauricio Macri, head of the market-liberal government, was also struggling with capital flight and crisis, so he lost the election in 2019 to the socially conscious Fernández and his deputy Cristina Kirchner. . Then came the pandemic, the war in Ukraine, the drought. Now someone else is inheriting the current and historical problems of the country. A number of candidates have already announced their intention to move to the Casa Rosada government palace in Buenos Aires.

The central bank has relied on controlled dollar exchange rates, purchase limits and conditions for years. To curb capital flight through legal means, the central bank increased interest rates significantly. Argentinians are allowed to earn $200 per month personally and legally, and only if they do not receive certain social benefits. But the demand is more than the official supply. That’s why Dollar Blue exists. It is twice as expensive as what is currently in the bank.

Under Macri, Argentina received the largest loan in the history of the International Monetary Fund (IMF), about $57 billion. But most of the money is long gone and always has to be repaid. In return, Argentina has committed itself to building up its budget deficit targets and dollar reserves. The Argentine government’s rescue mission is now set to negotiate new, looser emergency conditions with the fund in New York within the next three weeks. If the talks fail, Argentina will quickly go bankrupt.

Rumors cause capital flight

The capital flight was fueled by several developments. First, at an economic forum last week, Javier Milei, the right-wing libertarian candidate in this year’s presidential election, proposed introducing the dollar to end the exchange rate mess. There were many rumours. A presidential adviser recommended to Fernandez that the peso be devalued by 30 percent at once, and that he also replace Economy Minister Sergio Massa, it said. The adviser was fired a few days later, but a new rumor spread: the peso would soon be devalued by 50 percent. The result: a run on anything that brings in dollars to eliminate the peso.

Although trading in Dólar Blue is officially illegal, it is widely accepted. Reality has long overtaken legality. Argentina’s media reports across the board as the central bank issues its daily exchange rate against the dollar. There is also Euro Blue. Since Fernández took office in December 2019, the value of the Dólar Blue has increased sixfold. Despite everything, his government did not issue large denomination notes, instead reprinting them in large numbers.

Emergency camp for fake delusion

As the company’s own printing capacity was insufficient, Argentina’s central bank placed its printing orders in Brazil, Spain, France, China, and Malta. Argentina had 10 billion more bills in circulation in March than ever before. More bills mean more space, and some Argentine banks are now in short supply. Vaults are overflowing with money and banks don’t know what to do with it. Some use poorly secured makeshift camps.

More recently, two major banking associations complained to the central bank: “The problematic situation is becoming more and more complex and is causing difficulties in terms of logistics, construction capabilities and high financing costs,” they wrote in a letter. The government announced plans to introduce a 2,000 peso bill. The opposition demanded more in denominations of 5,000 pesos and 10,000 pesos, and the Peronist government said it would only refuse because it did not want to admit defeat.

Argentines experience very practical consequences in their daily lives. An ATM typically holds only 8,000 bills and has low daily withdrawal limits. Many counter the fake illusion with practical solutions and make payments as often as possible through electronic services and bank cards. But much of Argentina’s economy operates on the black market, or gray area, with a third of workers working illegally. It also requires money.