- POSTED: 25 Jan 2014 04:57
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Argentina has abandoned an unpopular ban on buying dollars allowing citizens to once again hedge against the plunging value of the peso by hoarding their savings in foreign currency.
BUENOS AIRES: Argentina abandoned an unpopular ban on buying dollars on Friday allowing citizens to once again hedge against the plunging value of the peso by hoarding their savings in foreign currency.
One day after the Argentine peso suffered its worst single-day fall in more than a decade, the move recalled memories of the country's 2001 financial crisis and increased pressure on the government.
President Cristina Kirchner's cabinet dropped the unloved 2011 rule restricting access to foreign currency, although the moved risks adding more downward pressure on the peso.
Jorge Capitanich, the leader of Kirchner's cabinet, said the government has decided "to authorize the purchase of dollars for spending or saving."
Flanked at the press conference by Economy Minister Axel Kicillof, Capitanich argued that the restrictions had always been temporary and had served their purpose.
He also announced that a 35 per cent surcharge on dollar purchases will be reduced to 20 per cent beginning next week.
At about eight pesos to the dollar, he said, the currency "has reached an acceptable level" under a policy of "managed flotation."
Share prices in Madrid tumbled 3.6 per cent on Friday, reflecting global market concern over the plunging currency in Argentina, where a large number of Spanish companies have investments.
Meanwhile, a top official from the International Monetary Fund attending the Davos World Economic Forum in Switzerland said that the IMF was keeping a close eye on events in Argentina.
"Of course, we are monitoring the situation very closely," said IMF Deputy Managing Director Min Zhu, whose organization, which has had no ties with Buenos Aires since 2004, stands "ready to help."
The peso has sunk nearly 19 per cent so far this year, and earlier this week, the government moved to cut back spending abroad by Argentines, to stem the drain on reserves.
The government restricted the number of purchases from abroad made over the Internet to two per year, at a maximum value of $25 each, above which it would impose a 50 percent tax.
The Central Bank of Argentina's rigid management of the official exchange rate has cut into the country's foreign exchange reserves, which have dwindled to $29 billion currently from $52 billion in 2011.
After spending another $120 million to shore up the peso on Tuesday, the bank appeared to abandon the effort to protect its stockpile of dollars.
Economic experts said the effective devaluation was unavoidable.
"They wanted to provoke a shock in the markets to create a bit more public confidence," said Aldo Pignanelli, a former head of the country's central bank.
Dollars as a hedge against inflation
Currency limits have been hugely unpopular with Argentines, who for 40 years have hoarded dollars as a hedge against inflation.
Restrictions on the purchase of dollars allowed a parallel black market to flourish, where the greenback has been trading at about 13 pesos.
By freeing up the peso and exchange controls, the central bank could conceivably calm the market by convincing Argentinians that they could freely exchange their pesos anytime.
That in turn could narrow the gap between official and black market rates and restore some confidence, and competitiveness on global markets.
Economists warn, however, that letting the peso sink increases the risk of even greater inflation, or even hyperinflation.
Government figures show the current rate of inflation to be 11 per cent, but experts believe it is really closer to 28 per cent, and say it could climb to 30 per cent by next year.
Teetering economy weakens Kirchner
Argentina's teetering economy has proven to be a major political liability for Kirchner, who has two more years left in office.
A lawyer by training, she has faced rising criticism of her handling of the economy, including the critical shortage of hard currency, sluggish growth and a widening budget deficit.
The latest economic upheaval comes 12 years after Buenos Aires roiled finance markets by defaulting on nearly $100 billion in bonds, unleashing a tidal wave of capital flight and runaway inflation.
Argentines remain traumatized by this 2001 collapse, which wiped out the savings of millions of middle class people and saw the end of the peso's fixed exchange rate to the dollar.
Years of economic uncertainty since have meant that rich exporters of agricultural goods like soy and corn have been reluctant to liquidate their dollar reserves.
Meanwhile the lack of global confidence has meant the country missed the gush of foreign capital into emerging markets over the past decade.
Kirchner's failure to control inflation, protectionist economics, import restrictions, nationalization of companies such as energy giant YPF and foreign exchange controls anger the business class.
But the poor revere the Peronist for her fight against poverty, generous social welfare programs and improved retirement pensions.
Kirchner's approval rating slide to about 30 per cent since she was swept back into office for a second term in 2011. Her term ends in 2015.