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Argentine peso stabilizes as government eases forex controls

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Argentina's peso stabilized Friday after plunging 14 percent in panic-selling over two days, helped by the government's removal of some exchange controls and the central bank's reported resumption of intervention.

One day after the Argentine peso suffered its worst single-day fall in more than a decade, the government 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.

After sinking from 6.89 pesos per US dollar on Tuesday to 8.01 Thursday, the currency held steady.

And on the black market, where the greenback bought 12.50 pesos Thursday, it eased to 11.70 pesos, though reports said there was little activity.

The Ambito Financiero business newspaper said the Central Bank spent some $160 million to hold the peso up on Friday, after stepping out of the market for two days and watching it tumble.

Jorge Capitanich, the head of President Cristina Kirchner's cabinet, said the currency "has reached an acceptable level" of about eight pesos to the dollar under a policy of "managed flotation."

Amid worries of a repeat of the country's 2001-2002 financial crisis, the cabinet dropped the unloved 2011 rule restricting Argentinians' access to foreign currency.

The government has decided "to authorize the purchase of dollars for spending or saving," Capitanich said at a press conference flanked by Economy Minister Axel Kicillof.

A board outside a foreign exchange shop in downtown Buenos Aires on January 24  2014 shows the rate ...
A board outside a foreign exchange shop in downtown Buenos Aires on January 24, 2014 shows the rate of 8.00 argentine pesos to one dollar
Leo la Valle, AFP

Capitanich argued that the restrictions had always been temporary and had served their purpose. He said that a 35 percent surcharge on dollar purchases will be reduced to 20 percent beginning next week.

Still, it was not clear whether the pause would arrest the peso's fall, down nearly 19 percent so far this year and 38 percent since early 2013.

Kicillof said Argentines will be able to buy dollars freely starting Monday. He added that Thursday's 11 percent drop in the peso, "was a very strong speculative attack on the currency intended to threaten the government's economic strategy."

"The measure's effectiveness will be seen on Monday," said economist Rodrigo Alvarez of the consultant Analytica.

"The government is trying to anchor expectations. We have to see how easy it is to obtain these dollars."

The fall of the currency and stocks came amid a broad selloff in equity markets around the world, with Japanese and US stocks losing about two percent and European shares 2.9 percent.

Buenos Aires stocks sank 3.9 percent, and in Spain, where many companies have a large exposure to Argentina, shares lost 3.6 percent.

There was also a dump of emerging market currencies, hitting India, Turkey and South Africa among others.

Analysts said the peso's effective devaluation was unavoidable and that it would strengthen the country's competitiveness in export markets, where it is an important global supplier of soybeans, grains and beef.

"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.

Worries that the economy could stall

But economists also said the devaluation would further challenge government finances and confidence in the economy.

Managing the currency has driven down the central bank's foreign currency reserves to $29.5 billion this week from $52 billion in 2011.

The devaluation will likely exacerbate inflation, which was running at 26 percent last year, according to private sector estimates.

And that could stall already-slow economic growth and spill over into government finances, because of the state's costly spending to subsidize imported consumer items like fuel.

A board outside a foreign exchange shop in downtown Buenos Aires on January 24  2014 shows a sale ra...
A board outside a foreign exchange shop in downtown Buenos Aires on January 24, 2014 shows a sale rate of 7.75 argentine pesos to one dollar and buying rate of 8.00 pesos per dollar
Leo la Valle, AFP

Amid speculation that the country could require external help to stabilize the situation, a senior official at the International Monetary Fund, which has had no ties with Buenos Aires since 2004, said it was "ready to help."

"Of course, we are monitoring the situation very closely," said IMF Deputy Managing Director Min Zhu from the Davos World Economic Forum in Switzerland.

The teetering economy though is a major political liability for Kirchner, 60, who has two more years left in office.

She addressed the public for the first time in months Wednesday but made no reference to economic problems.

The latest economic upheaval comes 12 years after Buenos Aires roiled financial markets by defaulting on nearly $100 billion in bonds, unleashing a tidal wave of capital flight and runaway inflation.

Argentines remain traumatized by the 2001 collapse, which wiped out the savings of millions of people from the middle class and saw the end of the peso's fixed exchange rate to the dollar.

Argentina’s peso stabilized Friday after plunging 14 percent in panic-selling over two days, helped by the government’s removal of some exchange controls and the central bank’s reported resumption of intervention.

One day after the Argentine peso suffered its worst single-day fall in more than a decade, the government 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.

After sinking from 6.89 pesos per US dollar on Tuesday to 8.01 Thursday, the currency held steady.

And on the black market, where the greenback bought 12.50 pesos Thursday, it eased to 11.70 pesos, though reports said there was little activity.

The Ambito Financiero business newspaper said the Central Bank spent some $160 million to hold the peso up on Friday, after stepping out of the market for two days and watching it tumble.

Jorge Capitanich, the head of President Cristina Kirchner’s cabinet, said the currency “has reached an acceptable level” of about eight pesos to the dollar under a policy of “managed flotation.”

Amid worries of a repeat of the country’s 2001-2002 financial crisis, the cabinet dropped the unloved 2011 rule restricting Argentinians’ access to foreign currency.

The government has decided “to authorize the purchase of dollars for spending or saving,” Capitanich said at a press conference flanked by Economy Minister Axel Kicillof.

A board outside a foreign exchange shop in downtown Buenos Aires on January 24  2014 shows the rate ...

A board outside a foreign exchange shop in downtown Buenos Aires on January 24, 2014 shows the rate of 8.00 argentine pesos to one dollar
Leo la Valle, AFP

Capitanich argued that the restrictions had always been temporary and had served their purpose. He said that a 35 percent surcharge on dollar purchases will be reduced to 20 percent beginning next week.

Still, it was not clear whether the pause would arrest the peso’s fall, down nearly 19 percent so far this year and 38 percent since early 2013.

Kicillof said Argentines will be able to buy dollars freely starting Monday. He added that Thursday’s 11 percent drop in the peso, “was a very strong speculative attack on the currency intended to threaten the government’s economic strategy.”

“The measure’s effectiveness will be seen on Monday,” said economist Rodrigo Alvarez of the consultant Analytica.

“The government is trying to anchor expectations. We have to see how easy it is to obtain these dollars.”

The fall of the currency and stocks came amid a broad selloff in equity markets around the world, with Japanese and US stocks losing about two percent and European shares 2.9 percent.

Buenos Aires stocks sank 3.9 percent, and in Spain, where many companies have a large exposure to Argentina, shares lost 3.6 percent.

There was also a dump of emerging market currencies, hitting India, Turkey and South Africa among others.

Analysts said the peso’s effective devaluation was unavoidable and that it would strengthen the country’s competitiveness in export markets, where it is an important global supplier of soybeans, grains and beef.

“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.

Worries that the economy could stall

But economists also said the devaluation would further challenge government finances and confidence in the economy.

Managing the currency has driven down the central bank’s foreign currency reserves to $29.5 billion this week from $52 billion in 2011.

The devaluation will likely exacerbate inflation, which was running at 26 percent last year, according to private sector estimates.

And that could stall already-slow economic growth and spill over into government finances, because of the state’s costly spending to subsidize imported consumer items like fuel.

A board outside a foreign exchange shop in downtown Buenos Aires on January 24  2014 shows a sale ra...

A board outside a foreign exchange shop in downtown Buenos Aires on January 24, 2014 shows a sale rate of 7.75 argentine pesos to one dollar and buying rate of 8.00 pesos per dollar
Leo la Valle, AFP

Amid speculation that the country could require external help to stabilize the situation, a senior official at the International Monetary Fund, which has had no ties with Buenos Aires since 2004, said it was “ready to help.”

“Of course, we are monitoring the situation very closely,” said IMF Deputy Managing Director Min Zhu from the Davos World Economic Forum in Switzerland.

The teetering economy though is a major political liability for Kirchner, 60, who has two more years left in office.

She addressed the public for the first time in months Wednesday but made no reference to economic problems.

The latest economic upheaval comes 12 years after Buenos Aires roiled financial markets by defaulting on nearly $100 billion in bonds, unleashing a tidal wave of capital flight and runaway inflation.

Argentines remain traumatized by the 2001 collapse, which wiped out the savings of millions of people from the middle class and saw the end of the peso’s fixed exchange rate to the dollar.

AFP
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With 2,400 staff representing 100 different nationalities, AFP covers the world as a leading global news agency. AFP provides fast, comprehensive and verified coverage of the issues affecting our daily lives.

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