“ARD”: The Argentine dollar

Posted By on 15/07/2012

Last month we wrote about Argentina’s inflation charade. Now there’s another layer to the story.

Earlier this month, Argentine President Cristina Fernández de Kirchner announced she would change her personal savings from dollars to pesos, and she urged other government officials to do the same. The suggestion is to lead by example and get other Argentines to start “thinking in pesos.”

But why does the government want people to want pesos more?

The idea is “de-dollarization,” whether official or unofficial. Today, dollars play an important role in the Argentine economy. Many people hold them as savings, since they are seen as stable assets. The dollar is also the main currency of real estate in the country, as well as the currency in which a significant portion of the national debt is denominated. As a result, the dollar is very valuable to individuals, companies, and the government.

And with the peso losing value so quickly, no one can get enough dollars fast enough.

For now, de-dollarization is mostly just the subject of a public relations campaign by Fernández’s government. But two weeks ago the government presented a bill that would require debt and new contracts to be denominated in pesos. And many fear that the dollars they have might be seized from them before too long.

The steps toward de-dollarization and the fears that the government may forcibly de-dollarize further are results of two sides of the country’s currency crisis that are now coming into direct conflict.

On one side is the government, which must pay back dollar-denominated debt and which sees dollars rapidly exiting bank accounts and the country. The government is keenly aware that it needs to keep dollars in the country—and within its reach. The central bank, which has seen its reserves diminished by a growing budget deficit, is trying to get as many dollars as it can in order to keep making debt payments on time.

On the other side are the people, who want little to do with the peso. Argentina’s currency has a volatile history, and its most recent shock came just a decade ago, when the country’s budget crisis led to debt default and, soon after, rapid and steep currency devaluation.

The people, aware of Argentina’s unofficially soaring inflation, are also doing all they can to get dollars. With the peso buying less each day, and with the euro unstable and in question, more and more Argentines are seeking the safe haven of dollars. But at the same time, they’re trying to move the dollars they have out of their bank accounts. Argentina, unlike many other countries with proprietary currencies, permits bank accounts denominated in foreign currencies, largely as a result of Argentines’ long-standing distaste for their own currency.

But dollars in the bank are at risk in a crisis. In January 2002, in the middle of the last crisis, the government announced that all dollars in Argentine banks would be converted into pesos at the officially determined exchange rate of 1.4 pesos to the dollar. Within a year, thanks to rampant inflation, the peso had fallen in value to about 4 to the dollar, and many Argentines had lost up to 75 percent of their savings.

With the country again in an economic bind (and one which is so far unacknowledged by the government), its people fear a similar action in the coming months or years, and as a result are trying to get their dollars out of the bank and to safety. No one wants to be holding dollars in an Argentine bank when the government forcibly de-dollarizes the next time.

All of this has combined to make Argentina’s economic situation highly unstable. The government is trying to hide the peso’s inflation, the central bank is trying to acquire as many dollars as it can, and the people are trying to find a way to secure their assets. The government and the people are now pitted squarely against each other, and each is resorting to greater and greater secrecy. (This article in Spanish details how people are seeking more covert ways to exchange money, now that dollars are hard to come by legally.)

Something is likely to give before too long, and few in Argentina will come out well off.