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Thursday, 13 February 2014

Myths and Lessons of the Argentine “Currency Crisis”

By Joseph T. Salerno

The crash of the Argentine peso last month brings to a close yet another foredoomed experiment in South American left-wing populism. The precipitous “devaluation” of the peso by 15 percent against the U.S. dollar in January represents its steepest decline since the devaluation of 2001 when Argentina defaulted on its foreign debt. From January 21 to the close of trading on January 23 the peso dropped from 6.88 per dollar to 8.00 on the official market. On the black market the peso fell by 6 percent on January 23 to 13 to the dollar. Over the past year the peso has declined by 35 percent.

In a foolish and futile attempt to maintain its overvalued pegged exchange rate, the Argentine central bank has sold off dollar reserves at the rate of $1.1 billion per month over the past year in buying up the excess pesos sloshing around on foreign exchange markets. Overall, dollar reserves have plunged from a record high of $52.6 billion in 2011to a seven-year low of $29.3 billion. Also since 2011, the Fernández de Kirchner government has implemented highly restrictive exchange controls including delays in approving repatriation of the dividends of foreign firms as well restrictions on purchases by tourists, taxes on credit card purchases, and, recently, limits on online spending that have made it nearly impossible for ordinary Argentine citizens to obtain dollars to hoard or invest abroad. Of course, these draconian measures have failed to stanch the outflow of dollars in the face of the salutary operation of the black market in which dollars were freely available at the equilibrium price of 13 pesos per dollar. The government finally threw in the towel on January 22 and 23 by refusing to intervene in foreign exchange markets to prop up the peso, which declined by 10 percent on January 23 alone. On January 24, the government went further and announced a loosening of exchange controls. Now Argentines will be permitted to buy pesos in proportion to their income while the redeemable tax on peso purchases has been reduced from 35 percent to 20 percent.

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