At last, the end of Argentina’s FX restrictions; does a free market lie ahead? Investigation

Argentina is notorious for its unstable financial markets system, despotic leadership and continual power battles between civilian governments the public, which over the last 70 years have resulted in numerous military coups. Investors, traders, business owners and those wishing to preserve their capital have, for many years, held money in US dollars in foreign bank […]

Argentina is notorious for its unstable financial markets system, despotic leadership and continual power battles between civilian governments the public, which over the last 70 years have resulted in numerous military coups.

Investors, traders, business owners and those wishing to preserve their capital have, for many years, held money in US dollars in foreign bank accounts, however since former president Cristina Kirchner’s rise to power, the government has made over 30 attempts to stem the flow of foreign currency in Argentina, creating a vast black market for US dollars, and, believe it or not, Bitcoin.

In mid-2013, Argentina’s government made an accurate assessment that its citizens held $160 million in US dollars in overseas bank accounts, mainly in North America, and subsequently implemented very strict capital control laws.

Attempts to repatriate the dollars and turn them into the unpopular and inflationary Peso were made, one of which was the introduction of the ‘Cedin’ which was a credit note, backed by the Argentine central bank, to the value of the returned dollars, that would be issued in lieu.

The rise and fall of the black market, and Bitcoin goes viral

Of course, this was extremely unpopular as faith in the Argentine financial system among citizens is very weak indeed, therefore the black market grew, and virtual currencies such as Bitcoin rocketed in value, to the point at which, by June 2013, values of Bitcoin in Argentina were 30% higher than in neighboring Uruguay.

Argentina’s government made such draconian changes to the system that it affected business owners wishing to sell their products internationally, and companies selling their goods to tourists and overseas visitors in Argentina, as the 15% levy on foreign currency transactions via credit card EPOS terminals was too much for most businesses, which led to a widespread cancellation of merchant services terminals in favor of Bitcoin systems, much to the dismay of the now-defunct Kirchner administration.

By early 2014, with the peso at 20% inflation, dollars being restricted and the worry that by simple day to day living, dollars would eventually be naturally converted to peso (for example, you bought a new car 2 years previously and paid for it in dollars, then trade it in for a new one, get pesos for it), it was looking like Argentina may have become the first nation in the world to adopt Bitcoin as a national currency.

That did not happen of course. That accolade goes to a tiny island off the coast of Portugal which has a population of four people, and this week adopted Bitcoin as its national currency, whilst Argentina’s populace struggled on with strict capital control laws and remained lumbered with the Peso.

Once the capital control laws were implemented, corruption became rampant among officials. It was explained to FinanceFeeds by a very reliable source that traveled from Argentina to Uruguay by car, with $1,000 in cash because he was a tourist and was not an Argentine citizen. At the border, the officials forcibly removed the $1,000, stating that it is illegal to take any money, especially in foreign currency, out of Argentina. When driving away, $1,000 lighter, this particular gentleman noticed the official putting it in his own wallet.

Light at the end of the tunnel?

Today, however, things look set to change as Argentina’s finance minister Alfonso Prat-Gay has stated that he plans to eliminate the FX restrictions that have now hampered the country’s economic situation for five years. This is very good news indeed, as Argentina’s citizens are so dependent on US dollars that in these times of capital controls, it is common for family members abroad to give their younger relatives dollar bills, which are then hidden under mattresses.

Incumbent president Mauricio Macri is hopeful that this will fuel the market for exports and rebuild the nation’s economy by creating growth.

There are not only liquid implications, as farmers in Argentina, a very rich nation in terms of natural resources, have been stockpiling commodities such as soybeans until the local currency falls, therefore this should free up such important industry sectors to do business without such awful restrictions.

The black market still remains far stronger than the 10 pesos to 1 dollar current rate, however Mr. Prat-Gay expects that the rate may weaken to approximately 14.2 pesos to 1 dollar, and has stated that the nation is currently negotiating a credit line of over $5 billion to replenish Argentina’s international reserves.

The lifting of restrictions will likely be rolled out gradually, with Argentina’s citizens still facing restrictions on the amount of dollars that they can buy each month, however this is still better than absolutely no FX transactions whatsoever.

Mr. Prat-Gay has confirmed that the central bank will intervene if the exchange rate fell too quickly, and is hopeful that this new ruling will turn Argentina’s fortunes around.

“The old system had killed the goose that laid the golden egg” he said.

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