Next Up… Argentina!

January 27, 2014

By: Kelly Diamond, Publisher

Poor economic policies are sending country after country into the basement, either to suffer through the turmoil or get a bailout or bail-in.

Argentina has been on the radar among other emerging markets around the world with a precarious economic situation.  Sadly, President Fernandez de Kirchner … as it was put in “Indiana Jones: The Last Crusade”… chose unwisely.

About nine months ago, the big brouhaha was Cyprus.  I wrote about it incessantly.  And rightly so!  The Cypriot government was seizing bank accounts, for crying out loud!  While I still don’t understand how seizing private funds for what is considered a “bail in” is meant to cause anything other than capital flight, news then began to emerge that many developed countries have similar provisions in their banking rules.

Around that same time, I also touched on a few other countries: first was Spain and the other Argentina.  I discussed the trend of Spaniards turning to Bitcoin, but I also drew your attention to Argentina’s “gold rush”.  No, not the gold rush that has men leaving their jobs to pan for metals in a river.  The kind of gold rush that has individuals taking everything they have and putting it into precious metals due to 26% inflation rates. 

People watched Cypriot pensioners lose their savings to reckless banks, while wealthy Russian oligarchs were getting out unscathed.  Cypriots couldn’t even withdraw their money… businesses couldn’t pay their employers… When the run on the banks happened, the banks could not release much more than living expenses to the individuals.

And when I say that “people watched”, I don’t mean that the world watched.  The world largely remained ignorant of what was happening.  The people who were watching were the ones conscious enough to give a crap about the global economy… so a veritable handful.

Argentinians obviously saw the writing on the wall well before it became news to Americans, and even then, not via the main stream media but rather by way of alternative news outlets.

Well, the ARS took a nose-dive this past week.  The ARS fell 10% just last Thursday against the dollar, reserves dropped nearly USD80 Million, and the dilemma facing the Argentinian powers-that-be is, as Buenos Aires economist, Luis Secco says, “Do they want more growth or higher foreign reserves?” 

The IMF admonishes Argentina for their unreliable data regarding inflation: while the government claims an annual 10% inflation rate, private economists believe the number to be closer to 25%.

Capital flight has already been taking place via black markets, diversions into gold and even into Bitcoin.  The risk of an even larger flight increases exponentially as the days pass considering there’s no real macroeconomic solution driving the directives of their government or central bank.  

“Since her re-election in 2011 when capital flight almost doubled to $21.5 billion, [President Cristina] Fernandez has put into effect more than 30 measures to keep money from leaving the country. Her policies have included blocking most purchases of foreign currencies, taxing vacations abroad and online purchases, banning units of foreign companies from remitting dividends, and restricting imports,” reports Bloomberg.   It would seem the strategy to keep money from leaving isn’t nearly as effective as strategies that might invite money to stay.  Why would money want to stay in an unstable emerging market like Argentina?  Well, it wouldn’t.  But it would want to stay if the tax structure were more inviting, if the overall atmosphere indicated a more pro-growth economic culture than an anti-flight one. 

Again, the choice remains up to Fernandez whether she is going to put reserves over growth in her decision making process. 

Thus far, however, we’ve not seen account seizures or bank closures.  Historically, Argentina has been able to weather such economic storms with its high exports of wheat.  But exports are falling, and faith in the Peso is all but gone with the divestments proving it.  

Their bond market is suffering, with nearly USD30 Billion in bonds in circulation that need to be made good on.  Bloomberg goes on to say, “Dollar-denominated bonds due 2033 sank 2.7 cents on the dollar to 66.6 cents. The extra yield investors demand to own Argentine bonds over U.S. Treasuries surged 24 basis points to 975. Argentina’s dollar bonds have plunged 8.2 percent this year, the biggest loss in emerging markets, according to JPMorgan Chase & Co.’s EMBIG Diversified index.”

Interestingly enough, despite the populist propensity of the Fernandez administration, neither the government nor the central bank has intervened in the markets… yet.  Unless you count the strangle hold placed on the US dollar and any exchanges involving that… even then, that hasn’t stopped the black market “Dolor Blue” from maintaining their activities.  While the ARS is trading at around 8 Pesos to the USD, black market currency exchanges are offering up to 4 Pesos above spot!  They just go into neighboring Uruguay to get the USD.

Their foreign currency obligations are hovering at USD20 Billion, with close to USD10 Billion in foreign debt.  The last time Argentina defaulted was in 2001 to the tune of USD95 Billion, which isn’t that long ago.  President Fernandez is relying on reserves to pay off foreign debt, but the reality is, she needs to allow the Peso to be devalued.  She also could stand to learn a thing or two from Japan’s dark decade, and allow the interest rates to go up.  Artificially distorting or attempting to manipulate the markets never works out well for anyone. 

I’m heartened to see that the Argentinians are not all taking this lying down.  That some are in fact engaging in black market currency trade, and others had the foresight to invest in gold and/or Bitcoin shows the Argentinians are actively trying to dodge the impending fall of their economy.  You know it’s a BAD day when people start divesting into the US DOLLAR of all things…  I will be interested to see how this plays out, and whether or not similar (desperate) measures will be taken against Argentinians as was taken against Cypriots.  Granted, Argentina doesn’t answer to the likes of Belgians or Germans as was the case for EU member Cyprus, so there is hope there.