By Bianca Fernet, The Bubble:
I told you so.
Everyone in Argentina seems to have his or her panties in a twist over this week’s drop in the official and unofficial exchange rate. And fair enough, it was a bit of a shocker. But this should not be surprising. Argentina is running out of money.
On Wednesday, the official exchange rate slid down from 6.96 ARS/USD, hit the 8.60 mark, and closed for the day at 7.75 ARS/USD.
In the more relevant black market, the rate moved from 10 ARS/USD, hit around 13.50, and then settled back in a bit above 11 ARS/USD.
The very next day, Economy Minister Axel Kiciloff and Cabinet Chief Jorge Capitanich announced the decision to lift restrictions on access to foreign currency and lower income taxes. The Argentine press is thronging about trying to figure out what may have brought on this precipitous drop. The international press is wringing its hands over devaluation.
I really don’t know where to begin.
Firstly, the official rate fell because it is fake in the first place. Exchange rates are the price of one currency quoted in another. If there is no one actually performing the transaction, then it is not the exchange rate because there are not exchanges taking place. One job a central bank performs is to maintain the exchange rate. And while the Banco Central de la Republica Argentina did put the brakes on the drop in the official rate via the sale of US$ 100 million, that doesn’t mean the drop was induced by Shell executives, or money greedy black market currency traders. Argentine pesos are barely worth the paper they’re printed on.
Secondly, as long as a gap exists between the official rate and the black rate, or as long as there even IS a black rate, the government can’t relax the currency controls. If it did, anyone with half a brain could make easy money overnight playing the difference in the rates. For a quick refresher on why arbitrage is a thing, please see this article that explains a fairly yawn topic using a cheeky pun that references domestic abuse.
So for all of you bright-eyed, bushy-tailed optimistic Argentine tax payers out there who read my column, put your hope and your tax return away. While you may pay lower income tax next year, your income still won’t be worth crap outside of Argentina. And the government will not let you exchange your income for dollars because they can’t, not because they are big meanies. The world is willing to trade 1 USD for about 12 ARS. If the government of Argentina gives you 1 USD for 8 ARS, they will be losing over 30%.
“But Bianca,” you may find yourself asking, “why would the government put a policy like that in place if they are not going to follow through?”
The government is trying to make you feel better and calm everyone down. Crises come on quicker than wildfires, and panic is the gasoline that causes them to ignite and spread.
The government is running out of dollars. They need to use the ones they have to pay the debt and import handy things like energy to try to lessen the frequency of scary third world events like blackouts, which have the uncanny tendency to precipitate riots and looting.
Closing the gap between the official and black exchange rates would be a critical step towards stabilizing the economy, but what we have here is a small devaluation that was matched lockstep by a drop in the unofficial market. The gap between the two is more relevant than either rate alone.
So if you live in Argentina, buy some batteries and flashlights and relax. If the electricity goes out and it is dark outside, just don’t go walk around in the street. Don’t hold pesos, use them to buy dollars or assets.
This shouldn’t last too much longer.
Historically speaking, Argentina is really only unquestionably the best at one thing: creating and then surviving economic crises.
Argentina is and will remain a beautiful country to live in or to visit. The past thirteen years of high social spending and printing money are like a night spent drinking bottle after bottle of Fernet. This is just a hiccup on the way to Argentina’s throwing up, passing out, and eventually waking up on the bathroom floor to face economic reality. By Bianca Fernet, Argentina, The Bubble.