Currency Controls Strangle Argentina, But Hey, “Take it up with the Next Government, We’re on Our Way Out”

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Running out of money doesn’t care if you’re a socialist or neoliberal.

By Bianca Fernet, ArgentinaThe Bubble:

Last week wasn’t easy for President-on-her-way-out Cristina Fernández de Kirchner. On the political front, she treated us with deafening silence following her candidates’ poor performances in the general election. But on the economic front her government was not so quiet.

Remember how Argentina’s reserves, or how much foreign currency the Central Bank holds, has been creeping lower despite foreign currency controls? Last week the Central Bank (BCRA) and National Insurance Regulator jumped back in to keep the country from running out of money for just a little while longer.

First, the BCRA raised interest rates by three percent, the highest in 18 months, to try to make holding pesos more attractive. Shockingly, not many people rushed to buy peso notes. The government sold ARS $11.3 billion, five percent less than the previous week, despite the higher rate.

Next, the Insurance Regulator passed a new law forbidding insurance companies from holding dollar assets in excess of their dollar contracts. English translation: Insurance companies whose clients are in Argentina and thus likely have peso-denominated policies cannot hold dollars even though the peso is likely to depreciate before these policies are paid. Not good news for the peso policy holder.

Importers received informal calls from their banks informing them that the automatically-approved amount they are permitted to pay providers was cut in half, from US $150,000 to US $75,000. While that might seem like a reasonable number please be advised that you can’t buy very many car parts, air conditioner blades, or other industrial input with US $75,000. This adds to the US $9.5 billion (that’s right, billion) that the Central Bank is already in debt to importers. Commerce Ministry Sub-Secretary Paula Español reportedly told importers to, “take it up with the next government – we’re on our way out.”

Airlines received similar happy news via informal third-party channels that their permitted dollar purchases were cut in half, effective immediately. This cuts their access to dollars down to about one third of what it was at the end of July, and forced airlines to restrict purchases of tickets in advance of 60 or 90 days. La Nación confirmed that American Airlines ended promotional fares in Argentina and will no longer sell tickets more than 90 days in advance. LAN also cut promotional fares on international flights.

These measures do more harm than good. Officially or nominally, Argentina’s reserves stand at US $27 billion, the lowest they’ve been since 2006. The actual usable number is estimated to be around the US $6.7 billion mark. By the end of the year, that number will be even lower at around US $3.5 billion.

This election season has been rife with accusations that any opposition to Kirchner’s brand of Peronism secretly wants to return to the neoliberalism of the accursed 90s that left Argentina broken and her people poor. What people seem to be forgetting is that the crisis of 2001 didn’t appear out of thin air. And pointing the finger at “neoliberalism” and “markets” (which it appears many see as synonymous with “vultures” for some odd reason) neglects one big glaring economic error – and his name isn’t Menem. It’s pretending for a very long time that 1 Argentine peso equaled 1 US dollar. Pretending 10 Argentine pesos equals 1 US dollar is along the same lines of unsustainable and dangerous.

Argentina’s painful situation that laid the groundwork for Kirchner’s rise to power rose out of a situation whereby the government propagated an economic lie. And then they ran out of money. Running out of money doesn’t care if you’re a socialist or neoliberal.

Cristina Fernández de Kirchner claims to have put in place policies that have raised people out of poverty and improved living standards of previously marginalized populations. For the sake of argument, let’s agree she has. If there’s no money to pay for them, these policies are a ticking time bomb in the pockets the country’s most vulnerable citizens, who depend on ANSES, the universal child allowance, precious cuidados price controls on basic goods, utility subsidies, etc. to survive every day.

Kirchnerism has not left an economic “model” to continue – it has left a laundry list of expensive programs. The list above contains some that indeed improve the situation of the nation’s poor. Others, such as Futbol Para Todos, which broadcasts soccer matches alongside government propoganda for free, are a laughable waste of public funds and should insult anyone with a brain. Add to the list the undesirable consequences of high inflation, currency controls, no imports, fewer jobs in the private sector, electricity outages, etc. and the idea of calling Kirchnerism a model to continue deteriorates further.

The few days leading up to November 22’s runoff will be politically noisy, but also economically interesting. The upcoming debate on 15 November between Kirchner’s candidate Daniel Scioli and opposition candidate Mauricio Macri should force both men to directly address their plans for Argentina’s economy. In the background, the government will attempt to keep the problems at bay until they leave in December – and possibly grab what they can on their way out the door.

Members of the opposition PRO party have initiated criminal charges against Central Bank President Alejandro Vanoli for fraud in the administration of public funds. The BCRA has sold futures contracts worth US $15 billion dollars at the official rate of 10 ARS/USD that come due in December, all to large companies well-connected to the outgoing government. If the official rate is adjusted to a more realistic 15 ARS/USD before these contracts come due, the new government will have to pay a considerably higher amount. I’d draw parallels with the so-called “vulture” funds right about now. By Bianca Fernet, The Bubble

But after the election, markets spiraled into sheer ecstasy. Read… Markets Loathe Uncertainty, But Loathe Kirchnerism Even More

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  9 comments for “Currency Controls Strangle Argentina, But Hey, “Take it up with the Next Government, We’re on Our Way Out”

  1. Nick Kelly
    November 3, 2015 at 5:59 pm

    Great piece. My comment: more or less the same can be said of Greece, bloated public sector. lots of expensive social programs, outside of food almost no manufacturing- but lots of appetite for manufactures.
    And out of money.
    But in the case of Greece everyone DOES blame everyone but Greeks- neo-liberalism (whatever that is) or the Troika or Germany etc. etc.
    Why is running out of money the fault of the socialist government in Argentina but not the more socialist governments in Greece?

  2. Jerry Bear
    November 4, 2015 at 12:35 am

    what do you expect? Argentina has always been a mess and why should it be any different now? They still manage to hold on and I think that in part it is due to the fact that they still basically own their own country. In Greece’s case the overwhelming corruption of their government has caused their nation to be basically sold to wealthy foreign interests. The Greek rulers sold bonds at deep discounts to extremely wealthy speculators. These speculators expect to be paid in full at the expense of the Greek people. These type of investors perhaps could legitimately be called “vultures”. in Greece, large numbers of people are going hungry, families are homeless in the cold, elderly people are dying of lack of medical care, but paying off those wealthy speculators who bought those bonds is absolutely the highest priority. Please keep in mind that these economic issues are not just some kind of numbers game but a matter of life and death to ordinary people.

    • robt
      November 4, 2015 at 6:03 pm

      So-called vulture funds or vultures-in-general do not speculate against countries that manage their finances responsibly. The managers/politicians of these irresponsibly managed countries’ economies do not care one fig about the citizens, vulnerable or not. Their only wish is to fool the gullible long enough to be re-elected and then make excuses by blaming everyone else. Those who vote for ‘free stuff’ deserve what they get, which is ultimately less than what they had; unfortunately they never seem to learn. Democracy is based on the belief that you can spend someone else’s money – something the ancient Greeks realized a few moments after the first election.
      Speculators by definition do not speculate against sound entities, nor do they speculate against undervalued targets, only against the unsound and overvalued. And a ‘bond’, by definition, is a promise to pay in the currency in which it was written. Either pay it or don’t borrow.
      Let us also not forget that the moment a loan is granted the supplicant’s attitude changes from obsequience to hostility and the posture of a victim.

      • Jerry Bear
        November 5, 2015 at 9:33 pm

        Ummmmm…… the countries that I see doing well currently are those with strong democratic values.When such values are real, they encourage a sense of responsibility in the electorate who are well aware they have nobody but themselves to blame if things go wrong. Nations which are dictatorships or have a strong historical tradition of such like Latin America are doing much worse. The people feel they are powerless and blame everything on their rulers, which encourages irresponsible attitudes. I don’t think history supports you. Or do you think Burma is better off than Australia? Canada better off than Honduras? Byzantine Greece better off than Classical Greece?

  3. MC
    November 4, 2015 at 7:13 am

    South America as a whole has always been the Continent of Tomorrow and, apparently, will remain so for a long time.
    Each and every time it seems to be on path to fulfill that promise, something terrible happens. It would be easy to blame foreign influences and international instability, but the truth is South America invariably bears this upon herself, like I literally did with a chest of drawers when I was three.

    The economic and social policies embraced by Venezuela and Argentina would be untenable even in more developed countries with far more diversified economies. In commodity-based economies they are downright pernicious.
    Venezuela can blame under $50/bbl all she wants for her woes but the truth is Chavismo was economically feasible (and barely so) only for a very brief period of time in 2008 when oil prices shoot over $120/bbl. Now the fiscal breakeven has inched closer and closer to $150/bbl as Chavismo, very much like similar programs worldwide, has been steadily expanded and has become even less efficient than it already was. And it gets worse.
    To cover at least part of the fiscal deficits the Venezuelan government has taken out loans with China. These loans have to be repaid in oil. Sadly so far the Venezuelan government has proven itself a bad debtor, delivering only 40% of the oil due. Beijing’s patience isn’t infinite and new loans will come with far more strings attached, if they will.

    Argentina is not a basket case as Venezuela, having a more diversified economy, but it suffers from many of the same maladies. Kirchenerismo was only slightly more tenable long term than Chavismo but it had very much the same effects: it became bloated and even more inefficient and it stymied private economic activity. Italian President Luigi Einaudi used the metaphor of a draught horse pulling a “very heavy wagon” to describe the necessity of having a healthy private sector to make welfare systems of any kind feasible at very least mid-term. If the horse falls sick or grows weak because it is denied fodder, veterinarian care and rest, the wagon stops at best or starts rolling backward down the slope dragging the horse with it at worst.

    It seems to me all these years the heavy wagon of Chavismo and Kirchnerismo not only grew progressively larger but was pulled not by a Shire horse but by a commodity one trick pony.

    • Nick Kelly
      November 4, 2015 at 6:36 pm

      During the Falklands war or Malvinas if you like i heard a journalist ask a Brit living in Argentina why they thought they were winning the war when they were losing it. He said: “They’re not in touch with reality, very few Argentines are.”

      Not that this is bad but apparently seeing a psychological therapist there is as common as going to a gym here. Relatively normal people take second jobs so they can afford it. It is also common to have a savings account with auto debit for plastic surgery.

  4. Julian the Apostate
    November 4, 2015 at 6:43 pm

    All over the world there are more people riding than pulling. Boy are they going to be surprised when the pullers keel over in a massive coronary…or break the traces and run off into the night. I know I know that nobody could have seen this coming.

    • Jerry Bear
      November 5, 2015 at 10:03 pm

      Hmmmm……. You know Julian, I recently read this year that half the world’s wealth is now owned by the top 1% and the 99%, who are everybody else, own the other half. I think the problem is not so much that the riders outnumber the pullers as that the thirst of the vampires is starting to exceed the capacity of the blood donors. And I very much doubt we have a free market anymore.

      • Jim
        November 7, 2015 at 9:44 am

        Your comment reminds me of the story in the “Book of Jasher” about the first pharaoh of Egypt. He was a gangster who stole from the people and got away with it by giving a lot of the loot to the king as a gift. Take everything from the people and return a few pennies to keep them happy. Seems that things have not changed much.

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