by A.M. Freyed

April 25, 2012
from Infowars Website
 

 

 

If you hold Argentine pesos, watch out.
 

Argentina to Devalue as President Slams Free Market

Argentina’s new President Eduardo Duhalde, blaming free market policies of the last decade for creating social chaos, asked Congress on Friday to rescue the economy by allowing a traumatic currency devaluation…

 

Congress, controlled by Duhalde’s Peronist party, will almost certainly pass the bill, which also gives the president powers to reform the foreign exchange and banking systems, regulate prices of goods and services, safeguard the value of savers’ bank deposits and ensure debtors do not go bankrupt.

 

While Congress prepared to act this weekend, Argentines huddled in pouring rain outside banks wondering if they would ever recover their deposits. Drug stores ran out of medicines like insulin, and shops raised prices to hedge against a devaluation that will be an effective income cut for millions.

– Reuters (2002)

 

It hasn’t reached the Western media yet, but all hell may break out in the Southern half of South America as people brace for an Argentine devaluation.

 

A realistic possibility? It’s not as if it hasn’t happened before.

Last time it took place was more than ten years ago, around the turn of the century. It wasn’t pretty then and it won’t be pretty now. It could cause significant political as well as monetary damage.

And it well may take place. The confiscation of Repsol’s YPF was much more than just a populist action by a politically savvy president. It was a calculated economic action. And that’s what a devaluation will be as well.

But this how one deals with monetary mismanagement (if one is not trapped in the EU). One declares that one’s currency is worth less today than it was yesterday. If you lost money, well… too bad. In devaluations, everyone basically takes it on the chin.

So, if you hold Argentine pesos, watch out. Argentina is no small country and, in fact, once it was one of the richest around. But that was then.

 

For the past decade it’s staggered from one political and economic crisis to the next.

“First comes inflation - which Argentina already has,” one source explains, “and then comes devaluation, which will be terrible for Argentina and surrounding countries. It’s going to be a big mess but it’s not being mentioned abroad. So far it’s just for the newspapers, magazines and commentators down here.”

Inflation in Argentina is claimed to be between five percent and 12 percent according to government statistics.

 

But these statistics are disputed considerably and the Economist Magazine recently stopped using Argentine numbers, calling them misleading. There already is significant price inflation - serious price inflation. The Argentine peso is again not well thought of and people would trade them for dollars if they could.

But there are few dollars in Argentina.

 

President Cristina Fernández de Kirchner’s decision to nationalize Argentina’s biggest oil company has been reported on as populist move, but it had more to do with a desperate need for dollars.

“Argentina is dollar poor in a world that needs dollars for almost part of its functioning… The world may not NEED dollars, but that is what it has.”

Argentina doesn’t have much gold, either. That was looted by previous governments.

Countries stockpile dollars to purchase oil and other commodities. While Argentina doesn’t have dollars, it’s got oil and oil is good as dollars since one can be purchased for the other.

 

If Argentina’s officials want dollars now, they just have to sell oil.

But it won’t be enough. What’s going on apparently is wholesale looting. The administration is dedicated to buying votes with government favors and then printing money to pay for them. It negated negative domestic coverage by literally taking over pulp and paper supplies. No paper, no criticism.

The administration has also raised taxes to increase revenue to a cash starved central government.

Those in Argentina and the surroundings have seen this before. Sooner or later, Argentina may devalue the peso formally. The last time round, the devaluation cut Argentine savings by half to begin with and the damage just kept growing from there.

There was also a good deal of tension with the IMF. And now there is again. The IMF recently closed its offices in Argentina, either as a protest or out of worry that sooner or later the economic crisis would express itself more chaotically via, say, rioting. Argentina cancelled it’s IMF debts along with Brazil in 2005.

Argentina wasn’t exactly a success story in the 2000s, but it did return from the worst of its 2000 monetary disasters. The sad thing is that the lessons learned haven’t stuck.

The populism that began with Peronism remains in evidence. This provides cultural entrée for looting, and that’s what successive regimes have done.

 

In Argentina, sometimes, history really does repeat itself.
 

 

 

Argentine Devaluation Will Shake the World?

As soon as devaluation was considered possible, a persistent bank run took place in Argentina.

 

It lasted for over a year and consumed two-thirds of the country’s foreign-exchange reserves… It had vast redistributive consequences…

 

Many Argentinean contracts had continued to be denominated in pesos, since the currency board did not eliminate the local currency…

 

The end of Argentina’s currency board was harrowing. It led to endless violations of contracts that left an enduring stain on the investment environment.

- Economist

It is only logical that the final scene of the Argentine devaluation will be played out with a devaluation, and it is one that may shake the world.

 

This is not something that is being reported widely yet, certainly not in the Western press, but it will be, certainly if a devaluation starts to look imminent.

Argentina last devalued its currency over a decade ago and in the process took down the economies of most of Latin America, including giant Brazil. Today, it is fashionable to say that Argentina is a far less powerful country and that the ramifications will be less onerous than they were. Brazil is said to be delinked from the Argentine economy and next door neighbor Chile has a slew of Western trading partners.

But this may not be so. For one thing, Argentines have placed their money in Uruguayan banks over the past decade, preferring to avoid the ones in their home country. They also hold dollars abroad rather than the unreliable Argentine peso.

Last time Argentina devalued, the first wave of injuries involved the savings accounts of average Argentines.

 

The middle class was hit hard, first by a freezing of said accounts and then by a forced conversion to pesos (if they held dollars in these accounts). Once the conversion was implemented, the peso was devalued by about half.

Adding insult to injury, withdrawal strictures were placed on the accounts. This meant that people could only take out fairly paltry amounts of money at a time. Those that kept significant sums for retirement basically found that their savings were basically useless.

And so, over time, money migrated to Uruguayan banks.

 

Uruguay is the “Switzerland of South America.”

If there is a devaluation, Argentine saver would seek to repatriate their dollars and this surely would shake the Uruguayan banking system. In turn, this would have an effect on other depositors from around South America that have also placed significant sums in Uruguay, especially Brazilians and Mexicans.

Chile would not be directly affected, but there is always tension between Chile and Argentina over Patagonia border issues. With economic tension often comes military tension, and such tensions are rarely good for investors or economies.

Price inflation is high in both Uruguay and Brazil. A devaluation in Argentina would likely have the effect of puncturing the real estate bubble that both countries now support. In Uruguay land prices have positively exploded. Once the bubble pops, the economies themselves would subside.

Uruguay is a small country and of itself a subsiding of the economy will mean little. But Brazil is a top BRIC country and one of China’s closet and biggest trading partners.

If Brazil’s current economic boom is punctured, the consequences for China might be grave.

 

Having lost Europe and America as consumer destinations, China’s massive industrial infrastructure has been kept afloat partly by trade with the BRICS and with South America generally, where economies are still doing fairly well.

But China itself is undergoing various political strains because and piling economic strains on top of them will only increase the difficulties that giant state has in continuing to make economic gains. It is quite likely, that China’s economy would be caught up in the same downward chain reaction that would affect South America itself.

China has been resistant to the economic downdraft sweeping the world. But if China staggers, along with South America, the sweep of the world’s large economies will be complete. China, Europe and the US were the three legs of the stool on which the world’s economy sat.

 

An Argentine default can remove the final leg of the stool.

This scenario is surely disastrous for most but not for the top elites that are likely trying to create a more expansive world government. The powers-that-be that seek further centralization might welcome the kind of rolling economic catastrophe currently taking shape. In fact, elite connivance may have helped cause it.

Certainly, the world’s central bank economies are conducive to this kind of boom-and-bust. And with every bust, the world grows closer still and power and wealth are further centralized.

 

The world generally is deleveraging now after the 20^th century’s sustained boom. The bust still has a ways to travel.

 

An Argentine devaluation could be the next step in such a deleveraging scenario.





 

 

 

 

ARGENTINA

Devaluation Fears Boost Capital Flight
by OxResearch Daily Brief Service
Jun 02, 2011
from TheLatinAmericanEconomy Website

 

Abstract

 

Summary
The pre-election increase in capital flight.

 

Despite record terms of trade, capital flight increased in the first five months of 2011, reflecting growing fears of a devaluation after a new administration takes office in December.

 

In recent years government intervention has led to increasing distortions that put both fiscal and external surpluses at risk.

 

 

 

ANALYSIS

 

Impacts
In the first four months of 2011 capital flight reached around half the full-year 2010 record, and may rise pre-election. Argentina has failed to capitalize on record terms of trade to strengthen fiscal sustainability and consolidate the external sector.

Growing macroeconomic imbalances raise fears of a sharp devaluation in 2012.

 

During the first quarter of 2011 net foreign assets formation for the nonfinancial private sector reached 3.7 billion dollars, a quarter-on-quarter rise of 64.1%, and just 4.6% below the record of the same period of 2010, when the dismissal of former Central Bank (BCRA) President Martin Redrado boosted demand for foreign exchange (see ARGENTINA: Reserves moves become political boomerang - January 18, 2010).

 

Residents' net purchases of foreign exchange reached 2.9 billion dollars, an increase of more than 1.0 billion over the fourth quarter of 2010. Between 200710 net foreign assets formation for the nonfinancial private sector reached 57.5 billion dollars, exceeding the BCRA's current stock of international reserves (52.0 billion dollars).

 

According to private estimates, in the first four months of 2011 capital flight reached nearly 5.3 billion dollars, around

half the record set in full-year 2010. Capital flight is expected to accelerate in the second half of the year due to the October presidential elections.
Record terms of trade .

Paradoxically, in the first quarter growing capital flight growth coincided with a new record in Argentina's terms of trade, illustrating the obstacles that poor credibility poses for potential economic growth:

In the first quarter export prices rose 17.6%, in comparison with 9.4% for import prices. As a result, the terms of trade expanded by 7.4%, a new peak that exceeded the previous record set in the first decade of the 20th century.

At present the terms of trade are more than 50% higher than the average of the 1990s, and 27% higher than the average for the past decade, a period characterized by favorable terms of trade for developing countries.

Since 2002 the gains from terms of trade reached 70.0 billion dollars, around 35% higher than the current stock of international reserves, and have been a major driver of the trade surplus, one of the pillars of macroeconomic stability in the last decade. Measured in 2001 prices, the first quarter trade surplus (1.8 billion dollars) would become a deficit of 2.7 billion.

 

This highlights the economy's vulnerability to a sudden change in international commodities prices.
Slow reserves growth.

Despite the large trade surplus, since the beginning of 2010 the increase in the BCRA's international reserves has been meager: between January 2010 and April 2011 the accumulated trade surplus reached 14.7 billion dollars, while reserves rose by just 3.9 billion (8.2%). Thus, the trade surplus has mostly fed capital flight.

 

More recently, growing capital flight has been reflected in the increasing gap between the official and black market exchange rates: by mid-May 2011 the black market rate had reached 4.34 pesos to the dollar, against 4.08 in the formal market (a differential of 6.4%). One year earlier, the gap was just 0.8%.

 

The increase is more worrisome because it takes place in the second quarter, when seasonal foreign exchange is abundant, due to the oil seeds harvest.

On the other hand, the real appreciation of the peso mostly driven by an inflation rate that, since 2007, has ranged between 1525% annually has worsened growing competitiveness problems, reflected in the steady fall in the trade surplus (see ARGENTINA: Shrinking surplus renews economic concerns - April 18, 2011):

Labour costs have increased in dollars:

between January 2010 and March 2011 the wage index expanded by around 30%, while the nominal exchange rate weakened by less than 7% (see ARGENTINA: Inflation pressures boost wage demands - February 22, 2011).

Competitiveness problems boost fears of a sharp exchange rate adjustment next year, as the new administration adopts adjustment measures during its first year.

The pace of currency depreciation has accelerated in recent months: while the nominal exchange rate had fallen by just 4.7% in 2010 (compared to a rise of around 25.0% in the consumer price index), in the first five months of 2011 it fell by 2.8%.

 

However, a moderate depreciation may not be enough to correct the growing macroeconomic imbalances (both fiscal and external), even if the international economic scenario remains as benign for developing countries as it is at present.

 

 

Fiscal deterioration
Although the fiscal accounts still appear strong, this is mainly the result of extraordinary revenues, such as profit transfers from the BCRA and social security agency ANSES, and transitory lending from the Central Bank:

Excluding these revenues, the primary surplus, which in the first quarter reached 4.8 billion pesos, would fall to just 1.5 billion, while the global deficit of around 350 million pesos would rise to 3.7 billion.

The deterioration of the fiscal position has been driven by the notable expansion of public expenditure, which in the last five quarters expanded at rates that ranged between 3045%, mainly driven by transfers to the energy sector as transport and energy tariffs remain frozen.

Given that part of tax revenues are dollarized (due to taxes on foreign trade), and that most public debt is currently denominated in pesos, the next government would have some incentive to encourage a sharp devaluation to restore fiscal sustainability.

 

Competitiveness problems boost trade disputes
The government's new measures to preserve the stock of international reserves to maintain macroeconomic stability has led to new disputes with Argentina's main trading partners.

 

In particular, the implementation of new import licenses last February has worsened bilateral relations with Brazil, Argentina's main trading partner.

 

In mid-May the Brazilian government blocked car imports of all origins, but the measure especially affected Argentina, as car exports to that country are, after grains and their derivatives, its main export product.

 

The Brazilian restriction was thus seen as a retaliatory measure. In addition, the car industry is the main driver of the manufacturing sector, with growth rates that largely exceed those of industry as a whole, so import bans in Brazil will affect the expansion of the manufacturing sector and thus economic growth.

 

The dispute has not been settled yet indeed, Brazil has threatened new import bans.

 

CONCLUSION

The favorable impact of a devaluation on dollar-denominated fiscal revenues and on waning competitiveness is likely to make such a measure increasingly attractive to the incoming government in the face of rising macroeconomic imbalances.

 

Concerns over this prospect may boost capital flight in the coming months.