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Prepare For Peso Plunge: Argentina Lifts Currency Controls
Late last month, Argentina voted to throw out the Peronists. In what amounted to a sharp rebuke of Cristina Fernandez de Kirchner's handling of the economy (among other things) Mauricio Macri defeated Daniel Scioli, Kirchner’s hand-picked successor, ushering in what the market hopes will be a new era for a country plagued by persistently high inflation and slumping growth.
First on Macri’s to-do list (and trust us, it’s a very long list), is reforming the exchange rate regime. As we recounted three weeks ago, The President-elect wants to unify the official and parallel exchange rates (~9.60 and 15.50 ARS/USD, respectively) and that will of course entail a substantial devaluation. Just how overvalued is the peso, you ask? "Grossly" so, Citi opined, following Macri’s election.
As we went on to detail, selling dollars to support the peso really isn't an option anymore because, well, because there are no more dollars. Although Argentina’s official reserves sit at some $25 billion, net reserves (which factor in swaps with China, among other factors) are likely somewhere between $400 million and $2 billion, which for all intents and purposes means the country is out of dollars.
This rather precarious situation led central bank head Alejandro Vanoli to do two things last month, i) force banks to sell half their dollar assets, and ii) sell $17 billion of dollar futures. Earlier in November, police raided the central bank after Macri's allies lodged a criminal complaint against Vanoli for violating the bank's charter by basically turning it into a giant derivatives trading hedge fund.
Last week, Macri succeeded in forcing Vanoli’s resignation.
“Although certain sectors are trying to spread the idea that reserves are ‘at zero’, the reality indicates otherwise,” Vanoli wrote, in a letter to Kirchner. “If the president-elect decides to impose a violent devaluation it will be exclusively as a result of a political decision.”
“However, many economists warn that liquid reserves are dangerously low since they have been used to prop up the peso’s value against the dollar, which is valued at 9.7 pesos at the official exchange rate but commands about 15 pesos on the black market,” FT writes, adding that “Macri called for Mr Vanoli’s resignation at a press conference the day after his election victory, amid outrage at the bank governor’s attempt to prop up the official exchange rate by selling about $17bn of future dollar contracts at an artificially low rate that will cause serious losses for the central bank if the peso is devalued.”
With Vanoli gone, the path is clear for the deval. A key figure in the execution of Macri's currency plan is former JP Morgan global head of FX research Alfonso Prat-Gay who will be Argentina's finance minister under the new Presdent. Prat-Gay was president of the country's central bank beginning in 2002. Over the course of Macri's campaign, Prat-Gay voiced support for the idea of unifying the official and black market peso rates. "There are no reserves left, and the capital controls don't make sense," the new FinMin said in November.
"The program to unify the currency market is the first signal for the economy to start to normalize," Prat-Gay told La Nacion last week. "We're going to fulfill that promise as fast and as exhaustively as possible. If we can do it the 14th, we'll do it the 14th, and if not, we'll do it once we see the right conditions," he added.
Well, the new FinMin might have missed that deadline, but not by much because Prat-Gay just made it official.
- ARGENTINA ENDS FX CONTROLS: FINANCE MINISTER PRAT-GAY
- ARGENTINA LIFTS CURRENCY CONTROLS AS VALUE OF PESO SEEN FALLING
The groundwork was set for the move earlier this week. As Bloomberg noted on Monday, Macri ordered financial institutions to "unwind their foreign-currency positions as part of an agreement with the futures exchanges under which they will rewrite the terms of some derivatives that would have handed holders a windfall profit." In other words, the new President is looking to ensure that when the deval comes, the central bank won't get hit too hard as a result of Vanoli's adventures in dollar futures. Here's more:
Federico Sturzenegger, the new central bank president, had to resolve the futures impasse before proceeding with lifting controls in order to reduce the bank’s liability stemming from the contracts, according to Rafael Di Giorno, a director at Proficio Investment in Buenos Aires.
“The government has to devalue as soon as possible since they need an inflow of dollars to rebuild reserves, especially from exporters,” Di Giorno said. “If they had devalued without fixing these contracts they would have faced a huge loss.”
And so, the stage is thus set for a new era in Argentina. For those interested in a case study of what happens after a dramatic devaluation, you now have front row seats for what is likely to be a 25-30% peso plunge. “It’s not a process devoid of risk but there’s also significant risk in doing this in several installments," Goldman's Alberto Ramos says.
Grab the popcorn.
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AKA: ends the Argentina-Kirchner-policitos' source of layup currency arb PL.
Disgusting.
Yes we have no dollars...
argentinia is a beautiful country if you remove the people
Spent a lot of tme in BsAs mostly. They have the same problem as damn near all countries--- Crooked Pols and Bankers; and worse they have gun controls.
Agree, the country is beautiful and 50% of the population is in BsAs. If they get squared away I would seriously look at this as a new home. Milestones
In order for the Fed rate to rise, banks will need to soak up liquidity by exchanging thier cash for USTs via reverse repos. This will mean banks balance sheets will collapse. Litterally they will shrink. This is US Fed member banks but remember the Fed loaned reserves to banks around the globe. They will need to participate.
This means the dollars are coming home to the Fed in exchange for USTs, USTs no one has wanted for months. The President';s Working Group on Financial Markets may have had their busiest day in years but are they ready for this kind of market manipulation to persist for days, weeks, months, if not years while the Fed member banks et al try their hardest to shrink their bloated balance sheets?
Argentina the Sick Man of South America, but now-a-days, it seems like they all are sick. The dream of Falkland's Oil is fading, both on low oil prices and on British high tech defense systems on the Island.
Argentina can't over come it's long past of Landlordism, Military repression, communists and lack of economic drive. Hand out, slave labor, executions and communist dreams of the working class.
If you look at Argentina today, the progress has been frozen since the 1950's. "Going nowhere" should be the national motto.
I always wondered if Argentina had not been settled by the Spanish, but by the English, Dutch and Germans, what type of prosperous nation would it be. People say ethnicity does not matter, I suggest this is bullshit, and ethnic culture has everything to do with it.
Australia, New Zealand, Canada and the US Colonies got the English, Dutch and Germans, and the rest is history.
I'm not sure I understand the ethnic angle, Jack. Argentina was a wealthy country prior to WW II. "As rich as an Argentine," was a common expression. Then, unfortunately, a long period of stupendous mismanagement followed, leading to all the evils you mention.
And they're not even English.
but the Argentinian people is a mix of many different ethnicities. that Argentina was colonized by the Spanish has more to do with the ethnicity of the big landlords, and old rich families than with the ethnicity of the people. We recieved far greater Italian immigration than any other country, and relative to local population it is extreme. even this didn't determine the ethnicity of the country because there is no such thing.
North of Argentina you find mostly aborigine ethnicity
Center of Argentina, you find mostly southern European ethnicity, for which I'm sure there's a technical name for
and South of Argentina, as the indian populations were wiped out by Argentinian goverments in the early-to-mid 19th century, it was later completley occupied by center and eastern European populations
I can't supply a link, but I've read in a mainstream source that the most "genetically European" country on the planet is, in fact, Argentina: Spanish and Italian plus a mix of everything else.
Visible minorities are present, but are something like 4% of the population. On average, Argentines don't even look like Chileans, much less Venezuelans.
I have to agree with Doug Casey: if you're not trying to earn your keep in the local peso-denominated economy, Argentina is a very attractive place to live (also assuming you have a back-up plan, for those occasional periods of economic collapse)
I disagree 10000000% that Argentina is an attractive place to live no matter where you derive your income. I went on THREE fact finding trips to Argentina to determine if I wanted to live there (ex-patriot).
NO FUCKING WAY. It has turned into a mixture of communism/third world country. Yeah, I suppose you could build your own little oasis there if you have enough money but once you have to start to deal with Argentina and their system and way of doing things - FORGET IT!
If you've got a lot of money to build your own sanctuary, Argentina is definitely not the place to go.
Recent ZH article said that Argentina had second worse inflation on the planet, with Venezuela placing first. Each time I went, I found NO bargains on real estate and guess what. If you do want to transact, you have to buy in CASH. I don't mean cashiers check, I MEAN GREEN STUFF. That's how you do it down there.
There were deals down there. Its one of the best places to be as an alcoholic. My experience is, I stayed two weeks in Buenos Aires (which is unrepresentative of the rest of Argentina), one month in Mendoza and took a cruise which started in BA and made its way down the coast. And did endless amounts of internet investigation.
Finance Minister Prat---Gay- Quote of the week.
the unofficial, unrestricted exchange rate for ARS/USD sits at 14.7 as of today and has been around these levels for the past few weeks.
Dammit! And after I had made reservations ; -)
The Argentinan farmers will finally be able to unload their grains that they have been storing abroad and that should help ease the foreign reserve pressure at the central bank slightly.
Look at the Dollar Menu in Argentina's McDonald's and see how overvalued the peso is. This is a dollar vacuum intended for unsuspecting tourists. $20 pesos for something worth $1 dollar. At the official rate of exchange of $9.80, $20 pesos is $2.04. So you are paying $2.04 dollars, more than double, for something that is worth only $1 dollar. The peso is 100%+ overvalued. It should be fairly valued at $40-$50 pesos for $1 dollar. Even at at the black market dollar rate of $14.45 peso, the dollar menu items will still cost you $1.38 dollars (38% overvalued), still over $1. If Argentina wants to see tourist dollars come back, devalue to $50 pesos per $1 dollar by February 2016.
http://static101.tiendeo.com.ar/images/tiendas/4506/cupones/16752/portad...
http://www.mcdonalds.com.ar/index.html
Ummm, always puzzled me how the frack a country named after Silver can go broke...over and over and over....but don't worry, JPMorgan shill at the Helm..trying to keep her off of the rocks until the plunder is finished. (cue Madonna.."Don't cry for meeeee Argentuna..")
Let's see how fast LocalBitcoins volume explodes: https://coin.dance/charts/ARS
Well thats what you get when, you destroy Americas middle class with low wage foriegn workers, and devalued currency .......
Now who`s going to buy trinkets, the keep commodity prices nice and inflated around the world??...........
Federico Sturzenegger.
Gee, I wonder when his folks came to Argentina.