Currency Wars – Gold is Money – Argentinian Currency crisis could be Brewing

Currency Wars – Gold is Money – Argentinian Currency crisis could be Brewing

Pressure over the Argentinian Peso and Government disagreements over solutions could brew another Currency Crisis.

Taken from BnAmericas:

ANALYSIS: A new Argentine currency crisis could be on the cards

Growing pressure on the Argentine peso has seen the parallel exchange rate reach 8.75 pesos to the US dollar, a record 72% premium over the official rate of 5.10. Amidst government disagreements on remedies, a new currency crisis could be in the offing.

It follows the new measures announced at the start of this week, aimed at protecting the dwindling reserves at the central bank (BCRA ). The measures saw an increase in the tax on credit and debit card use abroad from 15% to 20% that will now also apply to domestic purchases of foreign travel and tourism packages.

According to Alberto Ramos of Goldman Sachs, the growing distress in the foreign exchange market, suggests “a currency crisis could be brewing.”

Local press have reported that President Cristina Fernández summoned her economic team to a meeting Wednesday night at the Casa Rosada, the presidential palace, where disagreements surfaced on the possible new measures that could be taken along with rumors that recent events could cost the BCRA president, Mercedes Marco del Pont and other members of the economic team, their jobs.

According to a note from Goldman Sachs, the alleged conflicting views within the economic team center on deputy economy minister Axel Kicillof and central bank president Marco del Pont who are in favor of a multi-tier FX regime, while other members advocate tightening the controls over the FX market.

Since October 2011, Argentine daily La Nación has detailed 25 currency control measures in the country. According to Ramos, increasing the level of FX market repression via controls is just as problematic at a multi-tier regime as it tends to create greater demand for US dollars while the controls lose effectiveness over time as markets find ways around them.

“In our assessment, both proposals would be negative, as they tend to be ineffective over the medium term and do not address the fundamental causes for the increasing demand for USD, namely, entrenched high domestic inflation (+25% year-on-year), an increasingly overvalued ARS, [Argentine peso] and a relatively interventionist and business-unfriendly environment,” added Ramos.

In this regard, it is quite telling that while Argentina is struggling to contain a rapidly depreciating currency virtually all other economies in the neighborhood (such as Brazil, Chile, Colombia, Peru) are dealing with intense currency appreciation pressures.

For months analysts had been claiming that a slow and steady devaluation would be the preferred route for politicians but financial markets rarely afford such a luxury.

As threats to the Argentine economy mount, the question arises as to which is likely to happen first, an adverse judgment in the US courts in favor of bond holdouts or a currency crisis? The self-styled masters of the Argentine economy may well find their control undermined pretty soon from either or both of these alternatives. Look for blame to be shifted elsewhere.

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