In Argentina, A Populist Formula Goes Flat: WSJ Argentina devalued its peso Thursday in a move that raised fears of a financial crisis in South Americas second-biggest economy and recalled the meltdown a decade ago that sent the country on its long decline from a darling of global capitalism to economic pariah. A slide of more than 15% in early trading Thursday forced Argentinas central bank to step in by selling dollar reserves. The intervention narrowed the pesos loss to 8%, but that was the biggest one-day decline since Argentina defaulted on its public debt and devalued its currency in 2002. The market is exploding, said Francisco Diaz Mayer, a currency trader at ABC Mercado de Cambios. The increasing strains in Argentinas economy are the result of populist policies by Néstor Kirchner, the countrys late president, and his successor and wife, Cristina Kirchner. Their blueprint was simple: Use the boom in rising commodities prices for Argentinian exports like soy-and ramp up government spending to stoke the economy. Argentinas leaders also refused to submit their economic policies for review by the International Monetary Fund, which once saw the country as a poster child for free-market policies but was blamed by many Argentines for the pesos collapse. For years, the formula led to rapid growth and re-election for the Kirchners. But the strategy also resulted in inflation that is among the highest in the world, as well as unorthodox policies to contain the damage, such as price and currency controls. Argentinas central bank tightly controls the peso. The devaluation was a dramatic about-face for Mrs. Kirchner, who had vowed not to lower the peso, saying anyone who wanted to profit from such a free-market policy would have to wait for another government. On Thursday morning, though, her cabinet chief, Jorge Capitanich, signaled that the administration had stepped out of the market. It wasnt a devaluation caused by the state. For free-market lovers, the supply and demand of foreign currency expressed itself yesterday, he said. The peso tumbled to 8.50 per dollar from 7.14 per dollar. The central bank then reversed course and ended up selling $100 million in reserves to stem the slide, a person familiar with the matter said Thursday. Argentine President Cristina Kirchner speaks to supporters at the Casa Rosada in Buenos Aires on Wednesday. Agence France-Presse/Getty Images Venezuela partially devalued its own currency on Wednesday, weakening the bolívar to about 11.3 per dollar for certain transactions, including tourism and remittances, compared with the official exchange rate of 6.3 per dollar. Few economists expect Argentinas move to take pressure off the peso, mostly because a weaker currency could stoke inflation further by making imports more expensive and prompting ordinary Argentines to try to get their money out of the country by any means possible. The devaluation was a risky gambit by Mrs. Kirchner to bolster the peso and stem a sharp decline in the stockpile of dollar reserves, which the central bank has been using to buy up the currency at fixed prices that are far higher than what the peso trades for on the black market. Argentina is starting to face a dollar crunch. Central-bank reserves fell to $29 billion at the start of this year, down from $52 billion in 2011. Even before Thursday, the central bank had been burning through an estimated $100 million a day to defend the currency, according to Elena Castro, a vice president at brokerage firm Auerbach Grayson & Co. The big question is if the devaluation feeds into higher prices and leads to more social tensions. Annual wage talks will start soon, and the big question is what increase the unions will ask for. That is probably going to create political and social problems, said Carlos De Angelis, a professor of social sciences at the University of Buenos Aires. Another sign that the move might backfire was the response on the black market, where the peso fell to 13.1 per dollar from 12.2 at the start of the session. The drop suggests that the official rate still overvalues the currency. The devaluation could hardly come at a worse time for Mrs. Kirchner, who succeeded her husband as president in 2007. He died in 2010. Mrs. Kirchner underwent brain surgery last year. The devaluation came a day after her first public speech in six weeks. The country was rocked by widespread looting and violence that left around a dozen dead in December. The looting started after a police strike in an interior city, but it spread to other provinces. Scenes of crowds stripping store shelves bare were reminiscent of looting during the last economic crisis. For ordinary Argentines, the market turbulence of the past few days has revived memories of past crises and made Argentines even more wary of Mrs. Kirchners ability to fix the problems. My salary is worth less every day and inflation is unstoppable, said Carlos Delia, a 45-year-old bank employee. If the government doesnt do something fast…were going to have a problem similar to the one we had in 2001. The Argentinian peso was one of several emerging-markets currencies hit Thursday after weak economic data out of China heightened worries about the developing worlds ability to weather the end of easy-money policies. But the flare-up in Argentinas currency market was the most dramatic-and serves as a warning that conditions for many developing countries have worsened since commodities prices ended their decadelong climb. The shift is particularly dangerous to Latin American countries like Argentina and Venezuela that used the boom to embark on a spending spree, allowing inflation to surge and adopting currency controls and other unorthodox economic policies. The Kirchners came to power in 2003 after the last economic crisis brought down former President Fernando de la Rúa and set off a chaotic period that at one point saw five presidents in about a week. Néstor Kirchners policies helped the economy recover and made him enormously popular. He was barred by law from seeking another re-election in 2007, so Cristina ran instead. She won election handily. But the turnaround in commodities prices and growing strain from years of overspending that stoked inflation have gradually weakened Argentinas economy-and Mrs. Kirchners grip on power. Her ruling coalition failed to pick up enough seats in Octobers midterm congressional election to change the constitution so she could seek a third-term in 2015. While she still wields considerable power, her lame-duck status leaves her open to challenges from rival politicians in the ruling Peronist party. This week, the government continued to crack down on imports and the online purchase of foreign goods in a bid to prevent a scarce supply of U.S. dollars from leaving Argentina. On Tuesday, the government started requiring people to submit tax forms before making online purchases at foreign retailers. The government then limited such purchases to two a year. They dont have much of a choice any more because theyve been burning their foreign-exchange reserves for some time and the capital flight hasnt really stopped, said Caglar Somek, a portfolio manager at New York frontier-markets fund manager Caravel Management. With limited foreign-exchange reserves, they cant afford to keep defending the currency. They just cant sustain it, he added. Critics said Argentinas government has been slow to respond to the crisis, especially given Mrs. Kirchners recent absence from the public spotlight. That is a sharp turnaround for a president known for flamboyant speeches and constant Twitter messages, even about the television series Game of Thrones. After a big drop in the peso Wednesday, many Argentines hoped that Mrs. Kirchner would address growing concerns about the currency and other economic problems. Instead, in her first speech since early December, the president avoided mentioning the economy and defiantly defended her policies, including the states role in redistributing wealth. And rather than take steps to cut government spending and reduce inflation, Argentina has tried to underreport price increases, according to economists. The government says the inflation rate was 10.9% last year, but economists estimate it was closer to 25% to 30%.
Posted on: Sun, 26 Jan 2014 01:00:00 +0000
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