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Last updated: January 24, 2014 7:06 pm
The Argentine government said on Friday it would not let the peso fall any further after the authorities oversaw an 18 per cent drop in the currency this week, the biggest sell-off since the country’s almost $100bn sovereign default 12 years ago.
With Argentina still all but cut off from international capital markets, the devaluation is the latest and boldest attempt by President Cristina Fernández to stop capital flight, staunch a rapid decline in foreign reserves and prevent a balance of payments crisis in South America’s second-biggest economy.
The currency traded at just over 8 pesos to the dollar on Friday afternoon, still short of the “blue” parallel, or black market, rate of about 11. Foreign reserves have fallen more than $1bn a month over the past year to reach a seven-year low this week of $29bn.
“Our administered currency policy has reached the acceptable level of convergence for our economic objectives,” Jorge Capitanich, head of the cabinet, said from the presidential palace.
Economists have welcomed the government’s desire to exit a maze of currency restrictions first implemented in 2011, but also criticised the haphazardness of the measure, saying it did not get to the heart of the problem: tightening monetary policy to slow soaring inflation, privately estimated at over 25 per cent.
“We don’t know whether the peso will float freely or not and mainly what is really pending is a programme to tackle inflation, which is the underlying problem,” said Daniel Marx of Quantum Finanzas, a consultancy.
On the streets of Buenos Aires, many Argentines felt the same way. “This is all improvised,” said Antonio López, 63, an administrator for an office building, as he bought a newspaper from a street stand. “They don’t know what they’re doing. Inflation is going to rise. I wish I could buy dollars, but there’s no purchasing power.”
Many were also confused by an apparent relaxation of capital controls, after the government said on Friday it would allow Argentines to save in dollars from next week, and would also cut the tax rate on some foreign purchases to 20 per cent from 35 per cent.
Aldo Pignanelli, a former central bank president, said: “It’s impossible that the central bank will lift the clamp (on dollar purchases) because the current demand for dollars hugely outweighs supply and reserves are falling.”
The official rate for Argentina’s peso is still well off the black market rate, known as the “blue dollar” rate, suggesting further pressure on the official peso to depreciate . . .
Argentines are no strangers to abrupt devaluations and high inflation, and the experience of Argentina’s 2002 devaluation and debt default is seared into many minds, which is why the government has long stood back from a sudden devaluation.
However, stagnant commodity prices are shrinking the trade surplus and Ms Fernández’s policy of printing money to fund social spending is unravelling as the fiscal deficit grows. Her government has also begun to try and mend fences with international lenders by, for example, reopening talks with the Paris Club of creditors.
On Wednesday, the 60-year-old head of state made her first public appearance since undergoing surgery to remove a bloodclot from her brain in October but she made no mention of Argentina’s economic challenges.
“The chickens of populism have come home to roost,” said Arturo Porzecanski, an economist at the American University. “This is the beginning of the end of Kirchnerism in my view.”
Additional reporting by Jonathan Wheatley in London
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