Argentina bashes financial groups for speculation

Argentines turn to dollar on rising expectations of another devaluation and a recession.

Argentina bashes financial groups for speculation

World Bulletin / News Desk

Argentina’s government bashed financial groups Wednesday for trying to force policy changes for their own benefit, saying such moves should be penalized.

Jorge Capitanich, the presidential chief of staff, said unspecified financial groups are using “speculative strategies” to create uncertainty and drive up interest rates to inflate their profits.

“There is no reason for there to be uncertainty” about the economy, Capitanich said in a televised press conference.

The financial groups want to “charge usurious interest rates to appropriate part of workers’ salaries and promote a reduction in consumer demand,” he said.

“It is imperative that this speculative deliberate action must be socially penalized,” Capitanich added, without saying how.

He spoke after the peso plunged on the black market Monday and Tuesday in a sign of rising concerns that rising inflation and a weakening currency is pushing the country into recession.

The peso dropped 4 percent to 11.70 per U.S. dollar Tuesday on the black market compared with the previous day, and opened Wednesday at 11.80. That’s a nearly 15 percent decline from the 10.30 per dollar average since a 20 percent devaluation of the official exchange rate to 8 per dollar in January.

The black market exchange rate has become a leading indicator of confidence in the economy, and analysts say it could continue declining this year as the government appears unable to avert a recession, halt inflation and avert another devaluation.

The central bank had contained the exchange rate on the official and black markets after the January devaluation by raising interest rates to 30 percent annualized. This encouraged savings in pesos, helping to reduce demand for dollars on the black market, where many people are forced to buy because of strict controls on the official market.

The central bank also stepped up debt sales to reduce liquidity in the market, leaving fewer pesos available for buying dollars.

The strategy, however, brought adverse side effects in slowing economic growth. The higher interest rates have deterred people from borrowing to spend and made it harder for companies to invest and create jobs.

This led to a moderation of the austerity measures in April, when the central bank started reducing efforts to cut peso liquidity and let interest rates fall by two percentage points.

“The decline in interest rates reduced the attraction of saving in pesos compared with the dollar, and the market started to shift to dollars again,” said Gabriel Caamano, an economist at Estrateco Consultores, a consulting firm in Buenos Aires.

He said that expectations are rising of another devaluation on the official peso market, given that inflation has eaten up much of the gains, since January’s devaluation, for those companies that compete in export markets and against imports domestically.

“The only question now is when the next devaluation will be,” Caamano said.

Adding to the worries, speculation is running high of internal bickering between Juan Carlos Fabrega, central bank president, and Axel Kicillof, the minister responsible for the economy.

Fabrega is considered a moderate who wants to contain the exchange rate with more pragmatic measures, while Kicillof wants to avert a recession by stepping up public spending.

Capitanich tried to downplay these concerns. “There are no internal disputes,” he said. “We are focused on the design and implementation of economic policy.”

Capitanich linked some of the attacks to opposition political parties preparing to campaign for the October 2015 presidential election.

Most economists expect the government can ride through the first half of this year without major problems but they say the second half will be more complicated as the dollar inflows from farm exports slow. That will make it harder for the central bank to sustain the exchange rate and its hard currency reserves, which over the past three years fell to a seven-year low of US$28 billion.

“After August, the central bank will have to put in reserves to contain the exchange rate,” Caamano said. “And this will bring a lot more instability.”

Given that Argentina doesn’t have access to global financial markets because of its failure to fully settle a $100 billion default from 2001, it relies on its foreign reserves to pay the national debt and cover imports.

This makes it hard to both sustain reserves and the exchange rate.

Capital Economics, a London-based consulting firm in London, said Wednesday that it expects the central bank to choose to weaken the peso to 10 per dollar on the official market by the end of the year instead of allowing reserves to fall further.

The central bank, it said in a note to clients, “has drawn a line in the send for reserves at around the current level of US$28 billion.”

Last Mod: 22 Mayıs 2014, 11:17
Add Comment