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Argentina Eases Currency Controls, but Citizens Are Not Reassured Plunge in Argentina’s Currency Raises Fears of New Financial Crisis
(about 7 hours later)
RIO DE JANEIRO — Argentina’s government scrambled on Friday to try to contain a brewing financial crisis, allowing residents unnerved by a rapid slide in the country’s currency to buy dollars with greater ease. BUENOS AIRES — Cities across Argentina are still unnerved by all the looting that broke out last month after police officers went on strike, protesting salaries eroded by rampant inflation. Residents fumed over blackouts that left them sweltering during the heat wave in recent weeks. Then the currency plunged this week, the steepest decline since the nation’s economic collapse in 2002, stirring fears that another major financial crisis could be around the corner.
But rather than stemming anxiety, the move seemed to sow confusion on the streets of Argentine cities and in financial markets, fueling resentment over longstanding economic problems. “In 80 years, there’ve been tough times, but it’s never been as bad as this,” Irma Herrera, 80, a retired psychologist, said Friday after the government announced that it would make it easier for Argentines to buy dollars amid the financial upheaval.
“This is all improvised; they don’t know what they’re doing,” said Antonio López, 63, an administrator for an office building, fearing the country was heading toward a period of economic turmoil. “I’m not going to buy dollars when my monthly pension doesn’t even stretch to buy food,” Ms. Herrera said.
Argentina’s currency, the peso, has plunged against the dollar this week over concerns that demand for commodities, a centerpiece of its economy, is weakening in places like China, a slowdown that could threaten developing economies around the world. The prospect of safety or higher returns in the United States also saps investment from developing countries. In a matter of days, Argentina has become a symbol of the economic stresses mounting in developing countries around the world. Fears are rising that the demand for commodities, a centerpiece of the Argentine economy, is weakening in places like China, a slowdown that could threaten developing nations globally.
The abrupt swings in Argentina in recent days have sent tremors into the economies of other nations, reflecting a fear of contagion if instability intensifies. At the same time, the prospect of better returns in the United States is drawing money out of the developing world and battering currencies from Turkey to Russia to South Africa.
With Argentines angry about soaring inflation and a nearly 20 percent drop in the value of the peso this week, the government announced Friday that it would allow people to buy dollars with fewer restrictions as a way of shielding themselves. The economy minister described the shift as a response to “psychosis” in Argentina’s financial markets. The worries over contagion are spreading. In Brazil, the country’s powerful automobile industry is bracing for the problems here in Argentina, one of Brazil’s biggest export markets. But beyond the global forces at play, the financial swings this week have called attention to the particular challenges for some of Latin America’s most vulnerable economies.
“There’s something that’s happening all over Latin America, which is that the region is coming to the end of its commodities boom,” said Francisco Rodríguez, an economist with Bank of America Merrill Lynch. “Some countries are more vulnerable than others, and definitely the Venezuelas and Argentinas of the world are more vulnerable. Markets are getting very nervous about what will happen to them if you enter a period of a slump in commodities prices.”
This week in Venezuela, the government announced what amounted to a partial devaluation and new currency controls. On Friday, travel agents said several airlines had either stopped selling tickets over the last few days or made only a very limited number of seats available.
The airlines say they have $3.3 billion in revenues in Venezuelan banks that the government has not let them take out of the country. They worry that the value of that money, which is still in local currency, could shrink significantly.
“This is one of the high points when you speak to airline C.E.O.’s,” said Peter Cerda, regional vice president for the Americas of the International Air Transport Association. “What keeps them up at night is exactly this. What their money’s worth today, it might not be worth tomorrow.”
On Friday, Venezuela’s government also put new limits on the dollars it promises to sell citizens traveling abroad, with a cap of $700 per trip to Florida, compared with $2,500 for travel elsewhere in the United States.
“It’s madness,” said Antonio Miglio, 42, a businessman, who flies to Orlando, Fla., every year with his family to go shopping. “The government made this decision because of the economic crisis, but this will only make the crisis worse.”
Here in Argentina, the pressures have been building for years. Generous social spending after the debilitating crisis in 2002, like freezing household electricity rates and making payments to poor families, has led Argentina’s deficit to widen. The country has been printing money, fueling inflation. The issue has been so polemical that the government has been in a fight for years over how high inflation really is; independent economists say it reached 28 percent in 2013, while officials say it was 10.9 percent.
Argentina’s economy is still expected to grow at 2.8 percent this year, according to the International Monetary Fund, but growth has slowed significantly from recent years, and capital flight has been a longstanding problem. Given that the government has nationalized businesses like YPF, the country’s biggest oil company, some investors have pulled back, and many people here have tried to take their money out of the country.
To prevent that exodus, the authorities have tried to restrict access to foreign currency. Now, with a nearly 20 percent drop in the value of the peso just this week, the government said Friday that it would allow people to buy dollars with greater ease. The economy minister described the shift as a response to “psychosis” in Argentina’s financial markets.
“The government is trying to find a way out of the mess it got into,” said Fausto Spotorno, an economist at Orlando Ferreres y Asociados in Buenos Aires. “But there’s so much more to do, like tackle inflation.”“The government is trying to find a way out of the mess it got into,” said Fausto Spotorno, an economist at Orlando Ferreres y Asociados in Buenos Aires. “But there’s so much more to do, like tackle inflation.”
Argentina’s inflation rate, at 28 percent in 2013, ranks among the world’s highest, though the government contends it was much lower, around 10.9 percent. With Argentina’s government fueling the inflation by spending heavily on social programs, the budget deficit is also widening, heightening concern over the sustainability of the policies of President Cristina Fernández de Kirchner. Rather than stemming the anxiety, the government’s announcement on Friday seemed to sow confusion.
Mrs. Kirchner’s top aides are adopting a confrontational stance to the brewing crisis. Axel Kiciloff, the economy minister, lashed out on Friday at financial analysts who contend that the peso may weaken further, calling them “great liars.” In comments to an Argentine radio station, he attributed the sharp fall in the peso on Thursday to a “speculative attack” put into motion by a request for dollars by the oil giant Royal Dutch/Shell. “This is all improvised,” said Antonio López, 63, an administrator for an office building. “They don’t know what they’re doing.
Anxiety over the economy has been building for months in Argentina, highlighted by a spate of blackouts and sporadic looting in December, events recalling the chaotic financial collapse in the country in 2001 and 2002. The International Monetary Fund still expects Argentina’s economy to expand 2.8 percent this year, but growth has slowed significantly from recent years. The economy minister, Axel Kicillof, lashed out at financial analysts who contended that the peso might weaken further, calling them “great liars.” In comments to an Argentine radio station, he attributed the sharp fall in the peso to a “speculative attack” put into motion by the oil giant Royal Dutch Shell.
Other countries in the region are also grappling with economic challenges and a fear of contagion. In Brazil, the main stock index fell more than 1.5 percent on concern that a weaker peso would curb exports to Argentina, which is one of Brazil’s largest trading partnters. “The authorities in Argentina are suffering from low credibility,” said Alberto Ramos, an economist at Goldman Sachs. “The situation can get as bad as they want to make it.”
And in Venezuela — where the socialist government operates at a hefty deficit and inflation reached more than 56 percent last year, one of the highest rates in the world — authorities announced what amounted to a partial devaluation this week. The move, which shifts a portion of foreign exchange transactions to a devalued rate, was meant to try to curb a soaring black market for dollars. The streets of downtown Buenos Aires were bustling but calm on Friday, with more dark humor than signs of panic. “Great, we can buy dollars now,” said Nicolás Titaro, 61, a company treasurer in Buenos Aires. “We just need salaries that let us.”
The easing of currency controls in Argentina on Friday signaled a shift from earlier policies in which the government had made it much harder for people to buy dollars, forcing the currency trade into a thriving black market. Reacting to the latest policy shift, Argentines pondered whether this was the start of long series of unpredictable announcements.
“Great, we can buy dollars now; we just need salaries that let us,” said Nicolás Titaro, 61, a company treasurer in Buenos Aires. He criticized what he described as the government’s seemingly haphazard approach to the economy, saying, “Such improvisation is scary.”
Skepticism persisted in Argentina’s financial markets on Friday. The peso fell about 2 percent, after tumbling more than 8 percent on Thursday, while the cost to traders of insuring Argentine debt against the risk of default shot up the most in five months.
“This announcement creates uncertainty, and that’s the worst thing that can happen in the economy,” Aldo Pignanelli, a former central bank president, said in televised comments about the relaxation of currency controls.