Pesos Go Underground as Dollar Ban Backfires: Argentina Credit

Pesos Go Underground as Dollar Ban Backfires
Argentine President Cristina Fernandez de Kirchner delivers a speech in Buenos Aires. Photographer: Alejandro Pagni/AFP/GettyImages

Argentine President Cristina Fernandez de Kirchner’s foreign-exchange controls are driving pesos underground.

A quarter of Argentines are keeping their pesos at home, up from 19 percent a year ago, according to a survey conducted in September by the Catholic University of Argentina and TNS Gallup. The increase reflects how people are shifting money out of banks to trade dollars in a cash-dominated black market where the cost of the U.S. currency has surged 35 percent this year, according to Buenos Aires-based research company EconViews.

The migration of cash out of the financial system is stripping banks of funding and undermining Fernandez’s efforts to hold down interest rates and bolster an economic rebound. The 30-day deposit rate has jumped 1.8 percentage points in the past four months to 14.8125 percent. A three-day decline of 0.8 percentage point that pared the increase in the benchmark rate will prove short-lived as annual inflation of 24 percent drives more Argentines to move money into the underground economy, said Eric Ritondale, an economist at Econviews.

“Money’s moving out of the banking system and out of the formal economy,” Ritondale said in a telephone interview from Buenos Aires. “As much as the government wants to promote the use of pesos, the truth is they won’t be able to achieve it. You can’t get it done” with interest rates below inflation.

Rate Disparity

The so-called badlar rate, which banks pay on deposits of 1 million pesos ($210,400) or more, will climb to 17 percent by the end of this year, Ritondale said. That’s more than double similar rates in Brazil and almost five times those in Mexico.

The average interest rate offered among private banks for time deposits less than 100,000 pesos fell to 12.64 percent on Oct. 22 from an eight-month high of 12.85 percent on Oct. 19, central bank data show. Total peso deposits increased at the slowest pace in a year in September, central bank data show.

Fernandez’s controls are making it harder for Argentines to buy dollars to protect against inflation and a weaker currency.

The university survey, conducted from Sept. 21 to Sept. 30, found that 11 percent of individuals said they choose to buy dollars to keep at home or put in a bank as a preferred method for savings based on convenience, down from 21 percent a year ago, after the restrictions were set in place.

‘No Incentive’

“Banks aren’t offering attractive interest rates,” Angeles Arano, one of the researchers at TNS Gallup who conducted the poll, said in a telephone interview from Buenos Aires. “There’s no incentive for people to put their money in the system.”

Argentine bonds fell today after the country lost a bid to reverse U.S. lower-court rulings that may help creditors collect $1.4 billion on defaulted debt. Dollar-denominated notes due 2015 dropped 4.81 cents to 84.73 cents on the dollar at 3:09 p.m. New York time, pushing yields up 2.2 percentage points to 13.73 percent, according to Bloomberg data.

The U.S. Appeals Court in New York ruled that Argentina, which carried out a record sovereign default in 2001, can’t discriminate against holders of the defaulted bonds in favor of holders of the securities it restructured. A three-judge panel upheld orders issued by U.S. District Judge Thomas Griesa in Manhattan.

Of the 41 billion pesos pumped into the nation’s monetary base this year by the central bank, 84 percent are circulating among individuals, according to the latest central bank data. That compares with 59 percent in the same period last year. In total, just 21 billion pesos are in the banking system, about 8 percent of the monetary base on Oct. 12.

Cash Holdings

Cash in the hands of individuals accounted for 51 percent of private money supply, compared with 49 percent a year ago, EconViews found in an Oct. 22 study of central bank data.

The country’s money multiplier ratio, an indication of how much central bank-created cash is making its way through the financial system, fell to 1.495 on Oct. 5, the lowest since December 2007.

Bank deposits expanded 37 percent in September from a year earlier, while lending grew 40 percent, central bank data show.

Last month, liquidity in the banking system dropped 0.3 percentage point from August to 35.5 percent, the lowest since December. The central bank defines liquidity as the percentage of cash, deposits in current accounts and central bank notes relative to total deposits.

The badlar will resume its climb as liquidity drops and Fernandez’s recent measures, including forcing insurance companies to allocate $1.5 billion in state-sponsored projects, deter investment, according to Maria Jose Anastasio, a portfolio manager at Standard Bank Argentina SA.

Badlar Futures

“It’s an upward trend and you’ve got lots of drivers,” Anastasio said in a telephone interview from Buenos Aires. “These are part of the distortions that lead people to prefer to take on debt rather than save.”

Trading in the futures market shows investors expect the badlar will climb to 17.76 percent by April.

The drop in the badlar was expected as higher interest rates would hamper the government’s effort to bolster economic growth, according to Camilo Tiscornia, a former central bank economist.

“The government has thousands of ways -- through the central bank, through the social security agency, through the Banco Nacion -- to make the rate fall,” Tiscornia, who now runs research company C&T Asesores Economicos, said in a telephone interview from Buenos Aires. “They think that high rates will stem consumption and investment.”

Tighter Controls

Over the last year, Fernandez has tightened controls on the foreign-exchange market to curb capital flight, which almost doubled to $21.5 billion in 2011. After her re-election last October, individuals and companies were required to get authorization from the federal tax agency before buying dollars.

In July, the central bank issued a list of acceptable reasons to buy foreign currency, which didn’t include savings or real estate.

The peso has weakened 9.5 percent this year in the official market to 4.7513 yesterday, and will drop 3 percent by the end of December to 4.9, according to the median estimate of 15 analysts surveyed by Bloomberg.

In the unregulated market, known as the blue-chip swap, which investors use to acquire dollars by buying assets locally in pesos and selling them abroad in U.S. currency, the peso has weakened 27 percent this year to 6.4127 pesos per dollar.

Default Swaps

The cost of protecting Argentine debt against non-payment for five years with credit-default swaps surged after the court ruling, climbing 432 basis points to 1,391 basis points, data compiled by Bloomberg show. The swaps pay the buyer face value in exchange for the underlying securities or cash if a government or company fails to comply with debt agreements.

The extra yield, or spread, investors demand to hold Argentine government dollar bonds instead of U.S. Treasuries rose 132 basis points to 983, according to JPMorgan Chase & Co.

EconViews’ Ritondale says more individuals are turning to the parallel market to sell their pesos for dollars, where counterparties remain flush with local currency that continues to circulate in the informal economy.

“As the parallel market grows, each day you have more pesos outside of the formal economy,” Ritondale said. “If bank rates aren’t raised, you’re going to see the black market exchange rate shoot up.”

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