Dec. 21 (Bloomberg) -- Argentina is printing money five times faster than Ben S. Bernanke’s Federal Reserve, fueling a surge in inflation that’s saddled debt investors with the worst dollar-based returns in emerging markets this year.
Money supply, as measured by the M2 gauge that includes pesos in the hands of the public and pesos in checking and savings accounts, soared 39 percent in the past year as Argentina tried to revive its economy, versus a 7.3 percent gain in the U.S. The flood of pesos has cheapened the currency by the most in Latin America this year, leading to an average 13 percent loss for local bonds in dollars. Notes from the region as a whole returned 16 percent, according to Barclays Plc.
The South American nation has increased the amount of currency in its economy by 30 percent or more in three of the last four years, causing consumer prices to jump an estimated 25 percent annually. While printing money fueled annual growth of 7.8 percent from 2003 to 2011, it’s failing this year as the government chokes off investment and extends its influence over an economy forecast to grow just 2.2 percent. Yields on peso debt are now too low to compensate for the declining purchasing power of the currency, Moody’s Analytics Inc. said.
“The economic model is based off of negative interest rates and excess liquidity,” Juan Pablo Fuentes, an analyst at Moody’s, said in a telephone interview from West Chester, Pennsylvania. “Over a longer term, peso bonds aren’t attractive because inflation is eroding your capital.”
Eduardo De Simone, a spokesman at the central bank, didn’t return an e-mail seeking comment on the jump in money supply.
Unable to tap international markets since its record $95 billion default in 2001, the government has turned to the central bank to finance spending and meet foreign debt payments. The bank will probably transfer a record 120 billion pesos by the end of this year, versus 67 billion in 2011, according to former central bank President Aldo Pignanelli.
Since Mercedes Marco del Pont replaced Martin Redrado as head of the bank in February 2010, money supply has more than doubled to 436 billion pesos ($89 billion). That compares with an 83 percent increase during the six years the bank was run by Redrado, who was fired by President Cristina Fernandez de Kirchner for opposing her plan to pay creditors with reserves.
Unlike Brazil, Chile and Colombia, Argentina doesn’t use monetary policy to target inflation.
Instead, Marco del Pont sets goals for annual expansion based on M2. Her target for this year was for a 24.6 percent increase. In the 12 months to Dec. 7, M2 increased 39 percent, according to central bank data. The Fed has pumped more than $2 trillion into the financial system since its first round of quantitative easing in 2008 in a bid to prop up the U.S. economy, without igniting inflation.
“They need all the help they can get from monetary policy,” Neil Shearing, the chief emerging-markets economist at Capital Economics Ltd., said in a telephone interview from London. “In Argentina it’s different because the money printed is actually being spent by the government so that has a direct impact on the economy and tends to be far more inflationary.”
While the central bank has quickened the pace of the peso’s depreciation to 1.5 percent in November from 1 percent a year earlier, the Argentine currency will have to fall 30 percent to 7 per dollar to offset inflation and make exporters competitive, Shearing said.
The peso fell 0.1 percent to 4.9036 per dollar today.
While independent economists estimate annual inflation at 25 percent, the government puts it at less than half that rate. Consumer prices rose 10.6 percent in November from a year before, according to the national statistics institute.
The accuracy of Argentina’s inflation reporting has been questioned by economists since 2007, when Fernandez’s late husband and predecessor, Nestor Kirchner, replaced senior staff at the institute. The International Monetary Fund has threatened to censure the South American nation over alleged data manipulation.
The government is unlikely to quicken the pace of the peso’s depreciation ahead of congressional elections next year, said Sebastian Vargas, an analyst at Barclays.
“I don’t expect the government to devalue the peso in the official market,” Vargas said in a telephone interview from New York. “The rate of depreciation is going to be lower relative to expectations. It’s going to be gradual, at least until mid-term elections in October.”
Since her re-election in October 2011, Fernandez has banned most purchases of dollars, preventing Argentines from their traditional hedge against a drop in their own currency. In an unregulated market, in which investors buy local assets in pesos and sell them abroad for dollars, the peso has weakened 29 percent this year to 6.8635 per dollar.
Since former president Eduardo Duhalde abandoned a fixed exchange rate in January 2002, the peso has weakened 80 percent against the dollar, compared with gains of 12 percent by the Brazilian real and 38 percent by Chile’s peso.
The extra yield investors demand to hold Argentine government dollar debt instead of Treasuries widened nine basis point, or 0.09 percentage point, to 1,006 basis points at 2:27 p.m. in New York, according to JPMorgan Chase & Co.
The cost of protecting $10 million of Argentine government debt against default for five years rose 30 basis points to 1,431 basis points, data compiled by Bloomberg show. Warrants tied to economic growth fell 0.03 cent to 7.21 cents today.
The yield on peso bonds due 2018, which are linked to the official rate of inflation, has fallen 0.25 percentage point this year to 11.34 percent yesterday. That’s not high enough to make up for unofficial inflation and the risk of a sudden drop in the currency, said Capital Economics’s Shearing.
“Yields are low given the risk,” he said. “Monetary policy in Argentina has gotten to a point now where I don’t know how they’ll come out of it without having a hard fall.”