Nov. 12 (Bloomberg) -- Eric Francos, a French doctor on a three-week vacation with his wife and two children, was huddled off to one side of a pedestrian thoroughfare clogged with shoppers in downtown Buenos Aires, taking $100 bills out of his money belt as illegal money-changers beckoned with calls of “dollars, euros, exchange.”
“I know the risks, but so far I’ve never had problems, I try to be careful,” Francos, who plans on touring vineyards in the province of Mendoza, which lies 1,100 kilometers (680 miles) west of the Argentine capital and is renowned for its Malbec wine, said last week as he stuffed pesos into his front pants pocket. “Changing dollars in the streets is worth it.”
Tourists like Francos, who got 9.7 pesos per dollar compared with 5.9729 at the official rate, are turning to the black market to obtain local currency and shaving as much as 40 percent off their vacation costs. They’re also depriving the central bank of the foreign reserves the government uses to pay its debt, which is the most expensive to protect against non-payment anywhere in the world using credit-default swaps.
Visitors who spent $622 million during the second quarter sold only $342 million through official channels including banks, a 48 percent plunge from a year earlier, according to government data.
Last month, in an attempt to get more dollar inflows into the country, the government said Argentines who bring in foreign currency to pay taxes will be exempt from a bank deposit requirement.
Lured by a widening gap between official and illegal exchange rates as President Cristina Fernandez de Kirchner tightens limits on foreign-currency purchases, tourists are contributing to the longest stretch of reserve declines in at least two decades and helping to reduce dollars held at the central bank to a six-year low of $33.05 billion.
“The numbers show that tourists are changing their dollars in the illegal market to take advantage of the higher rate,” Belen Olaiz, who wrote a report on the illegal market for Abeceb.com research firm, said in a telephone interview from Buenos Aires.
An official at the central bank didn’t return phone calls seeking comment on the decline in reserves.
Reserves cover 27 percent of outstanding foreign-currency debt, the lowest in seven years, according to Orlando Ferreres y Asociados.
Argentina has been unwilling to pay borrowing costs that are almost double the average rate for emerging markets to tap global credit markets since its 2001 default on $95 billion of debt. In 2010, Fernandez ordered the central bank to pay investors who received bonds in two restructurings with reserves.
Since then, the government has drawn down more than $39 billion of central bank funds to pay debt, contributing to an unprecedented streak of 12 straight months of declines in reserves.
The country is using reserves to reduce its debt levels, which have fallen in the past years, said an official at the Economy Ministry with direct knowledge of the mater who asked not to be named due to internal policies.
The country’s foreign-currency debt held by private creditors fell to 9.3 percent as of June 30, from 11.9 percent at the end of 2010, data compiled by the Economy Ministry show.
Tourists who change money illegally face the risk of receiving fake bills or being robbed. Street money-changers, known colloquially as arbolitos, or Spanish for little trees because they’re like a fixed part of the landscape, often ply their trade within a few yards of policemen.
An alternative is to visit one of the small shops or back-street offices known as “caves” that use tourist agencies or dealerships in antiques, gold and coins as a front for trading currencies.
Sanctions for illegal currency trading range from a fine of 10 times the transaction if it’s the first time a person is caught to as many as eight years in prison.
Some shops and restaurants accept foreign currency as payment, giving clients more for their dollars or euros than they would get at a bank or using credit cards.
Pablo Romano, a 24-year-old employee in a clothing store on Florida Street, where Francos exchanged dollars for pesos, says he offers tourists who make purchases an exchange rate of nine pesos per dollar.
“We shouldn’t be blaming tourism for the drop in reserves rather government policies,” said Jose Luis Espert, who runs research firm Espert & Asociados in Buenos Aires. “High public spending makes the government print more pesos which Argentines don’t want.”
Foreign-direct investment in Argentina fell 32 percent in the first half of 2013 from the same period a year earlier to $5.2 billion, while investment in neighboring Brazil and Chile was $39 billion and $10.4 billion, respectively, according to the Santiago-based United Nations Economic Commission for Latin America.
“What we have in Argentina is a dollar supply problem, not demand,” Ricardo Delgado, director of Buenos Aires-based Analytica Consultora, said in an interview. “The big problem is that we’re not receiving dollars because investors don’t have confidence in the country.”
Investors demand an extra yield of 8.23 percentage points over U.S. Treasuries to hold Argentine debt, as of 5:24 p.m. in Buenos Aires, according to JPMorgan Chase & Co.’s EMBI Global Diversified index.
With the depreciation of the peso lagging annual inflation that economists estimate has run at more than 20 percent for at least four years, Argentina has become more expensive for foreign tourists.
The rising costs have also encouraged greater numbers of Argentines to buy goods abroad while on vacation and to withdraw cash to exchange in the black market at home. While the government slapped a 20 percent charge on the transactions to discourage consumers, the implied rate of 7.176 per dollar is still cheaper than the black market.
As a result, the country will run up an $8 billion tourism account deficit, or the difference between what foreign tourists spend in Argentina and what Argentines spend abroad, according to Delgado.
Fernandez may act to cut off access to dollars further for Argentines traveling abroad, both Olaiz and Delgado said.
“The government may decide to adjust credit cards payments of foreign-currency purchases,” Delgado said. “Still, any ideas the government may have are only palliatives if it doesn’t boost confidence in the country to solve its deeper problems.”
For now, Francos, the French doctor, will continue to spend in cash to finance his trip to Patagonia in the south and Salta in the north rather than swipe his foreign bank cards at the official rate.
If it weren’t for the cheaper rate, “many items are as expensive as in Europe,” Francos said.
To contact the reporter on this story: Eliana Raszewski in Buenos Aires at email@example.com