The Price of Argentina's Devaluation

Raul Gallegos is a Bloomberg View contributor, who covers Latin American politics, business and finance. He was a columnist for Reuters and a correspondent for Dow Jones and the Wall Street Journal. He is a graduate of the University of California at Berkeley and Columbia University. He grew up in El Salvador and is based in Colombia.
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There's been plenty of fussing since Argentina's biggest currency devaluation in 12 years, with much effort being made to assign blame.

What's missing is the government's recognition of the role it played in bringing Argentina to this sorry state. Deficit spending has helped push inflation to an estimated 28 percent last year, the highest in more than two decades. Add to that the government's practice of imposing price controls and nationalizing companies without compensating owners, and it's no wonder foreign investment has been scared off.

Amid this government-induced turmoil, it should be no surprise that Argentines are going to great lengths to safeguard their money by purchasing a strong currency like the U.S. dollar. Demand for dollars is a big reason the Argentine central bank's dollar reserves have declined by almost a third to $29 billion. To limit the drain on reserves, the government had little choice but to devalue the currency to 8 pesos a dollar from 6. Moody's Investors Service reckons Argentina may devalue the currency another 50 percent before the year is out.

Top Argentine officials seem oblivious, as if government policies had nothing to do with the health of the economy. On Sunday, Economy Minister Axel Kicillof told the leftist daily Pagina 12 that "Argentina has a cultural problem with the dollar," adding that "it's not just large speculators or wealthy sectors who are playing with the currency but, culturally, in the Argentine mentality there is a desire to own dollars." This should be no surprise in a country with a history of currency devaluations.

The following day, President Cristina Fernandez de Kirchner, during a trip to Cuba for a Latin America country summit, accused banks of manipulating the currency in a Twitter post: "The banks, only through them can market manipulation maneuvers be done." In a separate post, Fernandez said she had a chat with Brazilian President Dilma Rousseff concerning "speculative pressures over the exchange rates of emerging countries. (Sound familiar?)"

Still, Fernandez's own government on Monday eased restrictions so Argentines can buy dollars and save them in local bank accounts. Cabinet Chief Jorge Capitanich said the government would sell as much as $2,000 a month to individuals, depending on their monthly earnings. The dollar purchases will be taxed at as much as 20 percent unless buyers hold onto their dollar deposits for one year.

The move, meant to ease demand in a black market for the greenback, didn't appear to work. Shortly after Capitanich's remarks, the black-market rate rose to 12.25 pesos a dollar. Meanwhile, the government institute charged with selling dollars received more than 121,000 purchase orders for $59 million in U.S. currency. Banks and brokerage houses had to turn away customers.

Weakening the currency clearly isn't a popular thing for a government to do. Kicillof tried to downplay the devaluation's negative effects on the economy when he told Pagina 12 that "some speculative sectors sought a mega devaluation, but they didn't get it, because this is far from a mega devaluation." The devaluation of 1989 weakened the peso's value 2,038 percent and was much worse, he said.

The main worry is what comes next. Lawmaker Margarita Stolbizer posed a question many have in mind when she told Radio America: "In November a dollar sold for 6 pesos and now it's at 8 pesos per dollar. We've had a devaluation of more than 30 percent in two months, and this has a terrible outlook, of 50 percent or 60 percent" more this year. "Where are we headed?"

Fernandez's administration likes to blame inflation on greedy capitalists. In an interview published Tuesday, Capitanich disavowed any government responsibility for inflation when he told Ambito Financiero, "many times prices go up in Argentina for mere sport." Business and finance groups, he insisted, take "psychological actions" to manipulate the economy and markets for their benefit.

If inflation is a headache for Argentina now, weakening the currency probably will only make it worse. Moody's forecasts inflation of more than 30 percent this year. But the Fernandez camp is hoping that intimidation will prevent prices from rising, as imports become more expensive. Capitanich said that businesses that use higher costs for foreign goods as an excuse to raise prices "will suffer an urgent opening of imports" manufactured by their overseas competitors.

Or as Kicillof put it over the weekend: "The business person that says that there was a 16 percent devaluation," and increases prices "lies and steals." This kind of bluster isn't conducive to foreign investment or to restoring confidence.

La Nacion, a newspaper critical of Fernandez's administration, said in a Saturday editorial that "One doesn't need to be an economist to understand that the government has destroyed our national currency." The paper attributed the problem to "out of control fiscal and monetary" policies.

Some Fernandez allies recognize the trouble ahead. The Paco Urondo news agency, which usually defends Fernandez and her policies, said: "The reality in the slums is dramatic. And it's easy to foresee that the situation will generate even more discontent."

Fernandez's policies of price controls, devaluations and asset seizures may be meant to help her low-income supporters. But when they lead to accelerating inflation there's a problem. And although the market manipulators that Fernandez's government loves to hate might exist, telling people that prices rise out of mere whim amounts to ignoring reality.

The idea that economic forces can be curbed by tough regulations is part of Fernandez's political credo. But Argentina's history shows that when flawed government policies are the source of those forces, such an approach goes nowhere.

(Raul Gallegos is the Latin American correspondent for the World View blog. Follow him on Twitter.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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James Greiff at