Argentinian Peso
Argentinian Peso

Exploring one of the World’s Most Volatile Currencies

While Argentina is working to get out of their group and into the knockout rounds of the FIFA World Cup over the next two weeks, I think it is important to discuss an important currency related issue that has plagued Argentinians since 2002. As someone who has traveled to Argentina and experienced this issue first hand, I find it hard to understand how the people of Argentina haven’t truly known the true value of their money for the last 12 years.

In 2002, Argentina was in risk of a second debt default and was in the worst fiscal shape in the nation’s history. To save the value of a peso that was in freefall, Cristina Fernandez de Kirchner, the president at the time and current president of Argentina, enacted an emergency law that made is virtually impossible for anyone with Argentinian Pesos to exchange them for US Dollars. (McClure) The idea was that this law would stop the bleeding and keep money from pouring out of Argentina. While it was somewhat effective in slowing money exiting the country, Argentinians who have pesos are now stuck with them, and their net worth is tied to whatever the government tells them their pesos are worth on any given day.

This uncertainty in the value of their money and government distrust has created huge demand for Argentinians with pesos to turn them into US dollars and Euros…both considered far more stable than the peso. As a result, a very large underground currency exchange and informal banking system has developed on the streets on Argentina’s destination cities. Some call it a currency black market…in Argentina it is called the “Blue” market. Over the past 5 years over, “US$ 80 billion has been withdrawn from savings accounts and there is about US$ 160 billion of undeclared cash is estimated to be floating around the country.” (McClure).

Enter the “Blue Market”

As a tourist, you can go to Buenos Aires, and in the airport you can go to a currency conversion counter. They will give you about 6 pesos for 1 USD…this is the government controlled rate. The government has full control over this rate and adjusts it to combat inflation within the country. After leaving the airport, it won’t take long before you see “blue market” sales representatives walking in the streets. These are professionally dressed men and women that offer you 30-50% more than the airport did for the same dollar. Instead of 6 pesos…you can get between 9 and 11. Argentinians are so desperate to get rid of their own money, that they will take a 30-50% hit to get coveted US dollars. This is treated almost as a square business transaction and is widely known throughout the country, even though it is technically not allowed by the government. Ballpark “blue market” rates are even published in local papers! (Solomon).

Why is it a problem?

If Argentinians don’t have faith in the value of their own currency that means that foreign countries don’t either. Since 2002, Argentina has had a very difficult time promoting foreign countries to invest in their local economies. Furthermore, Argentinian nationals are slowly moving money out of Argentina…which reduces investment in the Argentinian local economy. As a country tries to come back from a debt crisis, domestic spending is necessary for recovery. How do we fix it? The simple answer to this question is, we can’t. It is up to the Argentinian government to relax its laws concerning currency control. Hopefully through legislation, government leadership along with banking industry leaders can come together to instill faith back into the Argentinian monetary system. Argentinians then can start putting the 160 billion dollars of cash floating around the country back into the banking system and stabilize the exchange rate. Until then, Argentinian pesos will be considered a NDF (non-deliverable forward) in terms of trading, and will remain one of the world’s most volatile currencies.

Sources:

McClure, Grace. “How and Why of Argentina’s Currency Black Market”. Fightfox.com, 20, Oct 2013. Web. 19 June 2014. “https://flightfox.com/tradecraft/argentina-black-market“.

Solomon, Jesse. “Argentina Currency Crisis is No Joke”. CNNMoney. 17 Mar 2014. Web. 19 June 2014. “http://buzz.money.cnn.com/2014/03/17/argentina-currency-crisis“.

Mike MurphyMIKE MURPHY
Director of Latin American Operations

mmurphy@tradeviewforex.com