Argentina photo.jpgEconomy 

The Fate of Argentina’s Debt

By Harrison Stetler 

In the Summer 2014 issue of World Policy Journal, “Change Matters,” Meredith Hoffman showcased the black market currency exchanges necessitated by Argentina’s history of financial insolvency and lack of transparency.

The difficulties facing Argentine citizens have their root in Argentina’s mismanaged default, which occurred in 2001. Over a decade later, the gendarmes of international finance are again forcing their weight on the beleaguered Argentinian economy—on July 30, 2014 Paul Singer’s New York-based hedge fund, Elliot Management, demanded a full repayment of Argentine bonds issued prior to the default.

In the proceedings and negotiations following the 2001 default, the Argentine government offered a lower-valued exchange bond to be repaid in full to debt-holders, which the Argentine government has been reliant in honoring. Firms such as Elliot Management, however, held on to and bought the pre-default bonds at well below market value and are now demanding full repayment in addition to servicing fees.

Potentially provoking a default is the recent ruling by Federal District Court Judge of Manhattan, Thomas Griesa, who determined that Argentina not discriminate between paying back liabilities on what are referred to as the exchange-bonds (issued following the 2001 default) from the hold-over bonds (owned by the firms that did not accept the post-default devaluing).

It appears as if—less than one year following Secretary Kerry’s disavowal in a speech before the Organization of American States of the Monroe Doctrine, long a pretext for United States influence in the internal affairs of Latin American states—the fate of millions in South America will once again be decided in the boardrooms of lower Manhattan.



Harrison Stetler is an editorial assistant at World Policy Journal.

[photo courtesy of wikipedia]



Argentina: Driven Black

By Meredith Hoffman

BUENOS AIRES—When the peso hit rock bottom in January, Ande Wanderer rang up her money dealer—a former official in Argentina’s national government. She’d sold off her stocks, cashed in her American savings, and wired him the money. Now she rushed to his office, a ninth floor room in downtown Buenos Aires. The official exchange rate was 8 pesos to the dollar. But her dealer gave her 11—the black market rate at the time—and kept a small fee for himself. That meant she got some 40 percent more pesos for her U.S. money.

“When I see tourists take money out of the cash machine, I want to tackle them,” says Wan- derer, 40, a Georgia-born journalist who’s lived in Argentina the past 10 years. “Yes [the black market] is illegal, but you realize once you’ve lived here for a while that you have to do illegal things to get by.”

Wanderer—who says her money dealer works mainly with high- power businessmen and picked up the trade as a “new avenue to make money after leaving the government”—has, like other financially savvy expats and Argentines, been using the currency black market here the past two years. Foreigners can get far more pesos for their dollars. Locals often have no other option to get dollars.

Argentina’s currency black market has almost always existed, but once every 15 or so years it booms, its fluctuations a major indicator of the health of the nation’s economy. Since 2011, the Dolar—actually “Dolar Blue”—the country’s term, attenuated by one letter for the dollar black market—has once again come alive, with an increased visibility through Twitter, online exchange companies, and its own website. Today, most individuals who choose to buy dollars are using Dolar Blue instead of official channels. Between $5 million and $40 million is changed on this black market every day, analysts estimate—but since it’s illegal, there’s really no way to know.

Black market vendors advertise cambio (change) for dollars boldly up and down Buenos Aires’ downtown pedestrian strip, and more discreet arbolitos(money changers, or literally “little trees”), like Wanderer’s supplier, offer pesos at black market rates through online bank transfers or PayPal payments in dollars. Then there are the cuevas (caves), the largest Dolar Blue exchange houses. For many here the black market has become a giant, unpredictable game—its strength stemming from the government’s efforts to tighten regulations on Argentines obtaining dollars or other foreign currency, economist Gaston Rossi says.

“The black market was marginal before. The difference in values was only 3 or 4 percent in 2010,” says Rossi, who served as secretary to the economic minister for President Cristina Fernandez de Kirchner in 2007-2008 and now runs a consulting company with his former ministerial colleague. “But when you put on exchange controls, it creates a natural demand” for dollars.

To some economists, the Dolar Blue network is more valid than the official exchange system. “Ultimately the most realistic value of the peso is in the black market,” says economist Ivan Cachanosky, a professor at the University of Buenos Aires and analyst for the non-profit Freedom and Progress Foundation. “The black market price is determined by supply and demand, but in the official rate the gov- ernment intervenes…and the official rate here seems to ignore the reality of the actual value of the peso.”


Argentina is currently in a financial bind. Its fiscal deficit has been surging each year, while the government’s reserves have been plummeting. A typical developed nation would resort to borrowing money from other countries to balance its spending, but Argentina has had a bad global reputation since it defaulted on its debt in 2002 and passed through any number of economic crises, explains Juan Luis Bour, chief economist of the Foundation of Latin American Economic Research. So if Argentina wants to borrow money, it has to pay a hefty price.

Instead, over the past few years the government has taken another route. It started printing ever larger quantities of pesos to finance its deficit, says Bour, whose foundation independently measures inflation and other fiscal data. “The government has been financing itself by printing more pesos, but the more pesos it prints the higher inflation,” Bour continues, explaining the plummeting value of the peso. “And when it obligates citizens to use the peso, it’s issuing that debt to the people. It’s like forcing you to pay more taxes, since the peso is worth less and less.”

Argentines have two options to escape this fiscal conundrum, Bour says. “You leave the country, or you turn to the black market.”

Over the past 50 years, Argentina’s currency has been devalued and replaced by a different form of money several times—all because the currency lost its value through inflation. Argentina is infamous for its series of economic crises (once every 10 years or so), the most recent being in 2001, when banks completely shut their doors and refused to give even depositors their own money. Some economic analysts blame government overspending and its focus on short-term benefits. Meanwhile, chronic instability has fostered a lack of faith in the country’s currency. “There’s a culture of ‘I want dollars,’” says Cachanosky of the long-standing practice of people saving money in U.S. bills, as Argentine currency quickly plummets in value. “In Argentina, the exchange rate is like the thermometer of the economy,” Rossi says. “In Brazil, for instance, no one cares about the exchange rate, but in Argentina everyone knows” what it is, from moment to moment.

Meanwhile, the government’s heavy fiscal hand—with regulations and typically high taxes—has helped prompt an informal economy where a third of all workers are paid under the table, according to a 1993 estimate, a number that has changed little since then. This means a black market for dollars always exists at some level. Since individuals and businesses must disclose their incomes when they ask for dollars from banks and the government, even before the 2011 exchange controls, they go to the black market when they want the currency. “There is no way to avoid the black market here,” says economic analyst Fausto Spotorno, director of research for the consulting firm Orlando Ferreres and Associates.


In 2010 and 2011, Argentines’ economic spirits soared as salaries increased 30 percent each year, and the peso dropped just 5 percent relative to the dollar annually— which meant Argentines could afford to buy more abroad. The government had also pumped money into the public sector and printed more pesos as a strategy to recover from the 2001 economic crisis.

At that point, President Cristina Fernandez de Kirchner and her advisors had no restrictions on access to the dollar, and people could change pesos for dollars at their will. But this apparent success was doomed. Argentina’s domestic inflation was increasing about 25 percent a year, so it took ever more pesos to buy products in the country. If a person saved pesos in the bank and earned the average interest rate of 12 percent, the depositor would still be left with a loss, since his pesos could buy less and less. Meanwhile Argentina was becoming less competitive exporting goods and providing labor to international companies, since the peso was increasingly expensive compared to the dollar.

“Consumption exploded, but it started growing against savings…there’s no way to save pesos with inflation,” says Spotorno. “Inflation is like a drug, and like a drug you have to maintain inflation to keep feeling everything is good. But at some point you no longer have investment in the country because you have no savings.” Fiscally savvy Argentines took note—and braced for a decline. “Once you start seeing the dollar become cheap here, it’s foreshadowing some economic problem,” says Rossi. To ensure their stability, individuals began buying dollars feverishly in early 2011, at the same time Argentina’s foreign reserves started to decline. In December 2010, the reserves were at $52 billion, but one year later they had shrunk to $46 billion, he says.

Then, this past January, Dolar Blue leapt to a record high, at 13 pesos to the dollar. There was a sense of frenzy in Buenos Aires, as residents watched the fluctuations of the market hour-by-hour on television screens around the city. Immediately afterwards, the government devalued the peso, admitting the currency’s official worth was lower than previously claimed (but still worth more than the black market rate). They also allowed limited access to dollars again, for upper- and middle-income citizens to put in their savings accounts each month. The first week of the new access was rocky, with lines snaking down blocks outside banks and many clients turned away because of “system malfunctions.” But in the past few months about one million people have been able to purchase some dollars for their accounts, the government told national newspaper La Nacion in April.

The government’s long overdue accountability for the inflation that its economic practices produce and the eventual devaluation of the peso have helped lower the official Dolar Blue gap. But Bour pre- dicts the spread will increase again until another devaluation of the peso is necessary. That’s because inflation is continuing to rise, while the government has fixed the official peso-dollar exchange at a ceiling of around 8 pesos to the dollar.

“This year inflation is going to be about 40 percent, and if you have inflation it’s hard to keep the peso fixed at 8 to the dollar,” Bour says. “They’re going to have to devalue again. This problem doesn’t have a short-term solution.”

Bour says the only way to calm the black market is to combat inflation. That would require a comprehensive stabilization program to readjust the nation’s fiscal and economic policies. But inflation, Spotorno says, has “gotten the worst of the economy,” so the government has no option but to take measures to contract the economy, or decrease its spending. Other economists agree that Argentina’s economic dilemma is far from a solution, but some emphasize a handful of measures the administration has taken just this year that could produce results. The government gave citizens more incentives to deposit money in the bank through increased interest rates, and those deposited pesos would likely go straight to the black market.

Meanwhile, officials have finally become more sincere about holding the line on prices. In February, Argentina’s official statistics agency INDEC gave an estimate of 3.7 percent inflation for the final quarter of 2013 (an annual rate in excess of 15 percent)—a drastic leap from the agency’s previous calculations, which had caused IMF to censure Argentina in 2013 for inaccurate data. The new estimate still has flaws, Bour notes, because the methodology is unclear and lacks transparency, but he still believes it’s a step in the right direction.

Argentine officials have also told local news outlets that they are in talks with international banks to take out loans. Early this past spring, the government announced a loan from Goldman Sachs—a sign the country is moving in the right direction and trying to restore credibility. In addition, officials unveiled an impressive agreement to repay $9.7 billion in longstanding debt to the Paris Club—a group of 19 donor countries, including the United States, Russia, and the United Kingdom—at the end of May, helping further restore Argentina’s credibility. Argentina now has five years to repay the debt, after the Paris Club announced it was satisfied by the country’s progress “towards the normalization of its relations with creditors, the international financial community and institutions.”

The plan paves the way for Argentina to borrow from international markets at lower interest rates, analysts say, and it surprisingly excludes any requirements that the nation strike an agreement with the IMF. Local economists have asserted that the IMF held the key to restoring a rational economic system for Argentina, since Argentina would have to present a new fiscal plan with lower expenses, a lower exchange rate (closer to the Dolar Blue rate), and agreements with each province in the country. Such reforms would open the door to a free market, Spotorno explains.

“This is an exchange rate problem… To me if the price is the same [in the black and official markets] you’re in conditions to liberate the dollar,” says Sportorno, adding that would be the best route to creating a free market and annihilating the Dolar Blue.

Another way to take down the black market would be to open access to the dollar immediately, Spotorno says of the more abrupt approach—cautioning that inflation would skyrocket even further overnight (as supposed to the other option, which would gradually increase inflation). Ultimately, he says, the key is to have a free market for dollars—and that is only possible if the actual value of pesos is recognized by the government.

Rossi agrees that a free market is the key to dismantling the black market, but argues it’s not the Paris Club’s job to mandate such reforms. The changes must come from the inside—and while they are possible, Rossi firmly believes the current government will not make such dramatic moves. First, the country would have to reduce public expenditures, which are the highest in the Western Hemisphere at 43.5 percent of GDP this year, according to the latest IMF data. The government must also slash the printing of money, dismantle exchange controls, and admit the lower value of the peso. But to do all this successfully, the government would also have to issue large amounts of debt.

“In terms of the economy, it could be easy, but this government seems unwilling,” Rossi says. And Bour agrees that an entire restructuring of the economy is necessary, but that must wait until the next administration enters at the end of 2015, at the very earliest. “Argentina will bear a curse for a number of years,” Bour says, “and that’s high inflation and a record spread between the Dolar Blue and official market.”


An agreement with the IMF may be critical to helping Argentina get on economic track, but the country has long had a rocky relationship with the powerful monitor. Politicians and citizens here blamed the IMF for the 2001 economic crisis, since the fund had encouraged Argentina to make draconian reforms that many believe led to the country’s downfall. The IMF agreed to lend Argentina money if it adjusted its fiscal expenditures, opened trade, and pegged the peso to the dollar in the 1990s, but after those reforms the economy collapsed. “Society was looking for an enemy,” and blamed the IMF, Rossi says, arguing that the problem was actually Argentina’s government, not the international agency. The government stopped allowing the fund to do economic analyses of the country beginning in 2006, and the IMF’s 2013 censure of Argentina prompted outcries from government leaders, who claimed the IMF was unfairly targeting the country. The censure also further soiled Argentina’s international economic reputation.

As part of the censure, the IMF threatened to impose sanctions on Argentina if it did not reform its consumer price index (CPI) to reflect true inflation rates. Early this year, the government made the necessary adjustment. “The pressure from the IMF helped restore confidence in our statistics,” Rossi says, maintaining that the controversial censure was actually the IMF’s best option to help Argentina in the long run. Meanwhile, some analysts assert the IMF should be even harsher with Argentina to spur real change.

“They asked Argentina to revise its statistics but haven’t been very strict,” Bour says. “You could say that by not putting enough pressure on Argentina to improve its macroeconomic policy or statistics they have caused damage by omission.”

But the IMF has maintained that it is committed to working with Argentina to improve its fiscal policy. The IMF “stands ready to continue the relationship between Argentina and the Fund,” it de- clared in late 2013 when announcing it would not place sanctions on the country.


What if Bour and Rossi are correct, and the government simply refuses to liberate the market? The economy will continue to spiral downward, analysts warn. Imports, exports, and investments will all reach such lows that industries here will shrink, and Argentina will slip ever deeper into economic decline. Real wages will keep dropping (they dropped an average of 5 percent last year), and unemployment will rise. The black market will remain the lifeline for many residents. But the black market is more a symptom of the economy’s sickness than the sickness itself.

“The black market leaves the country better off than not having it,” says Spotorno of the current situation that has left foreign trade severely restricted. Using the black market, small businesses can import necessary goods for their operations while official rules block the trade.

But a strong black market will also prompt further domestic price increases, since many business owners gauge the value of the peso based on the Dolar Blue instead of the official rate. And with the large gap between official and unofficial exchange rates, companies anticipate the inevitable rise in the official rate, waiting to export their goods until the official exchange is closer to the black market value. All this further slows the economy, which has already largely stopped growing since 2012, its growth rate plunging from 21 percent in 2011 to 6.5 percent in 2012 to under 3 percent last year.

Meanwhile there is a further underlying risk—that the black market will accumulate too much power. As the spread between official and unofficial rates widens again, legislators may reach a point when they have no other option but to devalue the peso to the Dolar Blue rate, perhaps even changing the form of currency again, as the government did in earlier economic crises.

Ultimately, the black market remains the inevitable result of grave mismanagement. “If the black market continues to grow, it is not because of the malevolence or perversity of Argentines,” Bour insists. “It’s because of the government’s inability to limit its expan- sion and to function like other countries at its equal level of development.”


Meredith Hoffman, a journalist currently working in South America, previously reported for The New York Times and

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