Over the past few months, Argentina’s economy hasn’t exactly been facing the most optimum of conditions. The parallel exchange rate, or “blue dollar,” is steadily creeping up to 16 ARS/USD, yet it is cheaper to send money out of the country than to bring it in. This relationship implies that more people want to transfer money in Argentina than take it out. It should correspond to a stronger peso rather than a sinking one. What gives?
According to the governing administration of President Cristina Fernández de Kirchner, her unorthodox mix of populist subsidies and other bread-and-circus-esque policies have created an economic utopia. Poverty has been eradicated, the evil vulture funds have been defeated and the external economic conditions of low commodity prices and capital flows away from emerging markets currently slamming neighboring Brazil don’t have any effect within our borders. Also inflation is around 10 percent per year. Yay! This place rules.
On the off chance that Cristina’s version could be complemented by an alternative viewpoint, let’s take a closer look at the factors influencing the parallel exchange rate and see which are at play here. First, brush up on why we have a parallel or unofficial exchange rate in the first place. Multiple exchange rates occur in economies where the government does not have enough foreign reserves to defend the official exchange rate. They don’t have enough dollars to exchange them at the official rate to all the people who need dollars, like importers, travelers, students going abroad, international investors, etc. so these people find other ways to get access to foreign currency. And bam, a parallel market is born! Welcome to the world, blue dollar.
When the blue dollar is higher than the official dollar — as it has been since the two rates diverged in 2010 — there is constant pressure on the official rate to rise and the peso to devalue. The government is forced to put in place currency controls to keep the local money from devaluing against the dollar. In Argentina, these currency controls take the form of restricting imports, limiting who can buy foreign currency and not allowing companies to send dividends abroad.
Argentines who need foreign currency must buy dollars from clandestine financial houses called cuevas or buy dollar-denominated securities (like stocks and bonds) from brokerage houses. These cuevas also send and receive transfers for their clients by maintaining a series of overseas accounts and communicating amongst each other to fulfill supply and demand. It truly is a parallel market.
Argentina’s attempts to keep a lid on the blue dollar have gone a step further than preventing money from leaving the market — the government also has in place measures to reinject dollars back into the market. The savings dollar allows the government to put physical dollars into peoples’ hands. These physical bills go directly into cuevas, pushing the blue dollar back down. This month, AFIP has cut in half the amount authorized for buyers of this savings dollar, which directly results fewer physical dollars in the market. One of the reasons the rate is creeping up to 16 ARS/USD.
Argentina has regularly forced state pension funds and banks to sell dollar-denominated assets. And just today a new law was passed that forces investment funds to sell dollar-demoninated securities like bonds at the official rate rather than the market rate. This effectively cuts off banks and financial institutions from the contado con liquidación or “blue chip swap” that they use to circumvent currency controls.
It is clear and inarguable that this government takes constant and repeated measures to keep the unofficial rate down, often at the expense of other sectors of the economy. But the blue dollar rate should not be the only observable way to evaluate the parallel currency market. The rate people pay to bring money in and out should exhibit the same tendencies. And it doesnt.
Today, to transfer money into Argentina would cost between 3.5 and 5.5 percent. To transfer out would be a negative 2 to 3 percent. A negative rate – take a second to wrap your head around that.
If you transferred US$100,000 into Argentina in the informal market, you would pay between US$3500 and US$5500 for that cash to appear in bills in the country. Counter to logic, if you wanted to transfer the same US$100,000 out of the country, the transaction would result in a cool extra US$2000 or so in your bank account outside the country. This relationship clearly demonstrates that the demand to bring dollars into the country is far higher than that to transfer them out. Which means the peso should be gaining value against the dollar, not falling like it is.
The most prevalent explanation behind how the peso can fall while the demand to bring money into the country goes up is sad. And it’s called the cable peludo by industry insiders’ slang, which literally translates to “hairy wire,” like a hairy wire transfer.
In the unofficial market of the blue dollar, more money is coming into Argentina than is flowing out. Yet the blue dollar is rising, meaning that in all of Argentina, more money is flowing out than is flowing in. The difference is made up by the banks.
It is widely understood that government officials and other connected individuals and entities are permitted to transfer large sums of money out of the country at the official rate of 9.40 ARS/USD. This money flows out via official channels, so it doesn’t affect the demand for outbound transfers from Argentina via unofficial channels like cuevas or using bonds. But these officials don’t keep their dollars overseas — they bring them back in via unofficial channels, which increases the demand and thus price to bring money in. This is a case of pure arbitrage — and represents an unconditional loss to the Argentine people. There is no excuse.
The unavoidable consequence of multiple exchange rates is rent-seeking behavior, whereby a party with access to both rates makes a pure profit while in no way undertaking any real economic activity. This government vilifies clandestine market operators and participants for undermining Argentina’s sovereign right to control its currency, and this criticism is misplaced. These actors only have access to one market — the unofficial market — and they participate not out of choice but out of necessity.
It is the government officials and well-connected individuals and entities that in reality exploit a unique ability to profit blindly while doing absolutely nothing. That money comes out of the collective pocket of Argentina. These operators should be brought to task for making the economically challenging task of unifying Argentina’s multiple exchange rates all but politically impossible by necessitating the dismantling of a gangster-like web of graft-fattened functionaries.