Argentina’s insatiable—and destructive—appetite for U.S. dollars


Paper gold. (Bloomberg News)

Argentina is recognized for raising some of the world's finest beef, and bottling some of the world's most coveted wines. And rightly so. But it should also be known for sitting on some of the world's largest piles of American cash.

For the eighth time in its history, and second time in the past 13 years, the South American country has entered into default on billions of dollars of debt. Standard and Poor's declared Argentina in default on some of its obligations after the country failed to reach an agreement with its bondholders late Wednesday and missed the deadline for a more than $500 million interest payment.

Argentina faced a major setback when the U.S. Supreme Court last month upheld an order that the country pay a group of New York hedge funds in full for government bonds that defaulted back in 2001. But that is hardly the only reason for the country's current economic crisis. It's not even the most important.

Argentina's economic problems are many. It has been elbowed out of international credit markets for more than a decade now—at the very least, ever since it failed to pay its international debts back in 2001—which has made it difficult, if not impossible, to borrow money from abroad. It has also seen its foreign reserves, which it uses to pay its debts, tumble in recent years, and inflation soar. And its isolationist policies have left it lingering on the outskirts of a growing interconnected global economy. But its most severe issue might also be its most innocuous-sounding: Argentina loves U.S. dollars a little too much.

The number of U.S. dollars hidden beneath Argentine beds, floorboards, and foreign bank accounts is mind-boggling. By some estimates it hovers near $50 billion; by others, it's much more than that; and by virtually every measure, it's a significant chunk of the total dollar-denominated cash floating around the globe. Argentines are believed to hold somewhere upwards of one in every 15 cash dollars circulating around the world. Only China and Russia hold more, a source who asked not to be named so they could speak freely said in an interview.

The reason for the country's borderline religious worship of dollars lies in both tradition, and a tradition of financial paranoia.

"Argentines are doing what they've done for many, many years," Steve Hanke, a Johns Hopkins University economics professor, said in an interview. "Everyone in the world does it. The only difference is that Argentines have a lot more practice doing it. This has been going on for generations."

Citizens of economically challenged countries collect U.S. dollars because they are about as secure a currency as exists in the world. Argentines are more practiced than most because their economy has been intermittently challenged for decades if not centuries. "If you go back 200 years, the country has been in default for nearly 35 percent of the time," Hanke said.

Modern day paranoia isn't all that different from yesteryear angst in Argentina. Fears of the country once again defaulting on its debt have been brewing since long before the latest court ruling, and the government has done little to assuage them. If anything, it has exacerbated them.

A rush of sudden and unanticipated capital flight from Argentina in 2011 scared the government enough to institute the first wave of what have amounted to dozens of currency controls. The measures, which have included limits on dollar exchanges and credit card purchases abroad, were meant to dissuade Argentines from collecting U.S. dollars, but instead stoked fears of financial weakness. "I think [Argentina's President] Cristina Fernandez and her economic team overreacted when they introduced the controls in 2011," Carlos Caicedo, a Country Risk Latin America Analyst at IHS, said in an interview. "When you introduce controls, you are sending the wrong message. People understood it as indication that something was wrong, so they bought more dollars." 

By limiting access to dollars, the government has unintentionally made them more desirable.

The Argentine populace is extremely fearful of the volatility of the Argentine peso. Enough so, that the government restrictions limiting the amount of US dollars locals can buy in the country have merely sent those seeking US dollars to get their fix at a premium on the black market. The illegal market rate for dollars in Argentina, which is often called the blue dollar rate and seen as a measure of actual demand for U.S. dollars in the country, rose to more than 10 pesos to the dollar last year, or nearly double the official rate. Earlier this year, the illicit rate jumped so high that Argentina's government was forced to devalue the Argentine peso to adjust. As of Wednesday evening, the black market rate stood at more than 12 pesos to the dollar, still roughly 50 percent greater than the official rate. 

"I remember a recent case in which a local judge was going to prosecute a grandfather who wanted to buy 100 American dollars as a present for his grandson," Caicedo said. "He was being prosecuted because he went to an unregulated exchange, but that's besides the point, really. The mere fact that the grandfather saw 100 dollars as a fantastic present for his grandson is all you need to know to understand the Argentine psyche."

Dollar hoarding affects far more than merely the country's unofficial exchange rate. "It's very difficult to measure this, but I think dollar hoarding has been a significant contributor to Argentina's economic problems," Caicedo said.

It has, perhaps most importantly, made it all the more difficult for the country's central bank to build its own dollar savings. Argentina's international reserves have plummeted by more than 40 percent since 2011, and now hover below $30 billion.


It has also led entire export industries in the country to hold their goods instead of sell them abroad in anticipation of a devaluation of the Argentine peso. Farmers, for instance, are hoarding soy, because they think the peso is going to devalue, and they want to maximize their earnings. "It's a cat and mouse race between the government and exporters," Caicedo said. "It's not just soy farmers though—it's also happened in other soft commodities, like corn."

While this default is different from the last—in 2001, the country had lower stockpiles of cash, higher inflation and unemployment, and a more damaged economic system—it's still not going to be easy. "It's a different situation," Caicedo said. "It's going to be painful, but it's not going to be as damaging."

Externally, Argentina will likely find its access to capital markets strained and foreign investment extremely limited. By some projections, Argentina was expected to see as much as 5 billion a year come in starting in 2015 if it managed to reach an agreement with its bondholders.

Internally, the default is likely only going to further Argentines' distrust of their country's monetary system, and with it the country's exceptional amassing of U.S. dollars.

 

Roberto A. Ferdman is a reporter for Wonkblog covering food, economics, immigration and other things. He was previously a staff writer at Quartz.
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