The Argentine Curse Strikes Again

Photograph by Diego Giudice/Bloomberg

Outside the Argentine Congress, the image of Che Guevara, a less than optimal economic thinker.

Bloomberg’s Camila Russo reports this week on Argentine Porsche arbitrage. Faced with a plunging peso, rich Argentines are selling their dollars on the black market at 9.8 pesos to the dollar, then turning around and buying luxury cars at the official exchange rate of 6 to the dollar. That locks in a price close to what they’d spend in the U.S.

Russo’s article follows yesterday’s story from Eliana Raszewski that details how tourists to Argentina cut the costs of their vacations by going to illegal money changers. Those have become so ubiquitous on the streets that they’re known as “arbolitos,” or “little trees.”  Individually all the news from Argentina makes for intriguing reading about market ingenuity. Taken as whole, it’s deeply troubling. This is how economic ruin works: it starts as farce, ends up as tragedy.

Argentina imposed foreign currency exchange restrictions in mid-2012 and is now reaping the consequences. Currency controls often sound like a good idea to governments facing an outflow of capital. Unfortunately, once they’re in place, they are next to impossible to shake off. Cyprus imposed capital controls in March for a period that was initially supposed to be one week. Then it was a month. Those controls are still in place; the latest promise is that they will be lifted in January. Iceland, which stopped the exchange of kronur in 2008, still has no timeframe to lift capital controls.

The difference between Argentina and Cyprus or Iceland is that those small countries saw their whole banking systems fail. They had no choice. Argentina, on the other hand, has painted itself into this corner. When Argentina first imposed foreign exchange controls two years ago, the peso traded at close to four to the dollar. Now the black market rate is more than double that. The Economist predicted that Argentina’s president, Cristina Fernández de Kirchner, would reverse the policy if there was an “uproar.” Instead, Argentina has imposed stricter rules, which are met, inevitably, with more vigorous efforts at evasion.

Capital controls send a clear signal to citizens, both rich and poor, that they can’t rely on the Argentine peso as a store of value. There’s no surer way to get people to dump pesos even more quickly. It may be fortunate for Argentina that the government has not been able to stamp out the black market. If Argentina is to avoid banishing itself from the world economy, it’s better at least that the peso should trade on the black market than that it should not trade at all.

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