Hi TM, This is apparently what the end game can look like, and I am almost (I like hedge words:0) sure that the Argentines could really use the security of gold had their central bank not sold it all a few years back. Chugs, Jay
Hyperinflation: Argentina's Best Option?
stratfor.com
Summary
Argentina no longer can defend both its currency and its banking system. With its economy on thin ice and no foreign aid forthcoming, Buenos Aires' "best worst option" may be to lift capital controls and print money. Hyperinflation will be the unavoidable result, but at this point it also may be the only escape from Argentina's downward spiral. The latest emergency economic package is a step in that direction.
Analysis
Argentine commercial banks, foreign exchange houses and financial markets closed indefinitely April 22 as the government sent its latest emergency economic package to Congress. Most automatic teller machines also stopped dispensing funds, La Nacion reported.
The latest "bank holiday" -- the second extended holiday since December, when Argentina defaulted on $141 billion in sovereign debt -- represents a dangerous new threshold in the ongoing financial crisis. It signifies that the government no longer is able to accomplish its two main survival goals: defending the currency and protecting the banking system from collapse. However, the new "Bonex" plan -- the forced exchange of some bank deposits for government bonds -- that accompanies the holiday may
represent a step toward an eventual resolution to Argentina's crisis.
The only way for Argentina to break out of the crisis is through hyperinflation. By eliminating capital controls and printing money, some banks will be able to survive, and the economy, distorted by years of unrealistic wealth expectations, eventually will be able to gain a more reasonable footing. The Bonex plan is likely an attempt to lessen the inflationary impact that the abolition of withdrawal controls and the printing of new pesos
will have.
That said, Argentines have ample experience with hyperinflation and won't take it lying down. The crushing combination of evaporating wealth and rapidly declining real wages will stoke political and social upheaval and probably bring down the government of President Eduardo Duhalde. That will open the door -- as hyperinflation almost always does -- for the emergence of a firebrand, populist political leader in South America's second largest country. Though the impact on Argentina's neighbors will
be minimal, such changes will create yet another headache in Latin America for the United States, which is struggling to formulate a coherent policy in the region.
Argentina's Central Bank announced the current banking and
foreign exchange holiday late April 19 after it became clear that a run on deposits again was threatening the banking system. Earlier that day, the central bank suspended operations of the country's 11th largest bank, Scotiabank Quilmes, for 30 days after its Canadian parent, Bank of Nova Scotia, refused to provide more funds to honor deposits.
The central bank followed the suspension by announcing the
nationwide banking holiday as well as a new plan to deal with the fiscal crisis. The proposed Bonex law would force depositors to accept five- and 10-year bonds backed by the government in lieu of their currently frozen, fixed-term bank deposits. The banking holiday will remain in effect until Congress passes the plan, La Nacion reported April 19.
Capital controls that froze a large portion of the deposits in Argentine banks have been solely responsible for keeping the banking system afloat since December. These controls have since been undermined by court rulings that ordered banks, including Scotiabank, to return the money of laintiff depositors. The Financial Times reported April 19 that the rulings have cost banks as much as $50 million a day and have led to concerns that the entire system could collapse before the end of April.
This cuts to the heart of the matter: There are simply too many bank deposits in the system and too little cash to meet them. Bank revenues on loans and other products have largely ceased, and foreign banks that dominate the market have refused to inject capital into Argentina to cover deposits.
Aid from the International Monetary Fund is really just a mirage at this point, and without it the government is in no position to help. The central bank has lost hard currency reserves steadily in a vain attempt to slow the depreciation of the currency, which has lost more than two-thirds of its value since the government allowed it to float in January. All the while, the Argentine economy has slowed to a crawl, with the only viable industries like agricultural and petroleum exports heavily taxed to help
fund the government.
The IMF now predicts that Argentina's economy will contract by 10 to 15 percent this year. Even so, IMF officials have made it abundantly clear that no immediate help will be forthcoming. Likewise, Duhalde's government is beginning to look elsewhere. "The (economic) program as the fund proposes, far from being sustainable, is a program that could lead us into major difficulties, so we are going to make our own sustainability proposal," the Financial Times quoted Duhalde as saying April 19.
Left to its own devices, Argentina must look for the least
painful way to break out of its economic prison. That escape will bring the country face to face with an old enemy: hyperinflation.
Politically and socially, Argentina needs to rid itself of
capital controls and allow people access to at least some of their funds. It also needs to pay wages -- government workers across the country are protesting growing wage arrears -- and allow the country's overall payment system to begin functioning again. A partially frozen banking system stifles the flow of funds that is the foundation of any economy.
Just about the only answer left for Buenos Aires is the old trick of turning on the printing presses. The Bonex plan is a step in that direction. Officials in Buenos Aires know that when capital controls are released, Argentines will rush to withdraw their funds. The government will be forced to back up banks with newly printed pesos. Buenos Aires is betting on the exchange of bonds for deposits to reduce the monetary overhang within the system, thereby decreasing the total immediate demand for pesos and in turn decreasing the total amount of new pesos it must print.
But the Bonex plan will only lessen hyperinflation, not eliminate it. As a result, everyone in Argentina -- except for the richest few, who already have shuttled most of their wealth out of the country -- is destined to get much, much poorer, and the country itself much more unstable.
An economically deteriorated and militarily emaciated Argentina in turmoil would not present an immediate security threat for its neighbors in South America. However, it would create yet another problem for the United States, since Argentina would be ripe for a populist and likely anti-American leader cut from the same cloth as Venezuelan President Hugo Chavez. Once a regional poster-child for free market and free trade policies, Argentina
could become a wellspring of discontent with such policies in Latin America. |
