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Argentina: Black market grows with currency

Associated Press Modified: May 19, 2012 at 2:46 pm •  Published: May 19, 2012

BUENOS AIRES, Argentina (AP) — Along a busy street in the Argentine capital, the man in the brown suit doesn't need to speak above a whisper to sell his goods: "Money change. Money change." Those who want to swap pesos for dollars follow him through a run-down mall to a lingerie store. There, amid bras and pantyhose, he closes deals for greenbacks.

Argentines have increasingly turned to such black market money changers since President Cristina Fernandez sharply restricted purchases of dollars in banks and exchange houses to try to keep hard currency from pouring out of the country.

Argentina has been kept from global capital markets since defaulting on its debt during a financial crisis a decade ago, so Fernandez's government wants to keep dollars in the country to replenish central bank reserves and pay government debts. Argentines, meanwhile, are haunted by nightmares of the crisis, when banks froze deposits and the currency lost value. So they are eager for dollars to stash in vaults or under their mattress. Others send them abroad for safekeeping.

Many economists say the new black market spawned by currency controls could choke back Argentina's economic growth and create even more inflation: Controls make it harder for people to do business and undermine confidence in the peso, causing it to devalue even more quickly. That can create the threat of shortages when people are unwilling to sell goods for a currency they do not trust. The curbs could also encourage Argentines to withdraw dollars from banks.

"The government controls toughened this week and will get tougher," said Aldo Abram, director of the Fundacion Libertad y Progreso consulting firm. "Argentines know this doesn't end well. The more they try to control it, the more Argentines will want to get dollars, even at a loss and this can lead to panic. ... It might look like people want more dollars but the reality is that they want to get rid of pesos. They're scared about what can happen to the country."

Under the controls imposed shortly after Fernandez won re-election in October, the country's tax agency, known as the AFIP, must approve all purchases of dollars. The formal exchange rate was 4.47 pesos per dollar on Friday, a slide of about 8.6 percent from where the peso was a year ago.

But employees at currency exchange houses in downtown Buenos Aires say approvals have become more difficult recently, and only about one in 10 Argentines is now getting tax agency authorization to buy dollars. Many have turned to so-called "exchange caves," where the free market price, known as the blue rate, tops 5.50 pesos to the dollar, 23 percent more than the official rate. The spread between the two markets has widened sharply since the government controls began.

"The tap closed last week without any official statement and we don't know when it will be opened again," a trader told the AP in anonymity, fearing reprisals because he also trades in the black market. "The more Argentines are kept from getting dollars, the worse they'll get. They get desperate and they look for dollars wherever and whatever it takes. It's impossible to predict where the blue price will reach to if this goes on."

Just days after Fernandez won an easy re-election in October, she began extending the government's reach in the economy with capital controls, import caps and more recently, the takeover of YPF, Argentina's largest energy firm. Fernandez has accused unnamed business groups of encouraging a run on banks to hurt her second mandate.

The currency controls, which some say are similar to those of Venezuela, have worked to discourage capital flight, but analysts say they spook investors and hurt the economy.

"These measures are creating more uncertainty, "said Daniel Kerner, an analyst for the Eurasia Group consultancy. "People turn to the dollar in Argentina because (the country) has a high inflation rate and high instability."

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