Give Us Your Real Dollars for Our Fake Dollars: Argentina Credit

President Cristina Fernandez de Kirchner’s wish of being able to print dollars is coming true as the central bank begins issuing dollar-denominated certificates today that trade in pesos.

Argentina is issuing the certificates, known as Cedines, as part of a tax amnesty plan to attract undeclared cash back into the economy. The nation’s foreign reserves have fallen at the fastest pace in more than a decade to a six-year low of $37.2 billion, as Argentina uses the money to pay debt instead of borrowing dollars at interest rates that are more than double the 5.95 percent average in emerging markets.

Fernandez, who said last year that it was unfortunate she didn’t have a “little machine” to print dollars, is trying to tap some of the estimated $160 billion held by Argentines under mattresses or in bank accounts abroad, to ease dollar demand stoked by more than 30 measures that she has imposed since 2011 to restrict access to foreign currency. While the measure is designed to provide individuals dollar-backed claims that can be used for real estate and energy projects, Empiria Consultores says Argentines will just exchange them back for U.S. currency.

“The deliberate intention of the government is for the Cedin to trade like a quasi-currency,” Hernan Lacunza, a former general manager of the central bank who runs research firm Empiria, said by telephone from Buenos Aires. “People will probably go running to exchange them for dollars as soon as they can so the effect on reserves will be ephemeral.”

Dollar Hoarding

 A central bank press official, who isn’t authorized to speak publicly, didn’t respond to a telephone message seeking comment on reserve levels and the tax amnesty plan.

The Cedin “is an ideal medium for the payment of U.S. dollar obligations,” and can be used for buying products from house appliances to construction materials, according to the law approved by congress May 29,

Argentines with undeclared foreign-currency savings have until Sept. 30 to trade their dollars for a certificate of deposit for investment, or Cedin, which will be traded in financial entities and foreign exchange agencies.

The government estimates citizens have undeclared funds of more than three times the nation’s foreign currency holdings. Argentines hold about one in every 15 dollars in circulation worldwide, according to Federal Reserve, U.S. Treasury and Secret Service estimates.

‘Little Machine’ 

Argentines with undeclared funds leave themselves open to investigation by the tax authorities and an offense is punishable by jail time. The plan will attract about $2 billion, newspaper Clarin reported June 28, citing a report by Banco de la Nacion Argentina state bank.

Fernandez, 60, is trying to shield reserves at a time when the nation’s energy imports are surging and its trade surplus narrows.

“Unfortunately for me and for most Argentines, I don’t have a little machine that makes dollars,” she said in a November speech in Buenos Aires.

The central bank’s foreign currency holdings have fallen by $6.1 billion this year and will decline by $4 billion more as the nation pays its bondholders. Central Bank President Mercedes Marco Del Pont said on May 9 that the net effect of the tax amnesty plan on reserves will be neutral.

‘Opportunistic Strategy’ 

The government will have to guarantee that individuals can exchange the Cedines for dollars to attract funds, which would keep the value of the peso from falling further in the black market, according to Hernan Yellati, head strategist at BancTrust & Co. in Miami. Money invested in real estate and energy can also help bolster economic growth ahead of congressional elections in October, he said.

“This is an opportunistic strategy to lower the parallel rate, control inflation and at the same time give a boost to economic activity before the election,” Yellati, who expects about $1.5 billion will enter through the tax amnesty plan, said in an e-mail.

The reference value for every $100 of Cedines, is 90 for purchase and 93 for sale, for an implied exchange rate of 7.2 pesos per dollar, according to a recently created website called Cedin Trading.

That rate would be weaker than the official rate of 5.3903 and stronger than the black market where Argentines pay as much as 8 per dollar. A fourth rate used for financial transactions by swapping bonds and stocks was 7.8257 at 4:26 p.m. in Buenos Aires.

The extra yield investors demand to hold Argentine government dollar bonds instead of U.S. Treasuries fell 19 basis points, or 0.19 percentage point, to 1,180 basis points, according to JPMorgan Chase & Co.’s EMBI Global index.

Property Sales 

Fernandez is seeking to reverse a rout in property transactions after her ban on buying foreign currency almost paralyzed the dollar-based market.

Undeclared dollars can also be traded for a government-issued bond maturing in 2016 that will pay a 4 percent annual interest rate that will be used to finance the energy industry and state-run YPF SA.

The tax amnesty plan will probably fail as it isn’t addressing inflation, which is the cause behind the decline in reserves, said Daniel Volberg, an economist at Morgan Stanley.

Consumer prices rose an estimated 23.4 percent in May from a year earlier, according to private economists.

“The real driving force for why we have reserve losses, why you have poor confidence, and why you have poor growth in Argentina is inflation,” he said in a telephone interview from New York. “We have plenty of experience with exchange rates that are misaligned and that are being propped up by a combination of intervention and capital controls, neither of those measures work.