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.

IRAN - Rial collapse stirs Iranian rallies, clashes

Riot police in Tehran clashes with demonstrators and foreign exchange dealers over a plunge in Iranian currency. The currency has fallen 40 percent against the dollar

Riot police clashed with demonstrators and foreign exchange dealers in Tehran yesterday over the collapse of the Iranian currency, which has lost 40 percent of its value against the dollar in a week, witnesses said.

Police fired tear gas to disperse the demonstrators, angered by the plunge in the value of the rial. Protesters shouted slogans against President Mahmoud Ahmadinejad, saying his economic policies had fuelled the economic crisis.

Western economic sanctions imposed over Iran’s disputed nuclear programme have slashed Iran’s export earnings from oil, undermining the central bank’s ability to support the currency. Panicking Iranians have scrambled to buy hard currencies, pushing down the rial. With Iran’s official inflation rate at around 25 percent, the currency’s weakness is hurting living standards and threatening jobs.

The government blames speculators for the rial’s collapse and ordered the security services to take action against them.

“Everyone wants to buy dollars and it’s clear there’s a bit of a bank run,” said a Western diplomat based in Tehran. “Ahmadinejad’s announcement of using police against exchangers and speculators didn’t help at all. Now people are even more worried.”

Close watchers of Iran say the protests pose a threat to Ahmadinejad rather than the government, but his term will end in June when a presidential election is due and he cannot run for a third time in any case.

They expect the government to stop the foreign exchange dealings and pump in money to stabilise the currency and prevent the protests from spreading.

Tehran’s main bazaar, whose merchants played a major role in Iran’s revolution in 1979, was closed yesterday, witnesses said. A shopkeeper who sells household goods there told Reuters that the instability of the rial was preventing merchants from quoting accurate prices.

Currency record low

The protests centred around the bazaar and spread, according to the opposition website Kaleme, to Imam Khomeini Square and Ferdowsi Avenue -- scene of bloody protests against Ahmadinejad’s re-election in 2009.

The national currency dived to a record low on Oct. 2 to 37,500 to the U.S. dollar in the free market, from about 34,200 at the close of business on Oct. 1, foreign exchange traders in Tehran said. On Sept. 24, it traded at around 24,600.

 Ahmadinejad on Oct.2 blamed the crisis on the U.S.-led economic sanctions on Iran and insisted the country could ride out the crisis. He urged Iranians not to change their money for dollars and said security forces should act against 22 “ringleaders” in the currency market.

Iran is working to shrink and eventually eliminate the free market in its tumbling rial currency, the economy minister was quoted as saying amid signs that foreign exchange trade outside a government-sanctioned center was drying up.

“The unofficial currency market will be gathered up,” Shamseddin Hosseini was quoted as saying by the Mehr news agency yesterday. “The foreign exchange centre is being completed step by step, and its development will eventually lead to the elimination of the tricksters’ market.”

Argentina Paypal-users activities limited to international payments

Paypal is to prevent users in Argentina from transferring money between their own accounts. The online payment service said that from 9 October: “Argentina resident Paypal-users may only send and receive international payments.”

The US dollar an ever more scarce asset in Argentina

Last year the Argentine government announced restrictions on the purchase of US dollars. It has led to an increase in currency sales on the black market - but Paypal's exchange rates are better.

Locals were setting up two accounts under different email addresses and transferring money between the two, exchanging local currency pesos for dollars in the process.

Under the new rules only one account per person can be registered within Argentina.

The government's rules were designed to curb the flight of savings from the country and make the economy less dependent on the US dollar.

Since the rules were introduced in November 2011, Paypal has been used as an alternative means of obtaining the US currency close to the official exchange rate, which currently stands at about 4.7 pesos per dollar.

That is much cheaper than the rate on the black market where one dollar costs about 6.3 pesos.

Argentina suffers a high inflation rate - private economists say prices are increasing by about 24% a year. This adds to a general lack of confidence in the local currency caused by memories of its depreciation during the economic crisis of 2001.

Many residents have tried to protect their savings against the risk of further turmoil by putting the money into more stable currencies.

Economist Eduardo Marty said that currency restrictions had been extended to all economic activities, from the export of goods to foreign travel.

“You have to apply for permission to import any goods,” he said.

“If you need to travel abroad the government gives you a meagre amount of money. Sometimes they approve it at the last moment and people are forced to buy on the black market.”

In September the government established a new 15% tax on all purchases made abroad, affecting credit cards and purchases made on international websites like Amazon and eBay, and transactions made on Paypal.

Following local media coverage about complaints over constraints to the Paypal service, the company acknowledged that the blockades were imposed by local banks.

In a statement Paypal apologised for the “inconvenience” the decision may cause.

“Argentina is a very important market to us as we expand our global footprint, and we are currently very focused on providing Argentine merchants and consumers the best possible service.

”Paypal customers in Argentina are still able to utilise Paypal for international transactions with 190 markets around the world,” said the company.