Market Watch

Argentina in Focus

Well, well, well… now this looks familiar…. Where have I seen this before…? (Uncle Scar)

Argentina should have to look no further than its own recent history to figure out how this is going to end. With any devaluation, the general populace  will always look to retain their wealth and protect their purchasing power (and rightly so). When desperate, they will literally move that wealth anywhere they can find, even cars. Bloomberg reports the absolute desperation the Argentinian people have found themselves in…

Argentines are buying more BMWs, Jaguars and other luxury cars as a store of value as inflation decimates their deposits and pummels the nation’s bonds.

Purchases of cars from Germany’s Bayerische Motoren Werke AG (BMW) and Jaguar Land Rover Automotive Plc, owned by India’s Tata Motors Ltd. (TTMT), jumped the most in April among brands sold in Argentina. The sales were part of a 30 percent surge in car sales from a year earlier that was the biggest increase in 20 months, according to the Argentine Car Producers Association. While used-car prices rose in line with inflation last year, or about 25 percent, peso bonds tied to consumer prices fell 13 percent. The drop was the biggest in emerging markets.

Argentines are buying cars, gold and even virtual currency such as bitcoin as they look for ways to preserve their savings as the peso is forecast to fall 17 percent this year.

The peso in the illegal currency market, known as the blue market locally, weakened to a record 10.45 pesos per dollar last week. This means Argentines with peso salaries who buy dollars in the black market to protect against a weakening of the local currency and 25 percent inflation lose about half of their money.

“The government takes away their salaries and deposits through inflation and negative interest rates,” said Jorge Remes Lenicov, a former Economy Minister from January 2002 to April 2002, when the country abandoned a decade-long peso peg to the dollar.

Speaking of the Bond market, if the people don’t want to buy your bonds anymore, or, only at a high risk return rate (13% +)which will further kill the country (like Greece),what is a totalitarian government to do? Ah yes, jail time. There are those who dont appreciate their wealth being evaporated through a government policy of printing. Dont worry, we will find them….

President Cristina Fernandez de Kirchner wants tax evaders hiding about $160 billion in dollars to help finance Argentina’s oil-producing ambitions. Her offer: Buy a 4 percent bond or face the prospect of jail time.

Argentines have at least $160 billion of undeclared funds, equal to about 36 percent of the nation’s gross domestic product, and $40 billion are hidden inside the country, Vice Economy Minister Axel Kicillof said at the May 7 press conference where he and other senior officials presented the amnesty.

Many Argentines hide assets to avoid a 35 percent income tax and a levy of as much as 1.25 percent on their personal wealth. Undeclared assets are also beyond the reach of the government, which in 1989 seized bank certificates of deposit in exchange for bonds and in 2002 converted dollar deposits into pesos.

Those joining the plan would be immune from prosecution and won’t be forced to pay past-due taxes, said Ricardo Echegaray, head of the tax agency. The search for evaders, which includes cross-checking information on income and personal wealth reports with purchases of real estate and cars, foreign travel and credit card purchases, will continue, Echegaray said.

“You better bring your dollars back because we will find you,” Echegaray said at the May 7 press conference.

For now Dollars are also a vast improvement over there current Peso….

The Fed is chary with its data releases. One table in a 2012 Fed paper on demand abroad for U.S. currency tells us that the annual net inflow ofcommercial shipments of bills denominated in dollars to Argentina and the former Soviet Union has increased since 2006 by 500 percent.In 2011, that growth rate stood at 48 percent, while total demand for U.S. currency, in America and abroad, has increased only about 10 percent. It’s unlikely that all of that growth came from the former Soviet Union alone; otherwise, why include Argentina at all? Demand for large dollar cash transfers to Argentina since 2006, then, has outstripped demand for dollar cash overall in the world.

If of course there is any doubt whether the government can do such things…Or whether or not the government can be subject to investigation, there is a solution for that as well…

Fernandez, 60, sent a bill to Congress on April 8 to restrict court injunctions against the government and would limit any injunction to a period of six months.The bill would leave citizens and companies unprotected in their attempts to seek an injunction against state action to protect their finances or assets, said Gregorio Badeni, a professor of Constitutional Law at University of Buenos Aires.

“The idea of injunctions was to strengthen the position of people and companies to confront the strongest actor, which is the state,” Badeni said in a telephone interview. “This means a step back of 70 years.”

Fernandez defended the restrictions on injunctions against the state, saying that injunctions can delay the law and legal rulings for years.

“By seeking injunctions against the state, they interrupt the application of laws or decrees ordered by legitimately elected authorities,” Fernandez said April 8. “We want legitimate, democratic, flexible justice for all Argentines, without fear of anyone.”

The Senate yesterday passed the bill restricting injunctions and will send the legislation onto the lower house, where the government has the majority to secure its approval, according to opposition Senator Maria Eugenia Estenssoro.

“The reform is a serious threat to constitutional guarantees,” said the Argentine Business Association in an e- mailed statement. “It would do great damage to Argentina’s investment environment and job creation.”

It looks as if Argentinians are not taking to kindly to their new situation. A “few” people reportedly hit the streets in protest; banging pots and demonstrating. I cant tell for sure from these pictures but my guess is they are not all that happy…

Full Bloomberg articles can be read HERE, HERE, HERE, and HERE