An American in Argentina

By Gregory F. Rehmke
Program Manager for Economic Thinking/E Pluribus Unum Films
www.EconomicThinking.org

(Editor's Note: Greg Rehmke grehmke@aol.com was visiting friends in Argentina. He was working at FEE at the time and posted this e-mail to fellow staff members before heading home.)

Things are strange here. For ten years the Argentine peso was tied one-to-one to the U.S. dollar and both currencies circulated freely. In addition, most loans and savings accounts were in dollars. The Duhalde government delinked and devalued the Argentine peso in January.

Friday [March 22] when I arrived, the peso to U.S. dollar rate hit 3 to 1. Economists here had predicted maybe that would happen by the end of the year. Yesterday [March 25] it hit 3.8 to 1 and the government "asked" banks and exchange houses to stop trading.

I have bought some nice clothes and leather goods all at prices one-third of what they were a short time ago. There are lines at ATM machines as people take out pesos to spend quickly or to exchange for dollars at the exchange houses (where there are long lines) or at the "little trees" (the name for the entrepreneurs who offer dollars at better rates that the banks. They say here that Florida street, the main street for these informal exchange operations, should be declared a national park, since it has so many "little trees").

Also, each province is now printing its own currency to pay employees and buy goods. I have a 5-peso "bond" from the Province of Buenos Aires government. Some restaurants have signs listing the various provincial currencies they will accept. (I am trying to collect samples to bring back to FEE.)

The government froze everyone's savings accounts and at one point told banks to pay out dollar-denominated accounts only as pesos. This led to mass protests. Most banks are foreign-owned and have reserves to pay out all dollar deposits. But the government prevented that in order to protect a handful of government-owned banks that did not have enough reserves and would have gone under.  These government-owned Argentine banks had been paying far higher interest rates than other banks (over 15 percent on checking and saving accounts). Though many banks bought high-yield Argentine government bonds, the government-owned banks had a very high proportion of their portfolio in those bonds. Foreign banks paid a standard interest rate and invested far more safely.

If the government would just get out of the way -- and permitted banks to allow their customers to withdraw dollars from individual accounts -- it could then let the insolvent banks go into normal bankruptcy. Depositors in government-owned banks would then receive a fraction of their original deposits. But those depositors were already receiving very high interest on their deposits, and so should not be surprised to discover a connection with higher return and higher risk. (If the government wanted to help such depositors, perhaps it could, after discounting deposits for extra-high interest rates, offer credits on future taxes.)

Instead, the government is arresting foreign bank managers and charging banks with taking money out of the country. The key point is that it was legal at the time to take money out, but later the government used an old economic subversion law, not used since the last military dictatorship, to begin the arrests. Further, the government is now trying to pass new laws that will tax deposits Argentines have in other countries (which of course will punish anyone who foolishly reported such deposits instead of sending dollars overseas informally). Other proposals call for new taxes on businesses privatized in the early 1990s, as a way of grabbing more cash. (One of my friends said she wasn't surprised by these measures. She said she "wouldn't be surprised if government officials knocked on my door tomorrow to take my family's silverware to cover the national deficit.")

The wall along the President's house (which is just a couple miles from where I am staying) is covered with real estate "For Sale" signs. Real estate agents protest there every week. Few homes sell now because the peso's future is uncertain, savings are locked up in government-mandated "little tents," and in addition sales and loans denominated in dollars are now illegal.

The Supreme Court here ruled that the currency controls are illegal and that banks must allow depositors to withdraw their funds. The President and legislature responded by trying to replace the Supreme Court members. And the President blames the current currency crisis on the Court for allowing dollar withdrawals. But here the Supreme Court decision applies only to that single case. Everyone else must go to court separately. So hundreds of thousands are doing just that, and await court dates and orders to allow them to get their dollars. Some courthouses had to be reinforced because of extra weight of paperwork for these cases. (The New York Times reports that Argentines, thanks to court orders, are now able to withdraw $50 million a day.)

Argentine TV last night showed a long line in front of the Italian embassy with fights breaking out over who was there first. And now the United States requires visas to come to the United States from Argentina.