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Argentina Faces New Devaluation as Dollar Demand Grows

Recession-hit Argentines are flocking to buy dollars, nervous over the government's latest debt default and pressure from the business community to devalue the peso for the second time this year.

Officially, a dollar is worth 8.42 Argentine pesos.

But it takes 14.26 pesos to buy one on the black market, a gap that only shows signs of widening.

President Cristina Kirchner has tried to convince Argentines to stop hoarding greenbacks and spend their pesos instead.

"You have to invest in things you can touch and see. The rest is just fairytales," she said recently.

But her appeals have largely fallen on deaf ears in a country that still bears the scars of its 2001 financial crisis, when the government froze $70 billion in deposits in a bid to stop a run on the banks.

Limited to withdrawals of $250 a day, Argentines flooded the streets, venting their wrath by banging pots and pans.

Rioting and the government crackdown that followed left 33 people dead.

Instead of retreating, the memory has grown more raw in recent months as the government again defaulted on the debt it restructured after the crisis.

Despite persuading the vast majority of its creditors to accept 70-percent losses on the face value of their bonds, Argentina lost a court battle against two U.S. hedge funds demanding full payment.

A U.S. federal judge barred the country from paying its restructured debt until it settles the $1.3-billion row, forcing it into a new default on July 30.

- 'Can't even export candy' -

After the 2001 default -- the largest in history at the time, at $100 billion -- Argentina shut itself out of global capital markets.

That has exacerbated its foreign currency crunch.

And with annual inflation of more than 30 percent and exports sagging, businesses are pressuring Kirchner's administration to devalue the peso again, after an 18-percent devaluation in January.

"We can't even export a piece of candy. Argentina is not competitive today," said Hector Mendez, leader of the largest employers' organization, the Argentine Industrial Union.

Consumers are also suffering, cutting back purchases by 1.3 percent in the first half of the year as inflation gutted their salaries.

The economy shrank 0.2 percent in the first quarter and shows no signs of recovering.

- Auto, ag industries hurting -

The plethora of woes has put the central bank between a rock and a hard place.

"If it raises the interest rate, it will deepen the recession. If it doesn't, it will add fuel to the fire of exchange-rate pressure and inflation," said Belen Olaiz of consultancy Abeceb.com

The central bank's reserves currently stand at $28 billion, down 45 percent from 2011.

And the agriculture sector, traditionally a key source of foreign cash, is in a funk over a 15-percent drop in soy prices.

Grain farmers are cashing in just $60 million a day at the central bank, down from $150 million in July.

Analysts say farmers are holding back their soy crops hoping for higher prices.

The vital auto industry, for its part, is unable to get enough dollars to import the parts it needs, exacerbating poor sales that are down 25 percent so far this year.

Source: Agence France Presse


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