• On the Argentine black market, the US dollar recently climbed above 1,000 pesos for the first time.
  • The price of the “blue dollar” has risen almost 60,000% since Argentina abandoned its currency peg in 2002.
  • The greenback allows Argentinians to protect their income while the peso continues to lose value.

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For Argentina’s economy and markets, chaos is a way of life.

For decades, the country has been rocked by hyperinflation, sky-high interest rates, a growing mountain of debt, a series of government bankruptcies and a crashing exchange rate. The country has been in recession a third of the time since 1950, according to a recent report from Spain’s Santander Group, based on World Bank data.

Just last week, the country’s central bank raised its key interest rate to an impressive 133% (yes, you read that right), intensifying a seemingly hopeless battle against rising consumer prices, which were nearly 140% last month.

Rampant inflation has wreaked havoc on Argentina’s currency over the years, losing much of its value against the dollar and diminishing its appeal to consumers. The greenback has risen nearly 100% to about 350 pesos in the interbank market this year, with even triple-digit interest rates failing to support local tenders.

Rise of the “blue dollar”

But that’s just the official side of the story.

In Argentina’s busy foreign currency black market, the dollar is far more expensive. U.S. currency notes are in high demand among residents to protect their savings, which risk losing value every day if held in the ill-fated local currency. It is estimated that Argentinians have billions of cash hidden in their closets and under mattresses.

The coveted dollars from the back alleys of Buenos Aires have their own price, even their own name: Dólar Blue or the “blue dollar”.

And they are always in demand, regardless of the cost.

Up 60,000% and still going strong

The unofficial exchange rate of the dollar broke through the 1,000 peso mark for the first time last week, reaching almost three times the official exchange rate. That’s an increase of almost 200% this year.

But it’s not just a story from 2023. It’s an issue that goes back just over two decades, when Argentina abandoned its exchange rate peg against the dollar, leading to a sharp devaluation of the peso.

Since that seismic market event, dollar rates on Argentina’s black market have risen nearly 60,000%, according to insider calculations based on figures from bluedollar.net, which provides data on the country’s informal exchange rates.

From a level of around 1.7 pesos at the start of 2002, the value was at 1,010 pesos last week – with some reports putting the blue dollar’s peak at as high as 1,050.

Hidden Dollar Treasures

Argentines had hoarded about $246 billion in undeclared cash, foreign bank accounts and safe deposit boxes at the end of 2022, the American libertarian think tank Cato Institute said in a blog post last month, citing figures from Argentina’s statistics agency. Local media also reported similar figures.

This is almost twelve times the country’s official foreign exchange reserves and equals about 40% of GDP.

Last year there were even reports of crowds raiding a local landfill for money after rumors emerged that a closet containing a stash of blue dollars may have ended up there.

The Argentine public’s appetite for dollars stands in stark contrast to some recent moves by the country’s government that have suggested a desire to rely less on the U.S. currency. The country used the Chinese yuan to repay some international debts and held talks with Brazil to weigh the possibility of a common currency.

Still, the economy’s dollar fixation is so strong that leading presidential candidate Javier Milei openly supported adopting the greenback as Argentina’s official currency, saying the peso was worth even less than excrement.

Argentine presidential candidate Javier Milei. Manuel Cortina/SOPA/Getty Images

There’s more trouble ahead

There is apparently no end in sight to the problems of the Argentine economy and currency.

The International Monetary Fund expects the economy to shrink 2.5% this year, and some forecasters are even more pessimistic.

“Inflation would reach 200% in 2023 and remain high in the first six months of 2024 as corrections in utilities and the exchange rate are expected from December 2023,” analysts at Spanish bank BBVA said in a research note this month.

“We maintain the forecast of a 3.5% GDP decline for 2023 and increase the decline to 2.5% for 2024,” they wrote, predicting that the peso’s official exchange rate would rise by another 80% by the end of the year 630 per dollar will fall.

That would almost certainly mean the blue dollar is hitting new highs.

Source : markets.businessinsider.com

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