Bloomberg News

Argentine Grandfather Refused $10 Bill Under Fernandez Controls

May 31, 2012

Argentine lawyer Julio Cesar Duran wanted to exchange a pocketful of pesos for $10 to give as a gift to his two grandsons. With the government clamping down on dollar purchases, the tax agency rejected his request.

President Cristina Fernandez de Kirchner’s tightening oversight of the foreign currency market is hitting international companies as well as average Argentines, who have traditionally bought dollars to protect their savings in a country with a history of devaluations and hyperinflation. In the unregulated market, the dollar costs about 40 percent more than the official rate of 4.47 pesos, a record gap.

“I wanted to buy $10, not $10 million, and the tax agency says I can’t,” Duran, 59, said in a telephone interview from Mar del Plata, a seaside town in Buenos Aires province, where he tried to buy the dollars at an exchange house last week. “I didn’t intend to do something that would destabilize the country’s finances.”

Duran hired a lawyer after his transaction was rejected, saying the government’s measures infringe his property rights and that the tax agency doesn’t have the authority to forbid exchange purchases. A federal judge is reviewing his request that the restrictions be lifted.

“This measure is manifestly arbitrary,” said Gregorio Badeni, a constitutional lawyer based in Buenos Aires. “These decisions on limits to the foreign exchange markets can only be ordered by the central bank or by the federal government and it has to be reasonable.”

Press officials at the national tax agency didn’t respond to a message left by Bloomberg News.

Reserves-for-Debt

With Argentina blocked from international credit markets since its 2001 default on $95 billion of bonds, Fernandez counts on the country’s trade surplus to bring dollars into the economy and boost central bank reserves, which she then uses to pay debt. The government plans on tapping $5.7 billion of reserves this year to pay debt, according to the budget.

The purchase of dollars by individuals and companies drains central bank reserves. With $21.5 billion being pulled out of South America’s second-biggest economy last year, up from $11.4 billion in 2010, Fernandez decided to staunch the losses following her October re-election.

Money Laundering

Within days of winning a second four-year term, Fernandez ordered mining companies including Xstrata Plc (XTA) to keep export revenue in the country, told insurance companies to repatriate investments and gave the tax agency the mandate for limiting dollar sales. The government said the moves were needed to limit money laundering and terrorist financing. In April, Fernandez banned Argentines from using their ATM cards to withdraw dollars abroad from peso-denominated accounts.

Yet with Argentina’s nine-year economic expansion slowing and inflation accelerating to 23 percent, the fastest in the world after Venezuela, the demand for dollars this year in both the legal and unregulated market has picked up.

“You can’t ask people to have faith in the peso with such fast inflation,” said Orlando Ferreres, a former deputy economy minister who now runs Orlando Ferreres & Asociados research company in Buenos Aires. “The government is trying to protect the dollars it has because it sees a more complicated landscape by the end of the year and next year.”

Fernandez’s currency controls made the so-called blue-chip rate for the dollar, set by price gaps between Argentine securities in local and global markets, soar a record 30 percent in the past three months, signaling currency outflows are picking up. The central bank’s international reserves fell to $47 billion yesterday, the lowest since March 7.

‘Obsessed’ With Dollars

Cabinet Chief Juan Manuel Abal Medina yesterday told Congress that Argentines are “obsessed” with dollars and that the government is seeking to “de-dollarize” the economy.

“It’s a cultural problem,” Abal Medina said. “It’s very important that Argentines be more normal and use dollars only for the trade exchange as it happens in other places.”

On May 17, tax agency officials caught a man offering dollars to passers-by in downtown Buenos Aires and arranged for his arrest by police. The crime is punishable by as many as eight years in prison, the agency said in a statement.

Argentina’s history shows the peso can be a risky investment. In late 2001, then-President Fernando de la Rua limited bank withdrawals, a measure that led to violent protests and a string of five presidents in two weeks. His eventual successor, Eduardo Duhalde, converted U.S. dollar deposits into pesos after the country abandoned a decade-long 1-to-1 peg with the dollar and the exchange rate plummeted to more than 4-to-1.

A decade earlier, hyperinflation led the government of President Carlos Menem to abandon the austral and create the peso peg.

When Duran’s request was rejected, he tried to buy a single euro, and then just one dollar, but those transactions were also rejected.

“I pay taxes, I have my house, I make a living from my profession,” said Duran. “I think it’s unfair and I can’t tolerate this ridiculousness.”

To contact the reporter on this story: Eliana Raszewski in Buenos Aires at eraszewski@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net


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