What's happening in Argentina?

1/29/2014 10:32:00 PM
A friend of mine pointed me to this article on the recent plummet in the value of the Peso in foreign exchange markets, which borders on incoherent. So I figured I'd try to set the record straight here.
  • The Argentine Peso has a floating exchange rate, so it is not the case that the government just "devalued" it, though a variety of Argentine government policies do influence the exchange rate by way of market forces.
  • The value of the Peso has falling for a while now as a result of domestic policies that have proven highly inflationary. Also, although the Argentine Peso has a floating exchange rate, the Argentine government has engaged in a variety of tactics to prop up the Peso's value on foriegn exchange markets, including selling off the country's accumulated dollar reserves and restricting the ability of citizens to sell pesos for dollars.
  • on Wednesday January 22nd, the Argentine government halted sales of US dollar reserves, allowing the Peso to depreciate. It plummeted by 13% in two days.
  • On Friday, January 24th, the Argentine government resumed sales of US dollar reserves in a bid to slow the decline of the Peso.
  • on Tuesday January 27th, the Argentine government tightened existing currency controls, reducing the amount of US dollars that Argentinian citizens could buy. This should theoretically prop up the exchange rate by reducing the supply of Pesos on foreign exchange markets.
So this is all a story of a government fumbling from one policy to the next trying to find a way to halt the decline of the currency without Volcker-style harm to the domestic economy.

Some key points that are confusing people: 1) the Peso is declining for domestic reasons, such as run away domestic inflation resulting from overly accomodative monetary policy, not as part of a bid to boost exports as some reporters have claimed; 2) the Argentine peso has a floating exchange rate--the government did not just "devalue" it by fiat; and 3) sales of US dollar reserves causes currencies to appreciate, not depreciate, by increasing the supply of dollars and decreasing the supply of domestic currency on foreign exchange markets.