Argentina: Government responds to peso crisis with panic selling of dollar reserves and interest rate increase
By
Rafael Azul
8 May 2018
In the midst of increasing financial volatility across the world, a massive flight of financial capital took place last week from the weaker emerging economies as speculators converted their peso investments into US dollar denominated securities. The flight was in part triggered by the recent efforts by the US Central Bank to incrementally raise domestic interest rates.
Last week, the currencies of the largest economies in Latin America—Mexico, Brazil and Argentina—suffered drops in value of 5.25 percent, 4.83 percent and 8.26 percent respectively as speculators moved billions of dollars out of the region and into Wall Street and US banks.
Among them, Argentina was the most affected. In an attempt to avert a collapse of the peso, the Argentine Central Bank fed the dollar buying frenzy, selling six billion US dollars from its reserves at the beginning of May (roughly one fourth of its total dollar reserves).
The Argentinian government also raised the interest rate for short-term government and bank bonds three times over the span of several days to 40 percent (i.e., for every 10,000 pesos the government borrows from speculators, it must pay back 14,000). The great fear is that runaway inflation will lead to a repeat of the 2001 collapse of the peso which provoked mass demonstrations and led to the fall of several presidential administrations.
By Monday, these measures appeared to have forestalled a further drop, at least for the time being.
The decrease in value of the benchmark 10-year US government bond (to 3 percent per year) and the anticipated repatriation of financial assets held overseas by US corporations, in response to…