Currency black market cautiously resumes

Black market currency dealing in Argentina tentatively resumed yesterday after intense government pressure halted operations for almost a week, foreign exchange traders said.

The so-called blue, or informal market, as measured by Reuters, has become the only option for Argentines who want to buy dollars since the government effectively banned purchases at the official rate last month.

President Cristina Fernández de Kirchner, battling capital flight and trying to keep dollars in the country to pay government debt, put controls on foreign currency purchases late last year. They were tightened further in May when tax agents set up shop inside foreign exchange houses to discourage backroom operations.

Traders said agents from the AFIP tax agency remained on many premises yesterday but that customer demand for greenbacks had encouraged cautious dealing to resume.

"There are people who get paid in pesos and need to buy dollars to meet certain obligations, but the AFIP (tax agency) won't let them. Rather than get themselves in debt, they're paying the 'blue' rate," one trader said.

"Very real fears mean that little trade is being done, I'd say the bare minimum. It's even proving tough to get prices because some traders don't even want to talk about (the black market peso)," the trader said on condition of anonymity.

GAPING SPREAD After a patchy session with few deals, the peso closed at 5 .92 per dollar, according to the ask price.

That implies a premium of 32 percent on the official interbank ask price of 4.49 pesos per dollar. Traders said buyers were forced to pay the difference because authorities were refusing all requests to buy dollars.

In the blue-chip swap market, which sets the implied exchange rate used to buy Argentine assets traded abroad, the peso traded at 6. 50 per dollar yesterday, traders said. That marks a 45 percent spread above the formal price.

Fernández de Kirchner's government has sought to narrow the gaping spread between the formal and black market exchange rates by telling traders to sell dollars more cheaply. Officials fear a sharply weaker black market peso risks fuelling annual inflation estimated at about 25 percent.

Fearing reprisals, and unwilling to sell at the price requested by the government, traders stopped trading completely on June 4 for the second time since the controls were put in place late last year.

Unable to get their hands on dollars, Argentines have also been stepping up withdrawals from bank accounts held in the US currency.

The rate of withdrawals has gathered speed since government officials started urging crisis-weary savers and investors to stop thinking and saving in dollars.

Justice Minister Julio Alak said the government was not planning to turn dollar-denominated debts, contracts and deposits into pesos by reforming the country's Civil and Commercial Codes.

Critics say the only way for the government to smother demand for the perceived safe-haven greenback is to guarantee macroeconomic stability and tame years of high inflation.

"The best way to peso-ize the economy would be for the authorities to strengthen the macro-policy mix in order to instill confidence in the (peso) and the outlook for the economy," wrote Goldman Sachs economist Alberto Ramos.