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Categorized | Currencies, Property

Argentina unveils new payment method

Posted on June 30, 2013

An Argentinian flag flies as people walk past the Metropolitan Cathedral in Buenos Aires©Getty

Argentina gets a new payment method on Monday that, unlike the peso, can be swapped for much coveted dollars in a country where greenbacks are like gold.

Though designed for real estate purchases, officials say the new Certificate of Deposit for Investment, or Cedin, could also be used to buy anything from washing machines to holidays, provided buyer and seller agree.

    Argentina has a history of resorting to funny money or emergency bonds as a substitute for cash in times of financial crisis, such as Patacones and Lecops.

    Those bonds, issued by the province of Buenos Aires and the national government respectively during the country’s 2001-02 economic crash, when it defaulted on nearly $100bn of foreign debt, were used among other things to pay salaries.

    The Cedin is different: the cash-strapped government, which introduced a strict clamp on legal access to dollars in October 2011 but has still seen central bank reserves decline at an alarming rate, is offering the bonds to people in exchange for dollars that have been held abroad or under the mattress without being declared.

    The catch is that, to be cashed for dollars by the central bank, they must be used in a real estate or construction transaction. The government hopes, however, that they can then circulate freely and be used for other purchases. “People will be able to buy white goods or any other product, pay for foreign holidays or pay off debts,” says Miguel Angel Pesce, deputy governor of Argentina’s central bank.

    Idesa, a consultancy, says Cedins “will operate like a national currency, convertible into dollars . . . The government is forced to seek alternatives because the Argentine peso has stopped serving as a savings instrument and has many limitations as a transaction instrument”.

    Argentines have a long-held love affair with the dollar, stemming from decades of painful experience of high or runaway inflation, currency crashes and economic turbulence – indeed the peso was pegged to the dollar during the so-called convertibility regime in the 1990s, though that experience collapsed in the 2001-02 crash.

    The greenback remains the preferred currency for savers and real estate transactions traditionally conducted in dollars have screeched to a halt amid the government’s currency restrictions.

    Since the government, in a bid to stem a haemorrhage of dollars flowing abroad, clamped down on accessing dollars, the black-market dollar rate has soared, virtually doubling the official rate in early May, sparking the announcement of the Cedin plan.

    The official dollar rate is now some 5.39 pesos while the parallel rate – dubbed the “blue rate” – has eased to around 8.04 pesos.

    The government dismisses the blue dollar as a tiny, illegal and illiquid market that has little relevance for most of the 40m population, but the “blue” has become a closely watched economic variable beside the overvalued peso.

    The problem for the government is that, even with the clamp on dollars, central bank reserves in Latin America’s third-biggest economy have tumbled to a six-year low – now less than $37.2bn.

    As such, the government sees the invitation to “launder” dollars for Cedins – and experts admit that the no-questions-asked attitude of the authorities could invite dirty money – as a way to boost reserves. Mr Pesce says it is credible to imagine $4bn being declared.

    “The Cedin has two opposing goals – to reactivate house sales and accumulate reserves,” says Eduardo Levy Yeyati, head of Elypsis, a consultancy, who sees the scheme as a “Venezuela-style” attempt to intervene in the parallel dollar market.

    But since house-sellers want to get their hands on dollars and are likely to swap the Cedin into dollars, the increase in reserves is unlikely to be lasting.

    “The Cedin are short-term sales of reserves,” he says. “The risk is that they will issue them against the declining reserves thinking that people will hold on to them for a while. That will compromise reserves in the future,” he added.

    Miguel Kiguel, an economist, said he struggled to see people using Cedins instead of pesos or credit-card purchases in instalments, which are very popular in Argentina.

    “People who want dollars will want dollars, not Cedins,” he says. “This is obviously a backwards step.”