Currency Massacre In Emerging Markets

South American Woes

Both Venezuela (socialist worker’s paradise) and Argentina (nationalist socialist paradise) have a problem with their foreign exchange reserves. In both cases it stems from trying to keep up the pretense that their currencies are worth more than they really are. The central banks of both countries are (and have been for some time) printing money like crazy, and inflation is galloping with gay abandon. Their governments publish misleading economic statistics, that inter alia attempt to hide the true extent of the monetary debasement – in short, their inflation statistics are even more bogus than those of other governments (we are leaving aside here  that the mythical ‘general price level’ cannot really be measured anyway).

Since they have maintained artificial exchange rates – coupled with capital controls, price controls and other coercive and self-defeating economic policies – people have of course felt it necessary to get their money out any way they can. This includes making use of every loophole that presents itself, so that e.g. in Venezuela, so-called ‘dollar tourism’ has developed, whereby citizens travel abroad for the express purpose of using their credit cards to withdraw the allowed limit in dollars at the official exchange rate (and buy some toilet paper while they have a chance to grab a few rolls).

Now the governments of both Venezuela and Argentina have reacted – the former by introducing a ‘second bolivar exchange rate’ for certain types of exchanges, the latter by stopping to defend the peso’s value in the markets by means of central bank interventions.

Bloomberg reports on Venezuela:

“Venezuelan bonds plunged to the lowest in more than two years after the government announced the latest partial devaluation of the bolivar, this time for airlines and foreign direct investment.

Venezuelans traveling abroad, airlines and foreigners sending remittances home must use a secondary exchange rate determined at weekly auctions, Economy Vice President Rafael Ramirez said yesterday. The rate set at the latest auction was 11.36 bolivars per dollar, compared with the official rate of 6.3. Airlines operating in Venezuela fell and one carrier suspended flights.

The partial devaluation comes as the government attempts to halt a hemorrhaging of dollars that has pushed international reserves to a 10-year low. The announcement came on the same day that the country’s largest private food producer, Empresas Polar SA, said it can’t import more raw materials because authorities are delaying the release of dollars.

“The government has done too little and too late to reduce the currency distortions,” Alejandro Grisanti, economist at Barclays Plc said by telephone from New York yesterday. “This partial devaluation means more money printing by the central bank to finance the government.”

[…]

Since taking office in April, President Nicolas Maduro has struggled to boost growth and rein in inflation in a country with the world’s biggest oil reserves. Consumer prices rose 56 percent last year even as government price regulators backed by troops forced more than 1,000 businesses to cut prices on everything from toys to electronics. The country’s international reserves fell to $20.5 billion this month from more than $28 billion a year ago.

Without access to dollars at the official rate, many companies and individuals turn to the illegal black market, where the bolivar weakened from 74 to 79 per dollar after yesterday’s announcements, according to dolartoday.com, a website that tracks the exchange rate on the Colombian border.”