MercoPress. South Atlantic News Agency

Argentina clips wings of speculative capital

Argentina imposed a six months compulsory “residence” on incoming financial capital. The regulation that already exists in other South American countries and excludes foreign trade operations and “direct foreign investment” is targeted to ease the impact of speculation in local financial markets.

According to the decree all incoming capital must register in the Argentine Central Bank and the Ministry of Economy is entitled to modify (plus/minus) the "residence" timetable of financial capital depending on macroeconomic circumstances. In this first stage it was established in six months.

Argentine and most emerging countries markets are constantly exposed to these financial "brief term" operations that roam globally looking for the highest interest rates or quick gains, and with the same speed they arrived, leave.

Given the huge volumes involved and the limited size of markets, these financial operations can have and have had a devastating impact in emerging countries destabilizing whole economies or leading to runs on any particular currency, bank deposits and/or bonds.

The Argentine Central Bank will be responsible for the enforcement of the decree and collecting fines from those who elude or attempt to avoid the six months compulsory "residence" period.

When the announcement was made public last week the Buenos Aires stock exchange experienced an important 6,84% plunge after having reached its highest point since 1997. The leading Argentine index Merval reported share earnings of 53% during the first six months of the year.

However the decision also helped the US dollar to recover in the Argentine money market. Since Argentina is still in default (the country is not paying interests or recovering matured bonds) and is going through an export boom, there's an abundance of US dollars and the Argentine peso has rapidly appreciated. Actually the local exchange rate has consistently dropped from 3,45 pesos at the beginning of 2003 to 2,80 where it stands now.

According to Argentine Central Bank reports last May incoming speculative capital reached 950 million US dollars, compared to a monthly average of 550 million US dollars during the first quarter of 2003.

"Speculative capital that come and go out of markets at will taking advantage of the best interest rates are not compatible with the Argentine economic model", highlighted Argentine Economy Minister Roberto Lavagna when announcing the country's new capital movement policy.