MercoPress. South Atlantic News Agency

Argentine forex market volatility calming but fears remain as to next steps

Buenos Aires billboards with foreign exchange rates

Argentina's central bank cut dollar reserve requirements after bank deposits plunged 645 million dollars last week following the government's moves to restrict foreign exchange purchases in an attempt to reduce capital flight.

Argentine banks are now required to hold just 20% of their dollar deposits at the central bank as reserves, the Argentine Central Bank said in a November 11 statement. Banks previously had to keep all dollar savings not being used to finance exporters at the central bank.

President Cristina Fernandez efforts to slow capital flight since her Oct. 23 re-election by ramping up oversight of foreign exchange purchases, ordering energy and mining companies to repatriate export revenue and telling insurance companies to bring investments back to the country sent investors to banks to withdraw dollars.

“This will facilitate the ability of financial institutions to meet their client demands,” the government said in a statement on the presidential website.

After a very turbulent week when the effect of the restrictive measures triggered the opposite effect causing an almost panic selling of Argentine pesos by individual holders fearing the worst, this Monday the market functioning was still limited but in the range of 4.25/4.29 Pesos to the US dollar, while the ‘blue’ or free market was below 5 Pesos after having reached 5.30 last Friday.

Dollar deposits have plunged 5% this year to 15.3 billion through Nov. 4, according to the latest central bank data, heading to their first annual decline since a financial crisis in 2001 that led to the government defaulting on 95 billion dollars of sovereign bonds.

“This is just a signal to try to calm down expectations,” former central bank President Martin Perez Redrado said via e-mail. “It is a very mild” measure, he added.

Central bank reserves fell to 46.6 billion dollars on Nov. 11 from a record 52.6 billion in January as Cristina Fernandez taps savings to pay debt and steady the peso. The government has spent 7.5 billion in reserves this year to pay debt and will tap 5.7 billion more next year, according to the central bank and the government's draft 2012 budget.

Facing inflation economists estimate at 24%, Argentines pulled 9.8 billion out of the economy in the first half of this year, compared with 11.4 billion in all of 2010, according to central bank data. Capital flight has accelerated since then and will reach a record 25 billion dollars this year, said Jorge Todesca, a former deputy economy minister.