MercoPress. South Atlantic News Agency

Argentina rolls back dollar restrictions hoping to contain market volatility; Monday test day

Capitanich and Kicillof said the Peso reached a 'convergence level' under a policy of 'managed flotation'

Argentina lifted on Friday restrictions on personal US dollar purchases for citizens, ending a prohibition on greenback savings that began at the end of 2011. The new measures, which occur one day after both the official and parallel 'blue' dollar saw record rises, were announced in a short press conference by Cabinet Chief Jorge Capitanich and Economy Minister Axel Kicillof. The measures become effective from Monday onwards.

“We have decided to authorize the buying of dollars on behalf of individuals, according to their declared incomes,” Capitanich announced.

He added that restrictions had always been temporary and had served their purpose. At about eight Pesos to the dollar, he said the Argentine currency “has reached an acceptable convergence level” under a policy of “managed flotation”.

The Peso has sunk 22.7% so far this year despite all the measures implemented by the government of President Cristina Fernandez to try and stem the drain, the latest of which is restricting the number of purchases from abroad made over the Internet to two per year, at a maximum value of 25 dollars each, above which it would impose a 50% tax.

The Central Bank of Argentina's rigid management of the official exchange rate over several years has had a steep cost to foreign exchange reserves, which have dwindled to 29 billion currently from 52 billion in 2011. After spending another 120 million dollars to shore up the Peso on Tuesday, the bank appeared to abandon the effort to protect its stockpile of dollars. But economic experts said the effective devaluation was unavoidable.

“They wanted to provoke a shock in the markets to create a bit more public confidence,” said Aldo Pignanelli, a former head of the country's central bank.

Currency limits have been hugely unpopular with Argentines, who for 40 years had been in the habit of hoarding dollars as a hedge against inflation and an unreliable domestic currency.

The restrictions on the purchase of dollars allowed a parallel black market to flourish, where the greenback has been trading at about 13 pesos (65% gap) and even higher at moments. By freeing up the peso and exchange controls, the central bank could conceivably calm the market by convincing Argentines that they could freely exchange their pesos anytime.

That in turn could narrow the gap between official and black market rates and restore some confidence, and competitiveness on global markets. Economists warn, however, that letting the peso sink increases the risk of even greater inflation, or even hyperinflation, and the decision must be supported by other fiscal, monetary and wage measures.

Government figures show the current rate of inflation to be 11%, but experts believe it is really closer to 28%, and say it could climb to 35% by next year.

However the real problem is the government's spending which seems limitless together with a battery of subsidies and frozen utilities' rates discouraging investments that became evident with the collapse of the power grid when the recent heat wave and the soaring energy and fuel import bill that gobbles billions of dollars annually.

Besides the government appeals to the central bank international reserves to prop the budget deficit and to comply with foreign debt.

The latest economic upheaval comes 12 years after Buenos Aires roiled finance markets by defaulting on nearly 100 billion in bonds, an earthquake which unleashed a tidal wave of capital flight and increased this Argentina's runaway inflation