Argentina prepares to end fixed exchange rate.
TLDR
- Argentina has a fixed exchanged rate, pegged to USD
- Peso is overvalued, so govt devalues at a fixed rate monthly
- Massive Currency flight expected if controls removed all at once
Original article - https://www.cato.org/blog/mileis-key-pending-task-ending-argentinas-currency-controls-part-ii
- Argentina has a fixed exchanged rate, pegged to USD
- Peso is overvalued, so govt devalues at a fixed rate monthly
- Massive Currency flight expected if controls removed all at once
Original article - https://www.cato.org/blog/mileis-key-pending-task-ending-argentinas-currency-controls-part-ii
There is no clean way to end a currency peg. IMF and Argentina need to rush up. This slow(ly) opening up is a farce. You have to let the currency float. Its a ridiculous system where the currency is devalued at 2% monthly (1% now) instead of just letting the market decide.
If the floating currency policy is good long-term - its good to do immediately.
If the floating currency policy is good long-term - its good to do immediately.
The peg - "hard fixed rate" is mandated as per the current law. The legislature will need to amend the law to bring in floating currency.
The President can change the rate itself. Even though he cant float it. So he can devalue it (or keep devaluing it regularly) to stay pegged to the market rate, instead of pegged to USD
The President can change the rate itself. Even though he cant float it. So he can devalue it (or keep devaluing it regularly) to stay pegged to the market rate, instead of pegged to USD
Hmm...interesting. I didnt understand this system of fixed rate + devaluations. But makes sense. But it shows what a toothless law it is.
How does a government determined value really affects things? Wont the market determine everything when you buy and sell your products internationally?
If a business in Argentina wants to buy machinery - the foreign seller will always quote the market rate. If he has products that he sells for USD 10K he will charge the same. And the Argentinian business will have to arrange that $ 10K regardless of what the government.
If a business in Argentina wants to buy machinery - the foreign seller will always quote the market rate. If he has products that he sells for USD 10K he will charge the same. And the Argentinian business will have to arrange that $ 10K regardless of what the government.
You're right and that is why it ends up messing up the economy and bringing it to a standstill
If you're exporting
1. Government offers you too few Peso for the USD you bring in
2. Exporters decide its not worth it - and park the USD they earned abroad
If you're importing
1. Government sets the rate of USD too cheap
2. Because its too cheap, its in short-supply. You will not get USD from the government. So you go off-market and try to buy it at the real market rate. It ends up costing even more since its off the books
With exporters parking money abroad the currency becomes even more devalued. And it keeps getting worse everyday since export is not bringing in USD to balance off the imports. Inflation shoots up
If you're exporting
1. Government offers you too few Peso for the USD you bring in
2. Exporters decide its not worth it - and park the USD they earned abroad
If you're importing
1. Government sets the rate of USD too cheap
2. Because its too cheap, its in short-supply. You will not get USD from the government. So you go off-market and try to buy it at the real market rate. It ends up costing even more since its off the books
With exporters parking money abroad the currency becomes even more devalued. And it keeps getting worse everyday since export is not bringing in USD to balance off the imports. Inflation shoots up
Always need a capitalist to fix the country after an authoritarian socialist. I hope this works out for the sake of their people