Argentina Hits Crisis Mode as Peso Declines Over 12 Percent, Potential Default

by on January 24, 2014 5:02 am BST

Argentina hit crisis mode as the peso is seeing the largest devaluation since the 2002 economic collapse, falling over 12 percent in the last two days. The Central Bank of Argentina has been selling US dollars in the open market since the collapse and leaving the one-for-one dollar peg. Unfortunately, the central bank doesn’t have enough in the foreign-exchange reserves to prop up their currency. Analysts say that the steep plunge could deepen Argentina’s inflation to 30 percent this year.

“There was a first sign of this change on Tuesday because the central bank didn’t show up (to intervene) until midday, and on Wednesday and today it just disappeared from the market,” said Juan Pablo Ronderos, an economic consultant from abeceb.com. Ronderos said that the central bank choose to devalue the peso immediately opposed to drawing it out because of dwindling currency reserves.

The central bank only has $29 billion in its reserves, the lowest in seven years. Argentina has kept strict controls on exchanging pesos for dollars to plug any capital flight. Due to the illegality, Argentinians have used black market currency markets for exchanging.

Neil Shearing, chief economist on emerging markets for Capital Economics, noted in a report that “the sharp drop will aggravate inflation, although the impact may be mitigated by the fact that some imports will already be purchases at the much weaker black market exchange rate.” The drop in the “official rate” was as much as 16 percent over the course of two days.

Possible default on liabilities steaming from a decade of fiscal mismanagement could trigger a balance of payments crisis. Riots have begun in fears of another massive default. In what started the economic collapse, Argentina defaulted on a record $95 billion and has since been shutout of the international debt markets. Time is running out of President Christina Fernandez de Kirchner.