(News Bulletin 247) – The Argentine peso collapses on the parallel market before the presidential election in Argentina on October 22. The latest statements by liberal candidate Javier Milei, a big favorite in the polls, have precipitated the fall of the currency of a country still traumatized by the great crisis of 2001.

The Argentine peso is experiencing a new bout of weakness. The dollar crossed the record threshold of 1,000 pesos per dollar on the parallel market on Tuesday, against a backdrop of exchange rate volatility and political uncertainty twelve days before a crucial presidential election for a notoriously fragile economy.

The dollar, at 365.50 pesos at the official rate since a devaluation in mid-August, was trading Tuesday evening at 1,010 pesos on the informal market, compared to 880 on Friday.

But in truth, the “arbolitos”, unofficial street changers, had deserted the tourist hyper-center of Buenos Aires, waiting for a little stability to do business…

The brutal depreciation of the peso coincides with statements on Monday by poll favorite liberal candidate Javier Milei, a supporter of dollarization of the Argentine economy: he urged Argentines not to save or make investments in national currency, which for him “not even worth a turd”.

The peso, this “waste” for Javier Milei

“Never in pesos, never in pesos! (…) This waste is not even used as fertilizer,” he insisted, explaining that dollarization of the economy — a measure with a risky and very controversial social cost among economists — would be easier to achieve with a strong dollar against the peso.

The parallel dollar market does not represent a significant volume but it is a reliable thermometer of the anticipations, in this case of the nervousness, of the Argentines. Who, subject to exchange controls, rush to buy dollars at the street rate and store them in anticipation of the worst: a safe haven, in a de facto bi-monetary economy.

The Minister of the Economy Sergio Massa, presidential candidate of the government bloc (center-left) and a priori doomed to a second round against Javier Milei, described the latter as “irresponsible”.

“Agitating, telling people to withdraw their deposits irresponsibly… When I see candidates capable of setting the house on fire to win an election, that worries me,” he said. This harms “millions of Argentines”, Javier Milei “plays with people’s savings”, he accused.

The Argentine Central Bank steps up to the plate

Against this backdrop of extreme nervousness, the Central Bank published a press release on Monday evening to try to reassure, affirming that “the Argentine system presents a solid situation of solvency, capitalization, liquidity and provisions”. In other words, that Argentines do not have to panic and withdraw their savings.

And on Tuesday, the Association of Private and Public Banks criticized Javier Milei, without naming him, calling on “candidates aspiring to govern to show responsibility in their campaign and declarations” and not to “unnecessarily generate anxiety” .

Tuesday evening, Javier Milei retorted that “calling to account the only candidate who has never held public office and who comes to propose a complete change of model to eliminate inflation forever, is a scandal.”

“As an economist, he (Javier Milei) knows well the consequences that such a sentence the peso is worthless can trigger on the economy”, however estimated to AFP Martin Kalos, economist at the business consulting company EPyCA.

The trauma of the 2001 economic crisis

Because many Argentines remain haunted by the memory of the “Gran Crisis” of 2001, when a lack of foreign exchange reserves (like today), added to external shocks, led to too much demand for dollars for offer, leading to a bank failure and the freezing of withdrawals.

A wave of panic, scenes of looting, riots followed and left 39 dead in December 2001. Without doubt the crisis which most traumatized Argentines since the dictatorship of 1976-1983.

Many economists, however, converge to estimate that the situation in Argentina will be very different in 2023, particularly with a much more solid banking system, which the banks recalled on Tuesday. And this despite “dangerously low levels of foreign exchange reserves”, warned the IMF in mid-August.

But the consensus is also that the “official” peso remains overvalued compared to the dollar and many Argentines fear a new post-election devaluation, like that which occurred in mid-August after the primaries. And which has further eroded purchasing power already eroded by inflation at 124% over one year (80.2% since January).

The Buenos Aires Stock Exchange closed sharply higher on Tuesday, at +10.03%, with many investors flocking to stocks with assets closely linked to the dollar, a form of preventive protection against a possible devaluation, according to analysts.

The October 22 vote promises to be undecided according to pollsters, with Javier Milei around 33-35%, doomed a priori to a second round with Massa (29-30%), the candidate of the opposition bloc (center-right ) Patricia Bullrich being left behind (25-26%).

(With AFP)