Why does Argentina have a dual currency ? The Blue Rate
Is the Blue Market Really a Black Market?
In a standard economy, money is money. Whether you carry a briefcase of crisp hundreds into a bank in New York, or a sack filled with small bills into a branch in Nebraska, the deposit to your account will look exactly the same. The commodity (money) has a single value – the amount printed on the bill.
Not so in Argentina’s blue dollar market. New hundreds will always command a better exchange rate than old, wilted twenties and tens, which are more of a problem to move or to pass along inconspicuously. Like other commodities, volume also matters. On a recent afternoon on Lavalle street, while DolarBlue.Net listed the buy rate at $13.5, arbolitos were offering anything from $13 for US$100, which rose to $13.2 if you were willing to sell US$1,000 in a single trade.
Likewise, tourists short on pesos in Patagonia, or the far north, will receive an unpleasant shock if they are used to rates in Buenos Aires. One money changer I visited in a small southern town looked up the official rate, then the blue rate, then split the difference. I refused. He just shrugged. When you are the only game in town, you can set your own terms.
Currency possesses another quality unique among illegal commodities – it does not always remain contraband. A kilo of cocaine will always be cocaine, but blue dollars find a variety of creative ways to return to circulation as legitimate pesos (a laundering process known in Argentina as blanquear). Many property transactions, for example, are documented as a mix of dollars and pesos – only the dollars change hands in reality, but it is a convenient way for individuals or companies to justify their spending of pesos earned on the blue market.
As a result, though blue dollar transactions support legitimate activities, the more you look, the more it appears to work like a traditional black market.
A brief glance at the graph shows that something curious is afoot. The official rate has shown a slow upward trend, with one big cliff in late January. The blue looks more like the foothills near Bariloche. How can the official rate stay so serene while the blue has become untethered?
Let’s return, for a moment, to the basics: The blue dollar rate exists because Argentines want a commodity which they cannot purchase legally, except under heavy restrictions. This is where all black markets, from dollars to drugs, get their start.
The official rate is an artificial setting reflecting the administration’s priorities while avoiding a complete economic crash or starting a revolution. Along with benefits, there are side effects – distortion of the economy and the problem of foreign reserves, among others.
The blue rate is a complicated amalgam of economic forces. An interesting analysis from early 2014, from the University of Mississippi, employed a statistical model to break down the blue rate into its component parts (restrictive government policies, seasonal variations, etc.) controlling for all other factors. According to this analysis, the author calculates that the first 4.6% of the brecha (the gap between the official and parallel rates) is a risk premium: the cost of operating in an illegal market.
Another 56% of the gap, by the same method, is the result of five government policies issued between May, 2012 and April, 2013. These are: limiting dollar purchases for saving (11.3%), limiting allowances for travel (12.1%), mandating that foreign pensions be paid in pesos (9.4%), adding surcharges to foreign credit card purchases (16.4%), and further exchange rate controls (7.1%).
Add another 7% to account for the strength of the dollar worldwide. (This is the amount that the dollar has risen against the euro in the last three months. By contrast, the official rate has only risen 3% against the dollar over the same period, a signal of active rate management.)
This still leaves more than 30%, much of which will be due to pessimism over the economy, the spectre of high inflation, and new restrictive policies.
The ‘Contado Con Liqui’ rate, as noted above, is another check on the blue dollar rate. This rate connects to the real world, since it is set by bond sellers and is used in actual transactions on a daily basis. Many observers see this as one of the main channels for government influence on the blue market. If the parallel rate rises too high, government-associated organisations could sell more bonds, depressing the price and injecting more dollars into the market.
There is one more factor: speculation. Typically, people buy dollars for investment, travel, business deals, or to hide income from AFIP. However, if the blue dollar is on a tear, people will convert pesos to dollars as a speculative move – the inverse of a regular market dynamic – pushing the rate still higher. The Casa Rosada sees this as the central issue: Cabinet Chief Jorge Capitanich has regularly spent part of his daily press conference approaching speculators and promising action against them.
Critically, one item that does not seem to affect the rate, in any assessment, is supply. Scarcity does not appear to be playing a part. Whether the dollars come from big banks, as Diego suggested, or money parked offshore by rich Argentines, or both, the amount in circulation always seems adequate to meet demand.
Part of an Article from the Argentine Independent. You can read the full article here