Amid mounting capital flight, Argentine banks impose $10,000 cap for dollar purchases
Facing an escalation in demand for U.S. dollars and accelerating capital flight, numerous Argentine banks have decided to limit their purchase by private parties to $10,000 a month.
The move comes amid a sharp increase this week in dollar purchases for the purpose of wiring funds overseas - part of a rapidly growing trend known in Argentina as the "financial bicycle."
Around 85% of the dollars purchased, according to Buenos Aires financial institutions, have been in transactions of between $2 million and $5 million - the legal limit in Argentina - and with scanty documentation. Of $14 billion purchased in the first half of 2017, nearly $8 billion left the country as of June.
This week, the Central Bank was forced to sell nearly $1.6 billion from its reserves to stabilize the dollar, which has jumped 12% to 18 pesos since June 19.
The 'financial bicycle' boom in carry-trade transactions began shortly after a package of financial deregulation decrees signed by President Mauricio Macri within days of taking office 20 months ago.
This trend has been largely financed by the Central Bank itself through short-term bills known as Lebacs.
Lebac debacle
Lebacs, issued in pesos and typically purchased for a 28 or 35-day term, pay an annualized 26% rate - or 10 to 15% in dollar terms. Attracting mostly domestic speculators, Lebacs are typically rolled over, with the profits used to buy dollars that are then wired overseas.
The value of Lebacs outstanding has more than tripled under Macri to 960 billion pesos ($54 billion). Investors, however, began dumping Lebacs on June 19, when a record 23% ($8 billion) were cashed in rather than rolled over.
Central Bank data show that of $60 billion in public foreign debt added in the last 18 months, $37 billion have gone to finance the bicycle and other capital flight.
Argentine Central Bank President Federico Sturzenegger denies that the "bicycle" has become unsustainable, and on July 27 ordered Piedro Biscay, the sole member of the Central Bank board to warn of a potential bubble, dismissed.
The current trend has drawn comparisons to the bubble created at the height of Argentina's last dictatorship in 1980, when the Central Bank issued Lebacs paying up to 60% interest in dollar terms to attract investment - only to end in a financial collapse in 1981 after insiders "bicycled" some $20 billion of the profits to offshore accounts.
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Macri was very narrowly elected two years ago thanks largely to Big Media support (non-stop, Faux News-style coverage), and has ruled largely by decree since then.
Quick to use race identity politics as well, they don't call him the Argentine Trump for nothing.
My hope is that they can keep borrowing from Peter to pay Paul long enough to wind the 'bicycle' bubble down - though it remains to be seen if they even see the bubble as a problem at all.
And as you pointed out, this has happened in Argentina before:
The dictator, General Videla, and Economy Minister (and media darling) Martínez de Hoz smiling at the height of the last 'bicycle' boom in 1980. By April/May 1981 the boom went bust, leaving Argentina in a decade-long depression from which it has never fully recovered.
