As Argentina’s Economy Enters Into Technical Default Bitcoin Comes To The Rescue
Alberto Fernández in interview partly blames IMF for country’s financial crisis and pledges higher wages and pensions. As Argentina’s Economy Enters Into Technical Default Bitcoin Comes To The Rescue
Argentina’s presidential front-runner said the government’s new plan to restructure its short-term debt shows the country is virtually insolvent, as a crisis of confidence has wiped out private sector demand for government debt.
“Now, there is no one taking Argentine debt, or anyone who can pay it,” said Alberto Fernández, who as candidate of the Peronist coalition is widely expected to win October’s presidential election. “Argentina is in a virtual, hidden default.”
Earlier this week, President Mauricio Macri ’s government unilaterally extended the maturity of all short-term paper and said it wants to restructure its debt with the International Monetary Fund, after the country’s treasury was unable to roll over obligations with the private sector.
Markets reacted negatively, with S&P Global Ratings downgrading Argentina’s debt to selective default on Thursday. “This has immensely stressed debt dynamics amid a depreciating exchange rate, a likely acceleration in inflation, and a deepening economic recession,” S&P said in a release.
The IMF, which gave Argentina a $57 billion bailout in 2018, said Wednesday that it was assessing the measures.
In his first interview with a foreign-media outlet ahead of the election, Mr. Fernández said he was unwilling to support the government’s emergency measures aimed at containing rising volatility. “The market now knows where they’re headed,” he said at his campaign headquarters, referring to the government’s efforts to restructure short-term debt.
The latest bout of volatility hitting Argentine assets was sparked by Mr. Macri’s crushing setback in a primary vote on Aug. 11 that made Mr. Fernández and his running mate, former President Cristina Kirchner, the favorites to win the Oct. 27 election by a wide margin. In Argentina, a nationwide primary vote is held before an election to decide which parties can field candidates, and is viewed as a strong indicator of the final election result.
The 60-year-old Mr. Fernández said that if elected, his administration would aim for a balanced budget eventually. But he first plans an ambitious program to restore purchasing power by increasing wages and government pensions, while containing inflationary pressures with a broad-ranging pact with employers.
“To reverse this cycle you must launch a plan to boost consumption, and I will not ask permission from the IMF for it,” said Mr. Fernández.
The possible return to power of the nationalist Peronist movement, which is expected to unravel the economic overhaul Mr. Macri launched after taking office in 2015, has unnerved investors.
Dismissing market concerns about a potential Peronist victory, Mr. Fernández said that the $57 billion bailout from the IMF, its largest on record, is partly to blame for Argentina’s financial-market slide.
Instead of being used to replace more expensive debt, Mr. Fernández said, the dollars from the IMF have evaporated in capital outflows as the government burned foreign-currency reserves to contain the steady depreciation of the Argentine peso. The central bank has spent close to $1.5 billion to meet rising demand for dollars since mid-August, or about 10% of its net foreign-currency reserves.
“The current crisis is a case of déjà vu,” he said in recalling the country’s financial collapse in 2001 that led to its default on $100 billion in government debt, a record at the time. His disagreements with the IMF’s conditions are also similar, he added.
“What I want them to understand in the IMF is that they are guilty of this situation,” Mr. Fernández said. “It was an act of complicity with the Macri administration. It was humankind’s most expensive reelection campaign, and they gave money to a compulsive spender.”
The IMF declined to comment. It said earlier this week that senior staff members met with Mr. Fernández and his economic advisers “for a productive exchange of opinions.”
Mr. Fernández said he made it clear he doesn’t support Mr. Macri’s austerity measures to balance the government’s budget, which were among conditions agreed with the IMF.
“Mr. Macri’s government caused damage similar to what Argentina suffered in 2001: a debt default, no foreign-currency reserves, a steep devaluation and increased poverty,” he said.
Argentina has defaulted eight times on its foreign debt through its 200-year history. It has also received close to 30 support packages from the IMF, which has had a rocky relationship with previous Peronist leaders.
Many economists say Argentina now lacks the financial firepower to stimulate the economy, which contracted by 5.8% in the first quarter from a year earlier. And not everyone blames Mr. Macri for the country’s latest financial debacle.
“The government made the right decision, taking into account the current situation,” said José Luis Machinea, a former finance minister and central-bank governor. “Political uncertainty linked to the outcome of the primary caused the renewal of short-term debt to collapse. In that respect, it’s hard to blame the government.”
Mr. Fernández, a veteran politician who likes to play guitar and listen to Argentine rock music, has extensive links across a Peronist movement that includes organized labor, far-left groups and conservative provincial governors.
He is also seen as more pragmatic than Mrs. Kirchner, who nationalized foreign companies and imposed capital controls when economic conditions deteriorated toward the end of her term.
Mr. Fernández said he is against capital controls and expropriations. He said that if he wins, he will seek to attract foreign investment, focusing on efforts to continue developing the vast Vaca Muerta formation, home to one of the world’s largest deposits of shale oil and gas.
“For us, it’s startling that the world believes that Macri is the solution,” he said.
Argentine Government Imposes Capital Controls
Measures aim to restrict dollar sales, contain foreign-exchange depletion ahead of presidential election in October.
Argentina’s government imposed capital controls in its latest bid to prevent a depletion of foreign-currency reserves amid a crisis of confidence that has fueled dollar outflows and financial-market turbulence.
The unexpected measure, which takes effect on Monday, comes after President Mauricio Macri ’s government sought last week to unilaterally extend the maturity of all short-term paper after it was unable to roll over obligations as a result of plunging demand for government debt.
“It’s Macri’s latest gambit to regain control of the situation,” said Matías Carugati, an Argentine economist. “These are very challenging times, and people are beginning to panic. It’s no surprise that the government is working on the fly, and the improvisation has some costs.”
The central bank has been selling dollars at a faster pace in an effort to contain a sharp depreciation of the Argentine peso. Mr. Carugati said reserves have fallen by $12.2 billion since Aug. 9, or about 20% of foreign-currency reserves. The peso has shed more than 20% of its value since Mr. Macri suffered a crushing setback in a primary vote on Aug. 11.
Alberto Fernández, the presidential candidate of the nationalist Peronist coalition, and his running mate, former President Cristina Kirchner, emerged as the broad favorites to win the Oct. 27 election, which would threaten Mr. Macri’s austerity policies. Mr. Fernández told The Wall Street Journal last week that Argentina was in a “virtual default.”
The government responded to the backlash from voters by freezing gas prices, increasing the minimum wage and providing a bonus payment to state workers as Mr. Macri seeks to win support ahead of the election.
In a decree released on Sunday, the government said the central bank would limit dollar sales, requiring companies and banks authorization to purchase hard currency. The country’s exporters would be required to repatriate all hard currency from sales abroad.
Individuals seeking to buy dollars will have a limit of $10,000 per month. Bank transfers abroad by individuals will also face a monthly limit of $10,000. Dollar purchases by nonresidents will be restricted to $1,000 a month, and they won’t be allowed to make bank transfers abroad.
Given the recent financial-market turmoil and political uncertainty, it is “necessary to adopt temporary and urgent measures to regulate the foreign-exchange market with greater intensity and strengthen the normal functioning of the economy,” the decree said.
The goal, the government added, is to “reduce financial-market volatility and contain the impact of fluctuations in financial flows on the economy.”
‘Buy Bitcoin’ Says Expert As Argentina Imposes $10K Limit For Citizens
Argentina has reimposed capital controls, limiting citizens’ and businesses’ freedom to buy foreign currency.
As Bloomberg reported on Sep. 1, the increasingly troubled South American nation took the step as the Argentine peso (ARS) suffers overwhelming losses against major fiat currencies such as the U.S. dollar.
Argentina Puts $10K Limit On Dollar Access
Argentina has shown an affinity for Bitcoin (BTC) in recent times, with trade volumes accelerating as uncertainty around the economy grew. Last month, a premium appeared on the country’s cryptocurrency exchanges.
Now, access to hard currency is restricted to just $10,000 for individuals looking to dump ARS on the market, despite its exchange rate falling 34% in USD terms since Aug. 2.
Demand for Bitcoin, a cross-border asset which is impossible to control, should therefore increase further, some suspect.
“Buy Bitcoin,” cryptocurrency-focused attorney Preston Byrne tweeted following the news.
Volume data showed Argentinians trading more in ARS on P2P crypto exchange Localbitcoins last week, a trend which may continue if circumstances follow those of embattled Venezuela.
Draper May Force Bitcoin Switch
Argentina’s economic woes may not match those of Venezuela, yet Bitcoin advocates appeared to preempt the crisis months beforehand.
As Cointelegraph reported, billionaire investor Tim Draper even met with the country’s president earlier this year to bet on Bitcoin outperforming ARS.
Should Draper win, he demanded Argentina shun the peso altogether, adopting Bitcoin as its new official state currency.
“That would be a perfect decision, as there’s a lack of confidence in this coin,” he reportedly commented at the time of the meeting in March.
Crypto Is Booming In Economically Challenged Argentina
At the start of 2020, Ripio, one of Argentina’s largest crypto exchanges, had around 400,000 users. It’s finishing the year with 1 million.
Ripio’s chief brand officer, Juan Mendez, told CoinDesk that around 70% of Ripio users are from Argentina, with the remainder mostly concentrated in Brazil. According to Mendez, the platform also saw a tenfold increase in trading volume this year compared to last.
“I’ve been with the exchange pretty much from the beginning and I’ve never seen this kind of growth. This is bigger than the 2017 spike on operations and on demand,” Mendez said.
Argentina’s economic woes, from enormous debt obligations to high inflation, compounded by the COVID-19 pandemic, drove its population to seek alternative ways to store their wealth this year. But as the government limited U.S. dollar purchases by its citizens, crypto quickly proved to be the next best thing.
Along with Ripio, crypto exchanges operating in Argentina saw record growth in 2020, with some experiencing all-time highs in trading volumes towards the latter half of the year.
Mexico-based crypto exchange Bitso, which expanded operations to Argentina as recently as February of this year, has already seen a 68% increase in trading volumes on the platform in the third quarter of 2020 versus the second. Bitso’s move to Argentina also helped the platform pass the 1 million user milestone earlier this year.
Peer-to-peer (P2P) crypto trading platform LocalBitcoins also saw a 547% increase in trading volume between August 2019 and August 2020, with an all-time high of over $1 million worth of bitcoin traded in the second week of August this year. Another P2P platform, Paxful, saw near zero trading volume for the last five years, but trading picked up this year, recording a whopping 60641% increase from September 2019 and September 2020.
The unprecedented growth in Argentine crypto trades is reflected in a larger regional trend as LocalBitcoins and Paxful also saw record trading highs in a number of South American nations including Chile, Colombia and Bolivia. Business in the region is so good that, on Wednesday, CoinDesk reported Bitso had raised a jaw-dropping $62 million to fund its expansion to Brazil.
The increase in the use of cryptocurrencies is taking place against a backdrop of devastating economic fallout from the COVID-19 pandemic, with the World Bank declaring Latin America and the Caribbean the “hardest hit” regions in the world.
Rather than hinder crypto use, the combination of the bitcoin price run, the inflationary economies created by countries desperately trying to mitigate the effects of the pandemic and the push for faster digital payments (particularly for cross-border remittances) drove adoption in South America this year.
Within this landscape, Argentina stands out.
Compared to hyperinflationary economies like Venezuela – whose economy is forecast to shrink by 6.8% in 2020 – Argentina seems even the worse for wear, thanks in part to a long and complicated economic history. In May, the government missed a $503 million interest payment on dollar bonds issued under New York law, putting the country into its ninth sovereign debt default in its history.
The nation’s GDP is set to contract by 12% this year, with nearly half its population already living in poverty.
“Cryptocurrencies are in a way allies for individuals, particularly in countries with a higher degree of political or economic uncertainty,” Andrés Ondarra, Bitso’s country manager for Argentina, told CoinDesk via an email.
As Argentinians, nervous over the country’s deteriorating economy, increasingly buy U.S. dollars to store their wealth, the country’s reserves shrink, forcing the government to devalue the currency and place restrictions on how much in foreign currency citizens are allowed to hold.
In a bid to salvage dwindling reserves, in September Argentina’s central bank limited the amount of U.S. dollars citizens are allowed to purchase to $200 a month with a 35% tax.
This led to more problems: After difficult negotiations with creditors, the government had managed to successfully restructure $65 billion in foreign debt back in August, but thanks to investor concern over forex restrictions, newly issued international bonds fell sharply through September and people continued to buy dollars despite the tax.
Each time the peso is devalued people scramble to find a way to protect the value of their salaries, Mendez said. To top it off, early December, Argentina’s senate passed a one-time wealth tax on the country’s millionaires to help fund pandemic relief efforts.
Ondarra said Argentina is a peculiar crypto market due to its users’ permanent search for access to value reserves and diverse financial solutions.
“Argentinians are always trying to find a stronger currency,” Mendez said.
According to Mendez, there’s a fundamental difference between crypto users in Argentina and Brazil, where Ripio also operates. The two nations are set apart because of the systemic economic failures of Argentina through the years, he explained.
“Argentina has had to overcome a lot of economic disasters over the years. We’re pretty much used to governments and strategic economic planning failing, and we are more willing to try different things in order to keep the country afloat,” Mendez said.
Mendez said Argentina’s topsy-turvy economic policy is perhaps reflected in the sudden spikes in trading on crypto platforms through the last few months.
For example, the government usually announces new financial restrictions in the late hours towards the end of the week (intended to be implemented the following Monday), Mendez said.
“So during the weekend and that whole week, we are always expecting a great demand for crypto,” Mendez said.
Argentinians see crypto as a great alternative store of wealth, even though his platform warns users that currencies like bitcoin are volatile digital assets, Mendez said.
Both Ondarra and Mendez agree Argentinians’ strong curiosity about alternative wealth reserves and increasing knowledge of cryptocurrencies have helped the growth of the local crypto space.
But Ondarra also attributes the rapid growth this year to the price run.
“An important factor that explains the increase in volume during the last months has been the upward trends in the price of bitcoin, which has undoubtedly kept people focused on the price action and led to higher trading volume,” Ondarra said.
He also explained that Argentine investors are closely watching the actions of big movers like MicroStrategy, which recently converted around $500 million of its cash investments from U.S. dollars to BTC.
This year, Argentina ranked 28 out of 154 countries in the Chainalysis crypto adoption index, with other Latin American countries including Venezuela, Colombia, Brazil and Peru placing ahead of Argentina as adoption in the region continues to grow at a rapid pace.
“It’s thriving. Everyone’s attention is focused on Latin America. And it’s growing fast,” Mendez said.
Argentine Lawmaker Introduces Bill For Workers To Be Paid In Crypto
The proposal may help Argentinians in the export business avoid heavy taxes from foreign currency payments.
A member of the lower house of the Argentine National Congress has introduced legislation that would allow certain workers in the country to receive some or all of their salary in crypto.
In a Tuesday tweet, Argentine Chamber of Deputies member José Luis Ramón said his proposed crypto bill would apply to anyone working as an “exporter of services” and those who depend on an employer for income. Should the legislation pass, it would allow such workers the choice of receiving a full or partial salary in crypto or Argentine pesos.
“The idea is that [workers] can strengthen their autonomy and retain the purchasing power of their remuneration,” said Ramón. “This initiative stems from the need to promote greater autonomy and governance of wages, without this implying a loss of rights or exposure to situations of abuse within the framework of the employment relationship.”
According to local news outlet La Nueva Mañana, workers who provide services abroad such as exporting would not necessarily need to convert their crypto income to Argentine pesos as they do with other foreign currencies. Law 27,541, passed by the Argentine National Congress in December 2019, established a 30% tax on foreign currency, but Bitcoin (BTC) and other tokens may not fall within this legal framework.
The crypto bill must be passed by both the Argentine Chamber of Deputies and the Senate before being sent to President Alberto Fernández for approval. Ramón is one of ten congresspeople representing the province of Mendoza, and the leader of the 6-person Federal Unity for Development alliance among three political parties.
However, there are 257 members in the legislative house and 72 senators. Everybody’s Front and Together for Change are the two dominant alliances in the congress.
The proposed bill comes as some lawmakers in Central and South American countries are pushing for regulatory clarity or outright adoption of crypto. Last month, El Salvador passed a law making Bitcoin legal tender, legislation that will go into effect on Sept. 7. Congresspeople in both Brazil and Panama have indicated through social media channels they would push for forms of legislation supporting crypto.
Argentina’s IOL Invertironline Plans To Add Crypto Trading
The so-called E*Trade of Argentina said in its most recent earnings call it will add crypto trading powered by a third party.
IOL invertironline, an Argentina-based trading platform, plans to offer crypto exposure to its 213,000 users.
Julio Patricio Supervielle, CEO of IOL parent Grupo Supervielle, said in the company’s second-quarter earnings call the trading app is working to allow customers to buy and sell cryptocurrencies, “concentrating stock and crypto-asset investments in the same platform,” he said.
Earlier this year, the fintech started highlighting bitcoin-related stocks, a proxy for investors who want exposure to the crypto sector without holding the coins themselves. PayPal unleashed a flood of fintechs after its October 2020 announcement that it would offer crypto buying and selling in partnership with custodian Paxos.
The IOL offering will be powered by a third party and extended to customers in Argentina at an unspecified date.
When reached by CoinDesk, IOL invertironline confirmed the details shared on the earnings call.
IOL plans to gradually expand to several Latin American countries – excluding Brazil – offering U.S.-based investment products, Supervielle said. As a first step, the company has requested authorizations to operate as an online broker in Uruguay.
The company, founded in 2000, was acquired by Grupo Supervielle in 2018 for $38.5 million.
Grupo Supervielle already has a presence in the crypto segment. In July, the group participated in a $16 million Series A funding round of Lemon, an Argentina-based crypto exchange.
Argentina Aims For First Crypto Futures In Latin America
Argentina’s largest futures market wants to be the first Latin American exchange to launch regulated Bitcoin futures.
Local exchange Matba Rofex revealed last week that it submitted a proposal to Argentina’s securities regulator to launch Bitcoin futures in Argentine pesos. Talks, which began a few months ago, are on track, but the regulator has not yet ruled on the matter.
Bitcoin futures have been available for years in loosely regulated exchanges, but there are few options available in regulated markets, such as CME Group Inc., the world’s largest exchange operator.
CBOE Global Markets Inc., the largest U.S. options exchange, offered Bitcoin futures from 2017 until 2019, when a crash in prices of the cryptocurrency dried up demand.
“We want to attract those clients from the regulated market that cannot operate on unregulated exchanges,” Ismael Caram, the deputy general manager of financial markets at Matba Rofex, said in a phone interview. “We perceive an incipient but continuous demand from clients, who want to add exposure in crypto assets.”
Argentina’s regulator is considering the proposal but it’s not a priority request, a spokeswoman said in response to a request for comment. The proposal will also need to be evaluated by the Economy Ministry and the Central Bank, she said when asked for comment.
Argentina is one of the nine countries with the highest adoption of cryptocurrencies, according to Chainalysis, a site specializing in crypto and blockchain.
In a country with recurring currency crises and inflation running around 50% annually, two-thirds of Argentines who invest in crypto say they do so to protect their savings, according to a study by Buenos Aires-based Wunderman Thompson.
Matba Rofex’s plan is for new futures to be operated with a cash settlement on electronic platforms, just like other financial derivatives.
Bitcoin futures will require higher guarantees and lower open positions than others because they’re considered to be riskier than standard derivatives, Caram said. The proposal is that investors deposit a guarantee of about 30% or 40% of the value of the contract.
The underlying asset for the new futures will be the Bitcoin price index, launched in April, which publishes the asset’s price in real time in Argentine pesos, based on 12 different local crypto exchanges.
That index closed Friday at 12.3 million pesos (about $60,000 at the country’s main parallel rate, the blue-chip swap).
Matba Rofex is also weighing working on futures of other cryptocurrencies, such as Ethereum, or new instruments, such as crypto exchange-traded funds, Caram said.
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