Argentina Backtracks on Some Currency Controls Amid Criticism

Argentina lifted some currency controls that had been in place for just one day after the rules halted most stock market transactions and drew criticism from bankers and brokers.

The central bank scrapped a rule that obliged investors to use dollar bills to buy dollar-denominated securities or securities with underlying dollar assets on the local stock exchange. The regulation was intended to stop investors from skirting a ban on overseas transfers by buying stocks and bonds
with pesos in Buenos Aires then selling them abroad.

"Capital controls in the long run always produce the opposite effect of what they are designed to do,” said Fernando Canzani, head of Standard Bank London Ltd. in Argentina. “The central bank’s reversal shows they understand that prohibitions can produce black markets.”

The measure was one of several controls announced during the last two weeks aimed at safeguarding the peso and foreign reserves as negotiations drag on for international aid. The regulations threaten to further isolate Argentina from international credit markets and reduce the country’s ability to revive from a fourth year of recession, bankers said.

A central bank spokeswoman didn’t return calls requesting comment. Last week, Argentina also forced more exporters to liquidate their foreign revenue through the central bank and lowered limits
on foreign currency holdings at exchange houses.

Volume Plunges

The central bank also said companies would need special approval to pay foreign debts unless they first negotiate a 40 percent reduction in principal payments, a drop in the interest rate to no more than 3 percentage points above the London interbank lending rate and a two-year grace period on principal.

Stock market volume yesterday plunged to 6.4 million pesos ($1.8 million) worth of shares, or one-sixth of the three-month daily average. Today volume on the Buenos Aires stock exchange was as high at mid-day as it was all day yesterday.

To control stock market activity, the central bank set a new prohibition on using the local exchange’s bank account in New York to transfer stocks and bonds abroad.

Economists said the government should instead focus on how to rebuild the country’s banking system, which Standard & Poor’s said is insolvent, and find an economic plan that’s palatable to
Congress and the International Monetary Fund. IMF and U.S.

Treasury officials have said Argentina isn’t ready for aid because it lacks political consensus around most policy issues. Currency controls are “a silly substitute for lack of economic policy-making,” said Jose Luis Espert, an Buenos Aires- based economist.

Capital Flight

Argentina’s peso has dropped 72 percent this year after the country abandoned a one-to-one tie with the U.S. dollar and halted payments on $95 billion of bonds eight months ago.

Reserves are down by a third at $9.2 billion. They have risen from a low of $8.8 billion in early August, and the central bank said it aims to maintain that trend with the tighter controls.
Central Bank President Aldo Pignanelli said he expected the peso to strengthen to at least 3.55 per dollar at year-end, according to an interview published in the Rio Negro newspaper. The peso weakened 0.1 percent to 3.615 in midday trading today.

Canzani said Standard Bank was evaluating whether it would have to scale back the small amount of trade finance and other lending it was currently doing in Argentina. Standard Bank’s
biggest loan since January was a $10 million trade finance agreement for a tobacco company that exports to Philip Morris Cos. in the U.S.

“If you forbid capital from going out, you’ll never get any to come in,” said Martin Anidjar, an analyst with J.P. Morgan Chase & Co. in New York.