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Argentina and the dollar – A fistful of financial instruments

In a speech last November, President Cristina Fernández de Kirchner regretted that she did not possess “a little machine to print dollars”. Over the past few years, Argentina’s international currency reserves have slid considerably. Since the country is virtually blocked from international capital markets, using reserves is its only way to pay off its remaining debt. To protect those reserves, Ms Fernández has effectively blocked the sale of dollars at the official rate since she was reelected in 2011.

The policy has succeeded in reducing capital flight, but expensive energy imports and limp tourism figures have continued to erode the reserves, which fell by $4.7 billion in the first five months of 2013, to their lowest level in six years. Economists do not expect that downward trend to slow. Quantum Finanzas, an economic consultancy, predicts that reserves will fall by another $3.6 billion this year and by $9.7 billion in 2014.

Ms Fernández’s “dollar clamp” has also created a hungry black market for dollars. As they watch inflation ravage their peso savings by 25% a year, Argentines are willing to pay prices far above the official rate to get their hands on greenbacks. At the beginning of May the black market rate, or “blue” dollar as it is known in Argentina, shot to 10.45 pesos to the dollar, nearly twice the official rate.

Ms Fernández is understandably anxious to reduce the size of the black market and find a new source of dollars. In May, following the blue dollar’s spike, she announced a plan that aims to accomplish both those goals.

The scheme, referred to locally as the “laundering law”, invites those with undeclared dollars to invest in property and the energy industry without facing penalties for their previous financial chicanery. The government believes that Argentines have about $160 billion tucked under their mattresses or hidden away in foreign bank accounts. That is about four times the value of Argentina’s foreign currency reserves.

Under the plan, citizens can trade their dollars for two financial instruments: a dollar-denominated bond for investments in Argentina’s energy sector, and a dollar-backed certificate valid for property transactions, known as a CEDIN. Whereas the energy bonds will not launch until July 17th, the CEDINs made their entrance on July 1st.

In exchange for their surrendered dollars, investors will be awarded a certificate of equal nominal value which must be spent on buying or renovating a house, business premises or land. The recipient of the CEDIN may then sell the certificate or cash it in for real dollars at the Central Bank. Alejandro Vanoli, head of the financial services regulator, declared that the certificates will have a “revitalising” effect and “bring an interesting level of liquidity to the economy”.

Economists are less sure. Miguel Kiguel of EconViews, a consultancy, wrote in a note that the certificates will attract $2 billion at most, and that most holders will swap the quasi-currency for real dollars after validating them in the property market. In an interview withReporte Inmobiliario, a property journal, Daniel Muchnick, an economist, wondered“Who, how and in what way is someone, with this repressive government, going to want to take their illegal money and enter into the conventional world? And moreover, who is going to want to invest their assets in a place where foreign currency can enter, but it will not be allowed out?”

The market is equally pessimistic. Some 70% of estate agents doubt that the CEDINs will reinvigorate the property market, which has been damaged by the government’s foreign-exchange controls. Argentines used to buy and sell their houses in dollars; the crackdown has therefore resulted in 16 consecutive months of falling sales. They fell by 35% last year and by 41% in the first three months of this year. Construction also recently suffered its worst decline in 10 years.

Some estate agents are more upbeat. A banner on Tizado Property’s home-page reads: “The CEDIN is real. It is time to invest in bricks.” But Tizado is in the minority. Although the CEDIN may have a modest effect on reversing downward trends in the property market and construction industry, it is unlikely to prove a panacea. By July 3rd, two days after the CEDIN’s debut, the government had yet to sell a single certificate. In Mr Kiguel’s words, the hope that the CEDIN will stop the fall in reserves seems to be “more based on a fantasy kingdom than the reality”.

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Real Estate Argentina: Central Bank publishes regulations on CEDIN bonds

Buenos Aires Herald

The Argentina Central Bank regulated the CEDIN, a trade bond that allows its holder to purchase property and use it as an alternative method to paying with US dollars in order to acquire real estate assets or any other transaction as long as both parts involved in the transaction agree.

The bonds will have the power to purchase urban and rural property as well as commercial businesses and construction materials. Those applying to purchase the bonds will transfer their money to a financial entity that eventually will receive the same amount of dollars in CEDIN bonds from the Central Bank.

Once the transaction is complete, the bank will execute automatically another transfer back to the Central Bank trough an electronic operation known as “Mercado Electrónico de Pagos” (Payments Electronic Market).

The CEDIN bonds won’t have an expiration date, and the banks won’t charge holders any commission or interest.

The proven Buenos Aires – Argentina lawyer professionals at the Kier Joffe law firm have experience working with foreign clients involved in all kind of cases in Argentina. Buenos Aires Argentina attorney professionals are knowledgeable in almost all the practice areas of law, to service its international cases in Buenos Aires Argentina. International clients will have the confidence of knowing that the case is being handled by an experienced and knowledgeable Buenos Aires  lawyer in Argentina.

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Real Estate: Argentine Tax Amnesty Won’t Revive Housing Market, Survey Shows

Bloomberg – By Eliana Raszewski

A dollar-denominated central bank certificate created to encourage the investment of undeclared funds in Argentina’s flagging real estate market will fail to reverse a decline in transactions, according to 67 percent of respondents in a survey by website Reporte Inmobiliario.

About 30 percent of the 984 people questioned said the new instrument, created to inject funds that hadn’t been declared to the Argentine tax agency into the economy, will help boost property purchases.

Real estate transactions plunged since President Cristina Fernandez de Kirchner tightened controls on the foreign exchange market after being re-elected in October 2011. She banned purchases of dollars for savings and for real estate transactions, which traditionally are carried out in greenbacks, Reporte Inmobiliario director Jose Rozados said on the website.

Last year “was the worse since 1980 in real estate transactions in the city of Buenos Aires,” Rozados said.

Sales in the city fell 48 percent in the first quarter from the same period two years earlier, before access to dollars was restricted, according to the capital’s public notaries’ college. Construction activity has fallen in 11 of the past 13 months on a year-on-year basis, government data show.

Last week, Congress approved legislation that pardons tax dodgers who invest their undeclared funds in either the construction industry by using the central bank certificates or buy bonds that will be used to finance increased oil and gas production.

The government says the legislation will help bring part of the $160 billion Argentines hide from the authorities into the economy.

While the peso fell 7.1 percent this year to 5.2915 per dollar today, the currency in the illegal market fell 20 percent to 8.54 per dollar, according to Ambito Financiero website.

The proven Buenos Aires – Argentina lawyer professionals at the Kier Joffe law firm have experience working with foreign clients involved in all kind of cases in Argentina. Buenos Aires Argentina attorney professionals are knowledgeable in almost all the practice areas of law, to service its international cases in Buenos Aires Argentina. International clients will have the confidence of knowing that the case is being handled by an experienced and knowledgeable Buenos Aires  lawyer in Argentina.

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Real Estate: Argentina April Construction up 3.6% on Year, Down 2.3% on Month

The Wall Street Journal – By Shane Romig

BUENOS AIRES–Argentina’s construction activity showed a moderate rebound in April, although the pace of building continues to suffer from government capital controls that have made the U.S. dollars traditionally used for real-estate transactions scarce.

Construction activity in April was up 3.6% on the year, but down 2.3% on the month, the national statistics agency, Indec, reported Friday.

Construction started to show small gains starting in February, but it has been slow to recover from a contraction last year. In 2012, construction was down 3.2% on the year, according to Indec.

In a bid to slow capital flight, the government has made it all but impossible for most people to legally buy dollars. The limits were first imposed in late 2011, but have been progressively stepped up since then.

That has rattled the real-estate and construction sectors, where values are usually pegged in dollars due to the country’s long history of inflation and repeated devaluations of the peso.

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Real Estate: Argentina Tries to Coax Undeclared U.S. Dollars Into Energy, Construction Projects

The Wall Street Journal – By Ken Parks

BUENOS AIRES–Argentina’s government will ask Congress to approve legislation that will allow Argentines to invest their undeclared U.S. dollar savings in local bonds to finance energy and construction projects, Economy Minister Hernan Lorenzino said Tuesday.

Argentines are thought to hold tens of billions of undeclared dollars in Argentina or offshore bank accounts.

Mr. Lorenzino’s announcement coincides with the weakening of the Argentine peso to historic levels against the dollar on the black market. At the same time, the central bank has struggled to rebuild its foreign currency reserves due in part to persistent capital outflows.

“People might have their cash in a safety deposit box, or under the bed, or worse, in a tax haven. This [measure] means taking those resources and incorporating them into the productive sector,” Mr. Lorenzino said in a televised press conference.

Mr. Lorenzino said the administration of President Cristina Kirchner will submit the legislation to Congress immediately.

All the senior members of Mrs. Kirchner’s economic team were present at the event: Commerce Secretary Guillermo Moreno, who is in charge of import and price controls; Deputy Economy Minister Axel Kicillof; Central Bank President Mercedes Marco del Pont; and tax chief Ricardo Echegaray.

Argentines have long viewed the dollar as a store of value due to their country’s long history of high inflation and economic crisis that frequently ended in major devaluations of the peso. The unrelenting weakness of the peso on the black market in the last six months is feeding fears that a devaluation might be in the works, and stoking even more demand for scarce dollars.

In an attempt to calm the public, Mrs. Kirchner said Monday that her administration won’t devalue the peso.

Inflation that most economists say is around 24% a year coupled with government restrictions on the dollars people and businesses can legally purchase are driving some Argentines into the arms of black market currency dealers.

The peso has lost about 64 cents this month to set a record low of around 10.04 to the dollar Tuesday, according to newspaper El Cronista, which publishes an average of underground exchange rates.

The black market is thought to be small, but does influence prices in some parts of the economy, especially real estate, which for decades has overwhelmingly used the dollar in transactions.

On the regulated currency market the dollar sold for 5.2090 pesos, though dollar rationing means that for most Argentines the official exchange rate is a mirage.

The proven Buenos Aires – Argentina lawyer professionals at the Kier Joffe law firm have experience working with foreign clients involved in all kind of cases in Argentina. Buenos Aires Argentina attorney professionals are knowledgeable in almost all the practice areas of law, to service its international cases in Buenos Aires Argentina. International clients will have the confidence of knowing that the case is being handled by an experienced and knowledgeable Buenos Aires  lawyer in Argentina.

www.kierjoffe.com