Thus, Argentina finds itself in a situation wherein foreign investors are fleeing the country while local ones, with fresh memories of the last crisis at the forefront of their thoughts, are cashing out their savings accounts to purchase dollars. And this is at a time when Argentina is seeing an inflation rate of over 20%, when the value of peso has been eroding, and when an artificially fixed rate of exchange is generating negative rates of return.

It is at this point that I want to return to my conversation with my friend regarding the Central Bank of Argentina and my response to him regarding its level of foreign reserves. Although many financial analysts criticized the policy of building such large foreign reserves, the president of the central bank, Martín Redrado, has defending it noting that it was “necessary to build an anti-crisis fund in the absence of access to foreign lenders”…. And this is a phrase he has repeated often enough that it must echo in his dreams.

With many global markets in turmoil since early 2007, and in particular those of China, Argentina has found its own economy has been tested since then. So far, the country has been able to withstand those tests without any major complications.

Currently the central bank is resisting the run on financial markets. In doing so it has already used part of its foreign reserves (more than $ 1.5 billion in the last few weeks). I have no doubt that the central bank will be able to overcome this test without any problems if one considers the amount of firepower it has (presently the reserves are slightly below the $49 billion mark).

Even with the existence of no short-term threats looming on the horizon, the current social and economic unrest should be cause enough for Argentina to take time to reflect on matters. If the central bank’s foreign reserves were not currently so large the situation today would be very different. Perhaps, in the event of a run against the peso, Argentina’s financial system would have being hit hard enough that it would have been brought to a near collapse. And we cannot forget that the majority of the common people here still remember the fears of 2001.

What is happening in the Argentine financial system and in the currency exchange are warning signs… Is the government listening?

We will meet again tomorrow,

Horacio Pozzo

Editor’s note: Argentina’s foreign reserves…this is one of the main subjects of concern here in these times of uncertainty and political unrest. In a departure from similar times in the past, the reserves held by the central bank seem to be enough to keep the currency stable. However, if the government fails to react to the current social and financial unrest, the level of reserves will only be able to prolong the inevitable outcome – not stop it. If you want to comment on this interesting article by Horacio, you can do so here: www.latinforme.com

Pages: 1 2

Pages: 1 2