In the Recoleta neighbourhood of Buenos Aires, just across from the cemetery containing Evita Peron’s tomb, a currency exchange shop that offers the official dollar exchange rate stands empty. Yet just a mile away, not far from the headquarters of the Central Bank, the currency trade is booming. It’s impossible to walk more than 20 feet without encountering an arbolito, translated literally as “little tree,” one of the men and women who claim to change money at the best black market rates. They are known as arbolitos because they stand planted for hours in one spot and offer handfuls of greenbacks to everyone who passes.
Argentina may be known for inventing the tango, but it is also the country with the highest number of psychoanalysts per capita. One can hardly blame Argentines for needing to talk to someone. Despite a prolonged period of economic and monetary stability in the 1990’s, the country’s economic history is characterised by periods of upheaval, hyperinflation, and currency instability. Although these periods of destabilization are destructive to the long term health of the economy, they also create short-term periods of arbitrage for those with the means and connections to take advantage of market dislocations.
I first lived in Buenos Aires as a student in the 1990’s. At that time, the country hitched its currency to the US dollar at one-to-one parity under the much-heralded Convertibility Plan. Convertibility ended in 2002 and the peso has steadily devalued to the current level of about 5.3 pesos to the dollar. Over the years, I’ve returned to Argentina with some frequency as a tourist, a private equity investor, and more recently as an investor in the technology sector. Although I had heard about currency arbitrage in the past, I always thought it was something that died out in the 1980’s. As I planned my most recent trip in early June to Argentina, however, I learned that I was mistaken.
Tell any Argentine that you’re going to visit Buenos Aires these days and you’ll be met with the same response: bring dollars. Over the past year, the spread between the official exchange rate and the black market rate – know as the Dólar Blue – has widened to over 90% at times. As a result, foreigners and the relatively small percentage of Argentines with access to dollars now integrate the Dólar Blue into their daily lives. The first rule of Argentina in 2013? Don’t pay for anything with a credit card if you’re a foreigner. Changing dollars to pesos makes everything one could ever want to buy, from steak to leather to your hotel, far less expensive.
Although operating in the Dólar Blue market is technically illegal, the parallel exchange is the worst kept secret in Argentina. Still, this is not your father’s black market. In a fascinating twist, the parallel market leverages traditional and social media to expand its reach and improve transparency. The leading daily newspapers, Clarín and La Nación, each publish the parallel rate in their business sections alongside the official exchange rate. A Dólar Blue Facebook page has over 17,000 “likes” and @dolarblue tweets out updated rates to some 26,000 followers. Ironically, for a market that operates with such transparency, none of the people I spoke to in Argentina could tell me how the Dólar Blue got its name.
Despite these published rates, insiders enjoy a distinct advantage when actually changing currency. Argentines who operate in the black market maintain long-standing relationships with trusted cuevas or caves, the underground shops that change dollars. Where these cuevas charge the Dólar Blue rate minus a commission of less than 3%, changing money on Calle Florida, a busy pedestrian street in the centre of the city, will likely entail a discount of 5 to 8%. The cuevas aren’t the only place where dollars are changed for pesos at favourable rates. Most business owners are willing to cut deals on the spot. I changed dollars for 7.5 at a pizzeria, settled for 8 in a taxi, and agreed on 8.5 among friends at a nightclub. I did learn, however, that I’d made a rookie mistake by bringing 20-dollar bills rather than 50’s or 100’s. Smaller bills trade at a discount since the market for larger currency is more liquid and higher denominations are more efficient to transport.
While tourists carrying dollars are clear beneficiaries of the Dólar Blue, the real action and volume in the market is driven by the subset of individuals and businesses in Argentina that have access to dollars. El Cronista, the Argentina business daily, recently estimated that there is as much as US$40 billion hidden away in some 700,000 safety deposit boxes in the country. That’s in addition to cash kept abroad in placed like Uruguay, Switzerland, and the United States. Cash kept overseas can be imported the old-fashioned way- in a suitcase in bundles of less than $10,000 – or via online money transfer services, such as www.xoom.com, that cater to Argentines.
Since its debut in 2011, the government of President Cristina Fernández de Kirchner has struggled to intervene in the black market, albeit with little success. Most recently, the government is pressuring the cuevas to suspend trading to take liquidity out of the market. Fernández de Kirchner is anxious to curb the parallel market because she understands what each of her constituents knows by heart: the very existence of the Dólar Blue signals that something is gravely wrong with the Argentine economy. The patient is very sick.
With each oscillation of the Dólar Blue, there is increasing uncertainty in the air. The spread between the official and black market exchange rates increased from 40% in the beginning of 2013 to over 90% in early May, before retreating to 60% at present. The widening spread creates a clear incentive to dump pesos, either into dollars or consumer goods like televisions or appliances. No one wants to be holding pesos when the system breaks down and as more Argentines clamor for dollars, the pressure on the exchange rate only increases. Yet Argentines know that the Dólar Blue, like other black markets of the past, will eventually disappear. As one friend commented wearily over a glass of Malbec, “I’ve lived through this before. We Argentines know how to deal with these things. We’ve just had to learn to adapt.”
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