{"id":1124,"date":"2014-01-28T14:44:21","date_gmt":"2014-01-28T13:44:21","guid":{"rendered":"https:\/\/blog.iese.edu\/economics\/?p=1124"},"modified":"2015-04-07T11:02:57","modified_gmt":"2015-04-07T10:02:57","slug":"weighing-in-on-the-argentine-peso","status":"publish","type":"post","link":"https:\/\/blog.iese.edu\/economics\/2014\/01\/28\/weighing-in-on-the-argentine-peso\/","title":{"rendered":"Weighing in on the Argentine Peso"},"content":{"rendered":"

Last Friday, Argentina saw the largest devaluation of the peso in the last 12 years, since the default in 2002 <\/span><\/a>. This caused a market shakeout that brought global stock markets down and several casualties in other emerging market currencies such as the Turkish Lira<\/strong> or the South African Rand.<\/p>\n

\"Peso<\/a>
Source: Bloomberg<\/figcaption><\/figure>\n

Nervousness has taken hold of many emerging markets currencies since last May\u00a0when the then president of the U.S. Federal Reserve<\/strong>, Ben Bernanke<\/strong>, signaled that the Fed was considering tapering its monetary stimulus<\/a>.<\/p>\n

\"The<\/a>
Cristina Fern\u00e1ndez de Kirchner with Barack Obama, 2011. Source: Presidency of the Nation of Argentina<\/figcaption><\/figure>\n

After the collapse of Lehman Brothers<\/strong> in 2008, central banks from developed economies reacted by increasing liquidity into the markets<\/strong>. A significant amount of it came in the form of Quantitative Easing<\/i> (QE), which involves the Central Bank buying long-term bonds<\/strong>, driving up their prices and hence implying lower returns.<\/p>\nThe low interest rates in developed economies lead to unprecedented capital flows into emerging markets <\/span><\/a>\u00a0(EM) prompted by investors looking for higher returns. With the Fed\u2019s first talk about winding down its asset purchases<\/strong> and ending the availability of cheap money, capital fled from emerging economies and currencies plummeted<\/strong>.<\/p>\n

Meanwhile, on May 6, 2013, President\u00a0Cristina Fern\u00e1ndez de Kirchner<\/strong>\u00a0said that Argentina would not give in to the devaluation of the peso. This\u00a0forced the Argentinian Central Bank to start selling dollars and actively buying the peso.\u00a0<\/strong>Foreign reserves are crucial since they are the currency required by their foreign creditors.<\/p>\n

Foreign reserves reached a seven-year low <\/b>having fallen<\/b><\/a> by more than 31 percent<\/b>\u00a0and Argentina is now running out of cash to keep selling. The peso could not continue to be held high <\/span><\/a>\u00a0and last Friday, it took a dive.<\/p>\n

 <\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

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