Argentina: The Black And Blue Market For Dollars

For nearly a century Argentina has been perceived as a nation gripped in economic turmoil and, more recently, it saw a black market spring up in 2012 known as the ‘dolár blue’ or ‘blue dollar.’ What is this phenomenon and how did it affect the Argentine economy?

Following the nation’s economic meltdown of 2001/2 one of the main issues facing Argentina was high inflation, consequently crippling the value of the peso, the national currency of Argentina. It is clear that Argentines had little confidence in their own currency. And this was characterised in the way which households, in the following decade, had saved in US dollars which provided at least some financial security. In an attempt to protect the country’s ever depleting stock of foreign reserves and make the peso artificially stronger, ‘el cepo’ (‘the clamp’) was introduced in June 2012 by President Kirchner’s government. With a specifically troubled history with currency controls it seemed the country was likely to repeat past offences. The buying and selling of dollars was restricted to licensed 'corredores de cambio' through the Banco Central de Argentina at a set official rate, preventing people from trading pesos on the open market.

Despite such government intervention, the existing problem of a lack of confidence in the peso remained. Exacerbated by the peso being overvalued the BCRA just couldn’t provide enough dollars. The effect of the fall in supply of US dollars, spurred the black market to respond to Kirchner government, by introducing ‘blue dollar;’ a term collared for the illicitly exchanged currency where pesos were traded for USD. It was a market so ubiquitous it was almost forgotten that it was technically illegal. Largely operating through financial houses or cuevas, roughly $20 million were exchanged per day. Websites emerged, a Twitter account @DolarBlue alerted tourists and citizens to differences between the ‘official’ and ‘blue dollar’ rates and even national newspapers published the two comparisons. Many businesses accepted US dollars, sometimes at the blue dollar rate.

So why was this such a problem? Simply put, whilst it did evolve into a market so big and booming it was bordering legal, it still wasn’t. The Argentinian government tried to cap the power of the blue dollar by putting more legitimate dollars into circulation through the savings dollar, which would end up in cuevas in a bid to weaken the blue market. This was a futile move as the distinct advantage of the blue dollar was that, instead of being set like the official rate, it was allowed to move in accordance with rises in inflation and the cost of living; it was allowed to reflect economic conditions. Unfortunately, those economic conditions were pretty dire.

The vast difference between the black market and unofficial rates indicated the country’s economic volatility and the clamp just did not solve the problem. Argentina’s foreign currency reserves continued to fall, dropping 30% in 2013 alone. The government was forced to make a U-turn at the end of 2015 when newly-elected President Mauricio Macri’s administration removed limits on the number of pesos which could be exchanged for other currencies, allowing the peso to float. In a bid to get the country back into the global economy and stimulate growth this seems a fairly good move given the country’s track record of artificially valuing currencies.

Unsurprisingly, after the lifting the clamp the grossly overvalued peso crashed overnight, dropping 27% in less than 24 hours. The future of the currency now depends on whether the peso stabilises at a fallen value, currently standing at 14.16 pesos to the US dollar. With inflation at 28% at the end of last year, Argentina remains in a vulnerable position with the long-term effect of a freely floating currency and faces an unclear future.

And what of the blue dollar now? It has been largely abandoned as the gap between the blue and official rates has since narrowed. Websites of the blue dollar, still remain for ‘historical purposes’ but, given the extent of Argentina’s economic faults, it is unlikely to be remembered as as one of its biggest failings. However, the true legacy of the blue dollar is to demonstrate the consequences of a mismanaged foreign currency and that markets prevail even when governments fail.