Wells Fargo: What's Next for Argentina After the Devaluation?

[Rajesh Desai]

 

Normally, experience gives people an edge compared to those without it. However, when it comes to devaluing its currency, Argentina’s experience over time has not proven to be an advantage. Essentially, countries tend to devalue the currency when there is no other alternative. The question then is, “why do countries get to the point where they must let the currency fall by a rapid and large amount instead of allowing them to follow the lead of the markets?” For example, in the United States the dollar depreciated slowly after 2001, losing more than 35 percent versus the euro, and this did not create a crisis in the foreign exchange market. Not that we are comparing Argentina’s currency to the U.S. dollar, as the former is not traded internationally, while the latter is. However, by the same token, because the U.S. currency is so important in the global economy, it has more influence when it rises or falls relative to the Argentinean currency.

 

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CA. Rajesh Desai