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As the Peso Crumbles to Ashes, Argentina Seeks Help from China

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32 comments on As the Peso Crumbles to Ashes, Argentina Seeks Help from China

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Chart courtesy of TradingEconomics.Com, annotations by Mish

Argentina has massive inflation and negative net foreign exchange reserves. 

With things spiraling out of control, Argentina Seeks Bigger China Swap Line to Prevent Peso Selloff

Economy Minister Sergio Massa will travel to Beijing May 29 to renew and renegotiate the swap line with his Chinese counterparts. How much Massa seeks to expand it by — and the amount he can freely use — remain unclear. His press office didn’t respond to a request for comment. 

The trip comes as Massa, seen as a potential presidential candidate in this year’s election, is trying to contain a peso selloff that’s part of a vicious cycle in Argentina’s inflation crisis with prices rising 109% annually through April amid a severe shortage of dollars. In parallel, Massa is also renegotiating Argentina’s $44 billion program with the International Monetary Fund, seeking to get more IMF cash in June than currently planned. 

Argentina and China signed a 70 billion yuan ($9.9 billion) swap line agreement in 2009 and expanded it to 130 billion yuan in 2020. It was rarely touched and viewed by investors as a last resort option. In recent months, China has allowed Argentina to use up to $5 billion of the swap, known as the “operating account,” to finance imports from China or let local companies pay off foreign currency debt in yuan.

Trend Continues

What trend is that? 

Argentina going bust again? Belief that any swap line agreement from China might matter?

Hoot of the Day

As of December 2022, Argentina’s Net External Debt is $277 billion. 

“Argentina and China signed a 70 billion yuan ($9.9 billion) swap line agreement in 2009 and expanded it to 130 billion yuan in 2020.”

That’s about $18 billion total. Of which, China allowed Argentina to use $5 billion in an operating account. 

Dollar Weaponization Expands – FDIC Message to Foreign Depositors Is Don’t Trust the US

I sympathize with the idea of an ongoing trend towards wanting to avoid US dollars. 

However, it is much easier said than done.

Please consider my Pettis Q&A post What Does China Do With a Dollar That’s No Longer Risk Free? Buy Gold?

I again discussed the difficulty of dollar avoidance on May 13, 2023 in Dollar Weaponization Expands – FDIC Message to Foreign Depositors Is Don’t Trust the US

But if it was so easy to avoid the dollar, the EU would have done that years ago, before Russia’s invasion of Ukraine.

Every country is tired of the US setting sanction policy for the entire world. As a Libertarian, so am I. Frankly, we all should be. 

Brazil’s President Calls for End to US Dollar Trade Dominance, So What?

On April 1, I commented Brazil’s President Calls for End to US Dollar Trade Dominance, So What?

BRIC-talk is compounded by the fact that the yuan does not float. And none of these countries have much of anything in common other than a desire to escape the dollar.

Not Now Does Not Mean Never

The demise of the current US-dollar financial system with SWIFT at the heart of it is underway. I just cannot tell you when the system crumbles, nor can anyone else. 

Regardless of where de-dollarization picks up steam, it will mark the end of global sanction madness by Trump and dramatically escalated by Biden. Bring it on.

This post originated at MishTalk.Com

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32 Comments
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MM2
MM2
2 years ago
I’m from Argentina, let me please share with you some issues and clarifications.

You’ve quoted the official exchange rate, but that exchange rate is not real. Most of the transactions comes from the informal market at a rate of $450 pesos per dollar. Oficial exchange is mere symbolic.
Unfortunately we already have 2 chinese military bases, one very known and the other not so famous. Nobody (I mean, the people in general) is happy with that but politicians sold it and we can do nothing about it.
Kirchner ties with China are very strong. And they build up their political power with chinese money, but now china is not so rich as you may think and consequently the Kirchner’s power are diluted. You can see how Massa (oficially finance minister, in reality the new president) has accumulated an enormous amount of power thanks to the democrat party (your democrat party) influencing the sferes of real power and money such as IMF, WEF, and so on.
So, when you think this is an attempt to leave the dollar that is not true at all, you couldn’t possibly be more wrong (may be when you actively defended covid vaccines, that was funny)
If you take a minute you can see how the main candidate for the presidential elections is proposing a dollarization for our economy, and this is supported by the majority of the private sector.

You are watching a transition, from china to US… well not the US as a state, but the real power of the deep state that you almost never noticed.
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Bam_Man
Bam_Man
2 years ago
Argentina does not have a functioning LOCAL CURRENCY credit market because of the ongoing, out-of-control inflation. No one in their right mind will lend “money” that depreciates by 100%+ a year before it gets paid back. The Peso economy is for all practical purposes strictly “cash and carry”. An alternative “stable” currency is needed for credit purposes. This used to be the US $ and probably still is, to a large extent. But now other alternatives are beginning to look just as attractive.
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8dots
8dots
2 years ago
Argentina Vaca Muerta is the second shale Natgas field in the world developed by US co. Germany might import LNG from Argentina if US isn’t good enough.
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Robbyrob
Robbyrob
2 years ago
How to Humiliate an Economist
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Perplexed Pete
Perplexed Pete
2 years ago
Are the Argentine Pesos created in the same way as US dollars? That is, by private banks issuing loans?
If the answer is yes (and my research says it is), then shouldn’t the solution to continual instability of the Peso (and Dollar) be to abolish bank-created money?
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MM2
MM2
2 years ago
Reply to  Perplexed Pete

you wrong my friend, main source of money creation is government deficit, financed by the central bank issuing short-term debt called “leliq”because of the “crowding-out” effect, private sector is left behind by the financial sector thanks to our predatory state. So debt is too expensive to use as you may in US.

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8dots
8dots
2 years ago
Argentina’s Malvina was attacked by the British Empire. The Falkland War erupted in 1982. Argentina compete with US Cargill. UK have Nuke subs, Argentina have none. Nations that sell weapon or military parts to Argentina are severely punished by the British and their US proxy. UK extract oil in Malvina. Argentina became a victim like Zimbabwe. God’s hand Maradona defeated England in 1986 world cup. China don’t care what the British do or say neither about the Monroe doctrine. China import soybean, corn, frozen cows carcasses, frozen fish and minerals. South America became Chinese bridge head to US. What Nikita couldn’t Shi can.
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MM2
MM2
2 years ago
Reply to  8dots
you are wrong my friend, Argentina attacked first. We had a declinning military regime who tought that a war could make people support them again. So they started it
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Doug78
Doug78
2 years ago
It’s just a Chinese loan to Argentina. No one in the West wants to loan them money anymore so it’s China’s turn to lose money.
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Six000mileyear
Six000mileyear
2 years ago
Reply to  Doug78
China, like the US and IMF, uses debt to coerce and control borrowers. Loans are issued knowing they will be difficult to be repaid. China will extract its pound of natural resources one way or an other.
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Doug78
Doug78
2 years ago
Reply to  Six000mileyear
If Argentina defaults on a debt and refused to hand over the mines that guaranteed the loan what will China do? Send in its navy to collect the debt?
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Maximus_Minimus
Maximus_Minimus
2 years ago
Argentina’s main problem is that it is populated by Argentinians.
As Adam Smith described the traits of a nation that leads to weath, so you can write The Missery of Nations. My bet is you coundn’t go wrong if you choose Argentina as an example for that book. USA & Co is just starting to move in that direction.
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8dots
8dots
2 years ago
China spend most of their silk road money on Argentina Egypt and Pakistan. The rest get crumbs.
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RonJ
RonJ
2 years ago
“Not Now Does Not Mean Never”
Simon Black: “Civilizations decline logarithmically— gradually, then suddenly.”
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Perplexed Pete
Perplexed Pete
2 years ago
Reply to  RonJ
US Treasury Assistant Counsel Russell L. Munk: “The actual creation of money ALWAYS involves the extension of credit by private commercial banks.”
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Lisa_Hooker
Lisa_Hooker
2 years ago
Reply to  RonJ
A logarithmic decay is the opposite.
Rapidly at first then more and more slowly.
Simon Black is neither a mathematician nor an engineer.
He’s a huckster selling second passport advice and dubious real estate.
Caveat emptor.
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Jojo
Jojo
2 years ago
Be careful who you borrow money from:
———–
‘In a lot of the world, the clock has hit midnight’: China is calling in loans to dozens of countries from Pakistan to Kenya
BYBERNARD CONDON AND THE ASSOCIATED PRESS
May 18, 2023 at 4:11 PM PDT
A dozen poor countries are facing economic instability and even collapse under the weight of hundreds of billions of dollars in foreign loans, much of them from the world’s biggest and most unforgiving government lender, China.
An Associated Press analysis of a dozen countries most indebted to China — including Pakistan, Kenya, Zambia, Laos and Mongolia — found paying back that debt is consuming an ever-greater amount of the tax revenue needed to keep schools open, provide electricity and pay for food and fuel. And it’s draining foreign currency reserves these countries use to pay interest on those loans, leaving some with just months before that money is gone.
Behind the scenes is China’s reluctance to forgive debt and its extreme secrecy about how much money it has loaned and on what terms, which has kept other major lenders from stepping in to help. On top of that is the recent discovery that borrowers have been required to put cash in hidden escrow accounts that push China to the front of the line of creditors to be paid.
Countries in AP’s analysis had as much as 50% of their foreign loans from China and most were devoting more than a third of government revenue to paying off foreign debt. Two of them, Zambia and Sri Lanka, have already gone into default, unable to make even interest payments on loans financing the construction of ports, mines and power plants.
…
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Call_Me
Call_Me
2 years ago
Reply to  Jojo
Desperate times lead to desperate actions – perhaps the terms were better than those from the IMF? Article is dated, but that organization doesn’t have a charitable history and have been ‘reforming’ their ways for a while
Call_Me_Al
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Captain Ahab
Captain Ahab
2 years ago
Reply to  Jojo
Thank you for posting this. The $hit is about to hit the fan–a major grab of world resources while Bidum eats ice cream.
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Jojo
Jojo
2 years ago
Be careful who you turn to for help, just as with a loan shark:
——–
‘In a lot of the world, the clock has hit midnight’: China is calling in loans to dozens of countries from Pakistan to Kenya
BYBERNARD CONDON AND THE ASSOCIATED PRESS
May 18, 2023 at 4:11 PM PDT
A dozen poor countries are facing economic instability and even collapse under the weight of hundreds of billions of dollars in foreign loans, much of them from the world’s biggest and most unforgiving government lender, China.
An Associated Press analysis of a dozen countries most indebted to China — including Pakistan, Kenya, Zambia, Laos and Mongolia — found paying back that debt is consuming an ever-greater amount of the tax revenue needed to keep schools open, provide electricity and pay for food and fuel. And it’s draining foreign currency reserves these countries use to pay interest on those loans, leaving some with just months before that money is gone.
Behind the scenes is China’s reluctance to forgive debt and its extreme secrecy about how much money it has loaned and on what terms, which has kept other major lenders from stepping in to help. On top of that is the recent discovery that borrowers have been required to put cash in hidden escrow accounts that push China to the front of the line of creditors to be paid.
Countries in AP’s analysis had as much as 50% of their foreign loans from China and most were devoting more than a third of government revenue to paying off foreign debt. Two of them, Zambia and Sri Lanka, have already gone into default, unable to make even interest payments on loans financing the construction of ports, mines and power plants.
…
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Captain Ahab
Captain Ahab
2 years ago
One disgruntled country is not a problem. Then, two countries break with the US and its dollar. Before you know it, three countries are trading outside SWIFT. Even five countries are not a problem, yet momentum is building. Eight happens quickly, and now it is getting to be an issue in the MSM. After 13, comes 21, 34… Now, there’s a crisis.
I wonder if Hunter and Joe have gold?
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Lisa_Hooker
Lisa_Hooker
2 years ago
Reply to  Captain Ahab
The escapees will not increase exponentially.
I think it will converge to a Fibonacci sequence.
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Doug78
Doug78
2 years ago
Reply to  Lisa_Hooker
Careful! You are getting too sophisticated for us here even if you are more correct than Captain Ahab.
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Captain Ahab
Captain Ahab
2 years ago
Reply to  Lisa_Hooker
Did I mention the word ‘exponential’? NOPE!
I merely gave numbers in the Fibonacci sequence, skipping a ‘1’. 1,1,2,3, 5,8,13,21,34… which was the solution to a hypothetical rabbit-breeding problem posed by Leonardo of Pisa, aka Fibonacci, in 1202. Note, however, the sequence was known to PIngala in 202BC (in India). What the sequence converges to is known the golden section (1.618…), by taking the ratio of two consecutive numbers, for example 8/5, 13/8, 21/13, 34/21. Euclid described the ‘extreme and mean’ ratio relationship in the 4th century BC, who got it from Plato, likely via an academy in Alexandria.
Now, why did I use the Fibonacci sequence to describe rate at which countries will break from the US and its $$$?
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1-shot
1-shot
2 years ago
China will learn the hard way, just as the US and hedge funds did before, that these “loans” end up being gifts, renegotiated to nothing over the coming years
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Captain Ahab
Captain Ahab
2 years ago
Reply to  1-shot
Before commenting on Chinese strategy, maybe read Sun Tzu’s The Art of War. You can see the quotable quotes version here: https://www.goodreads.com/author/quotes/1771.Sun_Tzu
Some Chinese ‘loans’ end up as ‘gifts’; however, some are staked by national assets and become millstones to the unfortunate nation (in Africa, South America, Caribbean…).
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Doug78
Doug78
2 years ago
Reply to  Captain Ahab
Judging by how well Argentina has been able to snooker everyone into giving them loans and not paying them back I would say they know The Art of War by heart.
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Call_Me
Call_Me
2 years ago
Reply to  Doug78
Liked simply for the use of the verb ‘snooker’. As for Argentina’s reading material, it seems more like the book of J. Wellington Whimpy to me.
Call_Me_Al
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Doug78
Doug78
2 years ago
Reply to  Call_Me
Successfully snookering sophisticated international banks and institutions requires a good grasp of tactics and strategies to hide your intentions and The Art of War is the textbook for that.
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Captain Ahab
Captain Ahab
2 years ago
Reply to  Doug78
I was not referring to Argentina, but to China’s strategic plans for global economic domination.
This is the webpage of the off-shore leases of a Chinese oil company: https://www.cnoocltd.com/col/col7321/index.html
I know of at least one country (on the list) where a Chinese ‘investment’ loan failed (perhaps deliberately) and was rolled over into oil leases at bargain basement prices, assisted by corrupt politicians.
My point is, the Chinese are smart enough to take advantage of ANY business situation. They do so with a long-term view, with tactics that would turn the stomach of most people. What is happening today is no different to them exploiting Bill Clinton’s White House to obtain most-favored-nation trading status.
‘Appear weak when you are strong, and strong when you are weak.’
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Lisa_Hooker
Lisa_Hooker
2 years ago
Reply to  Captain Ahab
The only folks that might outwit the Chinese are the Swiss.
Might.
The Swiss are more fair.
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Doug78
Doug78
2 years ago
Reply to  Captain Ahab
It’s well-known in developing countries that China has a habit of giving loans secured by assets with the goal of acquiring the asset when the loan fails. The fact remains that it is very hard for anybody really to recover that asset when the loan fails since the asset is not mobile. You can’t pick up a mine and take it home.
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