Thursday, March 18, 2010

The Argentine peso and its effect on American expatriates

By Steve Gartner

Edited by Chen Lou

Mike Yanqui will never forget his first visits to Buenos Aires. They came in the 1990s, and he fell in love with the bustling streets and eclectic buildings. He wanted to call the city his home.

But Buenos Aires, nicknamed the “Paris of South America, was one of the most expensive cities in the world.

“There was no way I could afford to live here,” said Yanqui, a native of Chicago.

That all changed in 2001, however, when a financial crisis hit Argentina. The value of the Argentine peso dropped to one-third the value of the U.S. dollar, allowing Yanqui to look at the financial crisis as an opportunity of a lifetime.

That lifetime became a reality in 2001 when Argentina tried to restructure its $132 billion national debt. After the government couldn’t pay the $95 billion it owed in bonds, its actions created an economic panic. Overnight Argentines withdrew $500 million from banks to protect their money from the collapsing government bonds

Julie Paxton, an economics professor at Ohio University, attributed the panic and the accompanying inflation on people’s worry about the currency. After all the rush on bank deposits, interest rates rose 200 percent, greatly devaluing the peso.

“As others see those price increases, they will ask for higher wages and other things,” Paxton said. “It becomes a self-sustaining cycle.”

Paxton said the best way to break out of the cycle was to work toward removing the debt, a problem that had plagued the country for years. With a struggling economy, finding money to pay down the debt has been nearly impossible.

Despite the difficulties plaguing Argentina economically, its devalued peso has benefited foreigners, many of whom couldn’t afford to live in Argentina in the past but could now live there in luxury.

Yanqui and his wife are an example. They moved to Buenos Aires where her family held rights to a cattle farm. He said he knew they wouldnt be able to find a better time.

“We were afraid of being sucked into buying some condo in downtown Chicago,” he said.

Like Yanqui, Jaime Schectman, owner of a vacation rental business in Patagonia was another American who took advantage of the devalued peso. He and his wife Shanie moved from Lake Tahoe, Calif., to Patagonia in 2005. Schectman said they now enjoy many luxuries in life, including a maid, weekly massages and regular dinners at the finest restaurants in Patagonia.

“Prices have risen since we first moved here in 2005,” Schectman said. “We have a much higher standard of living than back home.”

Despite the weak economy, the Schectmans continue to prosper because they run their business on dollars and don’t feel the effects of the devalued peso.

Yet most Argentines don‘t live like the Schectmans. Since 2001, inflation has continued to erode their spending power.

Taylor Selden, a U.S. businessman who moved to Argentina in 2004, said he’s seen the value rise from 2.8 to 3.9 per dollar since his arrival. This valuation of the peso most directly affects the average Argentine, people who don’t have the cash flow that most Americans who live there do.

“If he or she is not able to negotiate a salary increase to match the rate of inflation, the purchasing power of their salary will shrink and squeeze their monthly budget,” Selden said. “On a group level, this leads to union conflicts with companies and the government during salary negotiations, protests and social unrest.”

This unrest has only grown as the peso continues to suffer globally. On Feb. 16, the currency was valued at 3.8 pesos per 1 U.S. dollar, surpassing the lowest value in Argentine history, a mark set in 2002.

According to The Wall Street Journal, the peso has weakened 9.4 percent in the last year, the only loser among the six Latin American currencies tracked against the U.S. dollar. The situation is expected to get worse for the peso. The Royal Bank of Scotland estimates the value to balloon to as much a 4.25 pesos per 1 U.S. dollar in 2010.

Despite the devalued peso, Selden said not everything in Argentina is cheaper, especially imports.

“Groceries, eating out, and utilities are cheaper here in Buenos Aires,” he said. “Anything that isn't made here is much more expensive -- electronics and cars -- due to the crushing import taxes. So, it ends up being a mixed bag at best.”

Bernhardson Wayne from the U.S. who is currently visiting Buenos Aires said the inflation doesn’t change the way he spends his money.

“It hasn't affected me all that much, except that dining in restaurants and riding in taxis has gotten much more expensive,” Wayne said. “If I were dependent on a local salary, I would really feel it.”

Some U.S. citizens have been affected just as many Argentines have. Dan Pearlman hasn’t seen his standard of living improve.

“I moved here with money in the bank, and it was really cheaper to live here,” said Pearlman, a chef. “But I was also making less, so it balanced out.”

He moved to Buenos Aires from New York City in 2005 and has seen the standard of living drop to have of what it costs to live in New York.

Inflation also affects local businesses in Argentina. Yanqui said he’s seen shop owners refuse to open their stores some days because they were unsure of the actual price of their goods.

“If he opens the door and is selling it at a price that is too low, he’ll end up closing his door at the end of the day having worked his ass off and having lost money,” he said.

As Argentina continues to wrestle with its devalued peso, Yanqui said the government doesn’t necessarily view the problem as a major concern.

“I think some of it has to do with the government keeping the peso the way it is so some of the exports do well in foreign markets,” Yanqui said.

He’s unlikely to complain as he and other expatriates continue to prosper despite the depreciation of the Argentine peso.

Photos courtesy of Buenos Aires Photographer and The Argentine Post

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