Just a few days before it was announced the news In the wake of Argentinian president Cristina Fernández de Kirchner's cancer, a new "corralito" is sweeping the South American country. Illegal outflows of US dollars from Argentina have been a constant in 2011, reaching 20-year highs. According to the Central Bank of the Argentine Republic (BCRA), this year will end with approximately 24 billion dollars in outflows. The volume is also increasing every quarter, which is why the government of Kirchner's widow has taken certain measures that are reminiscent of the corralito that occurred a decade ago.
In an attempt to contain the uncontainable and to put a stop to widespread mistrust, police dogs – usually trained to detect drugs and weapons, but now trained to detect wads of US dollars – have been deployed. The Federal Public Tax Administration (AFIP) has deployed canine detection units at customs posts across the country, which arbitrarily search travellers leaving Argentina. From there to the freezing of US dollars in bank accounts, it is not a great leap, judging by the financial history of the early 2000s, although perhaps the recent memory of the chaos that engulfed the local economy at that time will serve as a warning to prevent this government from succumbing once again to the temptation to intervene in the banking sector. Time will tell.
What is curious, to say the least, is that police dogs try to prevent the smuggling of physical US dollars (Electronic USD are already monitored and subject to limits) along Argentina’s borders, whilst in the Eurozone the drums of war are beating over the unsustainability of the monetary union. It is likely that, in the Eurozone, the lesser financial and economic deterioration objectively places us much further away from a currency conversion ‘corralito’ such as Argentina’s (past or future). But perhaps it is simply the fact that there is less mistrust of our financial system that is the only thing still keeping us at a certain distance from such a breakdown and the closure of financial borders within the EU. For we must not forget that they are the emerging economies and we are the ones in decline – the European periphery.
When a country loses confidence in its economy, its financial system, its currency and its politicians, the process of decline is relentless. It may be delayed, but it is unstoppable. And in the Eurozone, we have been playing with fire for years now, but with the added complication that trust and mistrust intertwine in complex ways amongst utterly disparate economies, which share a single currency and are vulnerable to contagion within the financial system. And whilst some are teetering on the brink of the abyss, others are already on the path to a recovery that could be derailed at any moment due to banking contagion and unpayable public debt.
However, the final straw that triggered the Argentine ‘corralito’ was the suspension of loans by the IMF. Could the same thing happen in the Eurozone? That is certainly an interesting question. For the time being, and whilst the ECB’s hands remain somewhat tied by Germany, we have witnessed the traumatic replacement of DSK by the pro-European Cristine Lagarde, at the helm of the IMF. A replacement that bears a striking resemblance to a conspiracy to remove from the scene someone who would probably not have agreed to the International Monetary Fund lending such vast sums to the European financial system (both public and private). A plot so brazenly orchestrated that, as soon as DSK stepped down as head of the IMF, the court acquitted him.
It certainly does not seem the best idea to entrust our money and investments to the success or failure of political and financial conspiracies. We therefore prefer to invest whilst taking into account scenarios such as capital controls, collapse, default, devaluation, etc., in an attempt to minimise the disastrous effects that such scenarios could have on the wealth of those investing in assets dependent on the success of decisions made by the politicians at the helm of this financial Titanic.
Whilst we ponder how and when ‘Corralito 2.0’ might happen, and to coincide with the celebration (sic) of the first decade of the euro’s existence in our pockets, Let’s recall what happened during the original ‘corralito’, also on its tenth anniversary. One of those twists of fate.