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ECONOMY | 10-09-2019 11:19

Argentines make 7% returns in minutes thanks to capital controls

One system to circumvent the controls is paying a return of seven percent in a matter of minutes, and it’s completely legal. The profit derives from the difference between the so-called “MEP dollar” – which entails buying and selling bonds in different currencies – and the official exchange rate.

Argentines are beginning to find some benefits from the capital controls that President Mauricio Macri imposed earlier this month.

One system to circumvent the controls is paying a return of seven percent in a matter of minutes, and it’s completely legal. The profit derives from the difference between the so-called “MEP dollar” – which entails buying and selling bonds in different currencies – and the official exchange rate.

“We are barely keeping up,” said Federico Grand, a trader at Guardati Torti SA, a grain broker in Ciudad de Rosario. There are customers who come in three times a day to carry out the operation, he added.

The only limit is the US$10,000 monthly cap that the central bank imposed on dollar purchases by individuals. Some clients spent that entire limit last week alone, Grand said.

The official exchange rate that closed last week at 58 pesos per US dollar, is significantly stronger than the “MEP dollar”, which stood at 62.35 per US dollar on Friday. The differential, nicknamed “rulo“ by local traders, gives rise to generous profits and is similar to operations that were made during the capital controls under former President Cristina Fernandez de Kirchner.

This is how it works, assuming the exchange rate is at 58 per US dollar:

  • Step 1: A retail investor invests 58,000 pesos to obtain US$1,000 in the bank
  • Step 2: With the US$1,000 in their pocket, the person asks their broker to buy Bonar 2024 bonds in the market at a price of $45.24 (assuming the Sept. 6 price)
  • Step 3: Just a few minutes later, the person sells the securities and receives 62,344 pesos; the move would have allowed the person to make a 4,344 peso profit, which is equivalent to a return of 7.5 percent in dollar terms
  • The commission charged by the broker is 0.26 percent of the total amount or 150 pesos in this example, so the return is 7.25 percent.

The question is, how long will the government maintain an operation that can be very generous with retail investors, but at the same time causes the Central Bank to lose reserves?

by Ignacio Olivera Doll, Bloomberg

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