ARGENTINA: Govt Lashes Out at ‘Hidden Money’

Bottom Line: Argentina is hoping to reign in hidden money and redirect it to government coffers with a new "tax amnesty" as the black market exchange rate hits 5.2 pesos per US dollar and foreign currency reserves drop to a six-year low.

Analysis: In mid-May the black market exchange rate in Argentina reached 10 pesos per US$1 dollar at the same time the official exchange rate was 5.2 pesos per dollar. The disparity demonstrates a continued lack confidence in the peso, making for a dire shortage of dollars in Argentina. Aside from ordinary people and businesses who struggle to build up savings in a nation with strict currency controls and inflation estimated at 25 percent a year, the Central Bank is also running low on liquid capital. In April, foreign reserves dropped to below $40 billion for the first time in six years. Meanwhile, the Minister of the Economy Axel Kicillof says Argentines have squirreled away at least $160 billion in undeclared foreign bank accounts.

So President Cristina Fernández de Kirchner presented a law to bring that "hidden money" in from the shadows (whether in Swiss bank accounts or dollars stuffed in their mattress), to government coffers. The tax amnesty or "blanqueo" approved by Parliament on 29 May allows individual and corporate taxpayers in Argentina to legalize their foreign cash without paying any fines or back taxes. There are two vehicles for participants; both are intended to stimulate the economy and both will allegedly maintain the money as a dollar-denominated asset. The Argentine Savings Bond for Economic Development (Bono Argentino de Ahorro para el Desarrollo Económico, or BAADE) will provide national oil company YPF with much-needed capital, and promises investors a 4% annual return, while the Investment Certificate (Certificado de Inversión, or CEDIN) is a Treasury-backed certificate that permits funds to be used for the purchase, construction or remodeling of property. Taxpayers have until 30 September to legalize their undeclared assets, after which Secretary of Domestic Trade Guillermo Moreno promised action directed at those who opt not to take advantage of the amnesty. Speaking to a group of business leaders Moreno said "We have the information on who has money abroad and they will have to bring it…we will check and for anyone who doesn't, it will be bad."

Opposition falls into several categories; first, Article 9 bill explicitly states that participants will not be required to report on the origin of the money. It also lacks of limits on the quantity of assets declared. Those features lead many to argue the government is tacitly requesting criminal proceeds, or at least making it easier to launder money that comes from illegal activity. [In one stark case, businessman Lázaro Baez came under investigation for money laundering - with the possible aide of the President - in April; he is now on the list of business leaders who have agreed to invest money under the amnesty.] The federal government argues the blanqueo does not supersede anti-money laundering laws and says banks must bear the responsibility to ensure that deposits are not "laundered." This onus makes private banks nervous, as they could become a target of government investigations. Likewise, many Argentines think the claim that participants will remain essentially anonymous is a lie.

Finally, many middle-class Argentines are frustrated that they pay annual income taxes, value-added sales taxes, and adhere to currency strictures discouraging the use of dollars in place of pesos, and now upper-class millionaires who have the means to open accounts abroad are rewarded. In 2008, Argentina approved a similar amnesty, but in that case taxpayers had to pay a variable fine of between 1 and 8% of the value of their undeclared accounts as a penalty.

Bottom line: This deal will provide a much-needed influx of spendable cash for YPF to invest in hydrocarbon exploration and field development. However, it will not improve Fernández de Kirchner's popularity, and may further heat up inflation.