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Fallout from new capital flight measures

by on November 14, 2011

Argentina eased the requirements levied on banks that keep dollar reserves because of a massive plunge in deposits during the past week.  The former requirement of 100% of their dollar reserves had to be kept int he Central Bank, and that has been lowered down to 20%.The one week deposit fall of $645 million came after the news that dollar deposits in banks will be 5% lower this year, the first negative value since the 2001 crisis.

This change is trying to calm the markets, which have been uneasy since these restrictive measures were put into place. Capital flight has intensified in Argentina, and as quoted by Business Week:

“Facing inflation economists estimate at 24 percent, Argentines pulled $9.8 billion out of the economy in the first half of this year, compared with $11.4 billion in all of 2010, according to central bank data. Capital flight has accelerated since then and will reach a record $25 billion this year, said Jorge Todesca, a former deputy economy minister.”

While nervous investors have been keeping more of their money in cash, the value of the peso has plunged more than any other major country after Mexico. It is clear with this measure that the policies put into place had a shock value, and not a positive one. It remains to be seen whether letting banks keep more dollars will help stem this fear of the government hoarding dollars to back up its programs.

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From → Economic Policy

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