Argentina Takes Drastic Foreign Exchange Action To Prevent Capital Flight

by Philip Morton, Investors Offshore.com

04 December 2001

The Argentine authorities said on Saturday that they had imposed a number of banking controls in order to staunch the flow of deposits exiting from the country which could, potentially, lead to the collapse of the Argentinian banking system.

The government said that the measures, which include a $1,000 limit on the amount of cash which can be withdrawn per month, and restrictions for both companies and individuals on the amount of cash which can be transferred overseas, will remain in place for 90 days while the country restructures its $155 billion in federal and provincial debt.

Fears of a repeat of the financial crises of 1995 and 1998 may have played a part in the capital exodus which has been taking place throughout the year- before the government introduced these emergency foreign exchange controls around $14.5 billion, or approximately 17% of all bank deposits had made its way out of the banks, either to be stashed under mattresses, or to be transferred offshore for safe-keeping.

Despite the fears caused by its latest move, the government is confident that the measures will prove effective in the end, and has pointed out that with more Argentines being forced to use credit and debit cards in order to access funds over the imposed limit of $1,000 a month, it will be easier to crack down on widespread tax evasion.

'The strategy to recover confidence and calm fears has not yet worked,' said Domingo Cavallo, the Argentine Economy Minister, at the weekend. 'But we are going to persevere.'

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