Et tu, Argentina?

Argentina apparently bought $2.1b in the foreign exchange market over the past three weeks.  Brazil – if you are keeping tabs – bought around 3.65b.   The southern cone seems to have joined Bretton Woods 2 …

I spent most of 2001 working on Argentina in one way or another, and I never thought I would see the day when Argentina added $2b to its reserves in a month, let alone is on track to add well over $2b.   Just to put this kind of inflow in perspective, in 2001, Argentina lost $20b of reserves (net of IMF lending) through the course of the year.  That works out to an average monthly reserve loss of well under $2b.

Some of Argentina’s reserve growth comes from its trade surplus – this is the time of the wheat harvest in the southern hemisphere, and wheat is kind of high right now.  The country that Paul O’Neil famously said couldn’t export ran a $12.5b trade surplus in 2006   But some presumably comes from capital inflows.  Investors may be worried that Ecuador is about to "pull an Argentina," but they don’t have similar worries about Argentina.   At least not now.

Incidentally, it is a bit unfair to attribute Argentina’s default to Kirchner.  He wasn’t the President back in 2001.  He is, by contrast, the one responsible for Argentina’s decision to stay in default for an extended period of time and to demand a deep haircut from Argentina’s creditors.  He put the government of Argentina on a course where it had little need to borrow from global markets to finance ongoing fiscal deficits.

One of the things that has most surprised me over the past few years is just how willing countries that don’t exactly see eye to eye with the United States have been to finance the US by building up their dollar reserves.   

That applies to countries liek Argentina that have a somewhat different view of economic policy than the US and countries like Venezuela that have a very different view of economic policy than the US.  Venezuela apparently still has 80% of its reserves in dollars, even they aren’t held onshore in the US for political reasons.  That applies to countries like China and Russia, which seem a bit more keen on "bureaucratic" capitalism and state control than US, aren’t so keen on little things like democracy and presumably have a slightly different conception than the US of the world’s future geopolitical order.  And it applies to the various sheikdoms in the Middle East, which presumably have a very different vision of the “new Middle East” than the Bush Administration.