Wednesday, December 14, 2011

Currency Roulette: Uruguay 2012

It’s the time of year when Argentines start to pack their bags for the beach and, for many of them, the beach means nearby Uruguay. Casinos, such as the one at Punta del Este’s massive Hotel Conrad (pictured below), are a secondary draw, even though everybody knows that the house always wins. Uruguayan officials, though, are a little worried that the whole country will be a casino this summer, and that Uruguay itself will be the loser.

That’s because, especially in summer, this is a country with one official currency, the Uruguayan peso, plus the semi-official US dollar and Argentine peso, which circulate freely alongside local money. Given the recently weakened Argentine currency, whose value that country’s government has managed to maintain by strict exchange controls that may not survive in the long run, Argentines may find that Uruguayan businesses will not accept their pesos at the official rate. This could have the effect of making Uruguay 20 percent more expensive for Argentines this summer.

That’s also a concern for Uruguay’s Banco Central because, at the end of the tourist season, they usually expect Argentina to repurchase those pesos at the official rate. If Argentina declines to do so, Uruguay could be stuck with a gaggle of foreign banknotes whose value is eroding.

Uruguayan-Argentine relations are always a little contentious because, since Uruguay was once part of the Provincias Unidas del Río de la Plata, the former Banda Oriental (“Eastern Shore”) values its autonomy against its far larger neighbor. Argentina has more than ten times Uruguay’s population, and the Argentine capital of Buenos Aires is almost as populous as all of Uruguay. Recently, the Argentine government may have suggested that Uruguay was a de facto haven for tax evaders – in effect, a money-laundering country.

Uruguayan President José Mujica refused to blame Argentina for such accusations, and vigorously denies that Uruguay is a tax haven but, in reality, it is. That’s not in the sense of moving large amounts of illicit cash but, because of its traditionally liberal banking laws, it’s long been the destination of choice for Argentines who want to move their money from under their mattress – sometimes literally – to banks that will respect their deposits. Many middle-class Argentines have bank accounts in Uruguay, which they consider far more secure for their savings.
As summer approaches, though, Argentines at the beach will have to watch their pesos and Uruguayans will have to watch the exchange rate. Fortunately, for non-Argentines who can take advantage of the stable exchange rate between the US dollar and the local peso, this should not be an issue.

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