Argentina Defends World's Worst Currency

(Bloomberg) -- Argentina’s central bank appears to be willing to do whatever it takes to exorcise last year’s currency crisis, even if it means prolonging a recession and putting the reelection of President Mauricio Macri at risk.

The bank has sold a net 190 billion pesos ($4.6 billion) of short-term debt in March, effectively pulling 13.5 percent of the country’s entire monetary base out of circulation, as it seeks to push up interest rates and stem a renewed attack on the peso. It’s an even more drastic response than required under the country’s $56 billion loan accord with the International Monetary Fund.

The tactic succeeded in propping up the currency, which pared losses on Friday, held steady Monday and edged lower Tuesday. It had slumped 6 percent in the first four days of last week, reaching a record low and posing the biggest test of the updated IMF deal since it was signed in September.

Argentina Defends World's Worst Currency

The bank’s withdrawal of so much money pushed interest rates up by about 6 percentage points, to almost 60 percent. That threatens to deepen the recession in an economy that contracted 2.6 percent last year, undermining support for President Macri ahead of the presidential election in October, when he’s likely to face a left-populist challenger.

Tested Every Day

The latest peso rout was triggered by concerns over global growth, and showed that Argentina’s currency remains the first domino to fall in any revival of risk-off sentiment. While the central bank has coped this time, it’s unlikely to be the last test of its mettle.

"Every day is a new test for the peso," said Alejandro Cuadrado, a senior currency strategist at BBVA in New York. "It also shows the BCRA’s shortcomings when it comes to managing the currency, although it tries very hard. And eventually finds some way.”

It is easy to see why the Argentine peso is the first currency people sell when growth concerns re-emerge. It has been the worst performing emerging-market currency in each of the past three years amid rampant inflation and a chronic shortage of dollars.

“Things other countries could get away with for ten years, Argentina can’t get away with for one month,” Jeffrey Sachs, a professor at Columbia University, said in an interview in Mexico City.

‘Fundamentals Are Good’

Macri had pledged to change investor perceptions, stabilizing the currency and slowing inflation. It hasn’t worked out that way so far. Inflation remains stubbornly high at 49 percent in January and the peso is once again the worst performer this year, down 9.3 percent.

Some analysts think the worst may be over for the economy -- if the central bank holds its nerve. Industrial production fell 10.8 percent in January from the year earlier, better than estimated by analysts and less severe than the 14.7 percent slump the month before.

"The fundamentals of Argentina are good,” said Marcos Buscaglia, senior partner of the investment firm Alberdi Partners. “The country is on the verge of a great soybean harvest that begins in April and, if the threat of dollarization doesn’t return, we will see a fall in inflation and a strengthening of the peso.”

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