Argentina Got a $50 Billion Loan and Peso Is in Free Fall Anyway

(Bloomberg) -- Argentina is struggling to stop the peso’s plunge just a week after obtaining the biggest loan in the history of the International Monetary Fund.

Traders are desperate for policy makers to lay out a strategy to curb the volatility, and complain that all they’re getting in response is disjointed and unpredictable policy. The rout deepened Thursday as the currency tumbled more than 6 percent against the dollar to a record low, extending its decline since the end of April to almost 27 percent.

Argentina’s peso tumble continued to escalate, upending local businesses, sapping the value of savings account and adding to the woes of a country already under siege from double-digit inflation and fiscal and current account deficits. BlackRock Inc. and Brown Brothers Harriman are among shops calling for further peso declines as outside factors including a resurgent dollar, rising global interest rates and less investor tolerance for risk conspire against an easy solution for Argentina.

“There’s anxiety in the trading desks because there’s no indication of where the peso is going next,” said Jose Nogueira, a partner and trader at ABC Mercado de Cambios in Buenos Aires. “We’re lacking proper signaling from the central bank.”

A surge in dollar demand has meant that the exchange market only has a respite when publicly managed banks buy pesos in the market, according to a note by ABC. The peso slid Thursday with no intervention from the central bank amid rumors that some of its directors will depart from institution. Trading on the MAE electronic market fell to $240 million on Thursday, the lowest since September 2017, and almost half of the past year’s average daily volume of $471 million.

Investors had expected the $50 billion deal, which outsized market forecasts, would return calm to the market after a sharp selloff in May amid global volatility and concern about the central bank’s credibility boiled over. A change in the central bank’s inflation target last December was cited as the beginning of the confidence crisis.

Officials sought to arrest the decline by jacking up interest rates to the highest in the world at 40 percent, intervening directly in the market and using a $5 billion offer at 25 pesos per dollar to contain the currency while the government negotiated the deal with the IMF. The day of the announcement, central bank president Federico Sturzenegger said that the bank would only intervene in the market in "disruptive situations" and that the currency would operate with normality.

The central bank has remained quiet since, spending $794 million over two days to curb losses as volume plummets.

“There’s zero liquidity and huge volatility,” said Joaquin Almeyra, a fixed-income trader at Bulltick in Miami. “It’s hard to understand what they’re doing. One day you intervene and spend reserves like crazy to curb losses, and another day you let it drop 5 percent with no volume.”

On Wednesday, the Finance Ministry pledged to sell $7.5 billion of the IMF funding to cover budgetary expenses. Some analysts also saw it as an attempt to stabilize the peso.

The central bank declined to comment. The finance and treasury ministries did not immediately respond to comment.

Headwinds

The magnitude of the peso move underscores the challenges President Mauricio Macri faces as he attempts to improve the economy and roll back protectionist measures put in place by his predecessor, Cristina Fernandez de Kirchner.

Some in Argentina have pointed out that Macri will be challenged next year to reach its fiscal spending target while likely running for re-election. Pressure from labor groups and powerful unions is also mounting, with truck drivers striking on Thursday demanding wage increases to compensate for an unexpected surge in inflation and protesting Macri’s economic policies.

Argentina’s “headwinds” will keep weighing on market sentiment, said Diana Amoa, an emerging-market money manager at JPMorgan Asset Management.

In the longer term however, “the IMF program will go some way in restoring market confidence in the authorities’ commitment to addressing the economy’s structural weakness," she said.

--With assistance from Ignacio Olivera Doll, Aline Oyamada and Ben Bartenstein.

To contact the reporters on this story: Carolina Millan in Buenos Aires at cmillanronch@bloomberg.net;Patrick Gillespie in Buenos Aires at pgillespie29@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Brendan Walsh

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