Argentina Peso Falls as Government Fails to Ease Market Concerns

(Bloomberg) -- Argentina’s announcement that it plans to sell $7.5 billion in the foreign exchange market to help stabilize the peso and support its budget failed to prevent the currency from falling to a new record low on Wednesday.

The peso initially rose after the Finance Ministry said the central bank will conduct daily auctions on behalf of the Treasury to sell the dollars. But gains were short-lived as analysts said the measure was unlikely to provide enough support for Argentina’s economy in the face of high inflation, a widening budget deficit and higher global borrowing costs.

“The gap between inflows and the current account deficit is still huge," said Ezequiel Zambaglione, head of research at Buenos Aires broker Max Valores. "But the sense is that inflows aren’t guaranteed this year. We need either foreign investors to return, or the current account deficit to drop."

Earlier on Wednesday, the Finance Ministry said it would use the funds to support budget expenditures once it gets access to a credit line from the International Monetary Fund. In a separate statement, the IMF said Argentina requested 30 percent of a the $50 billion credit line to be disbursed upon approval and half of that be made available for budget support. The Fund’s executive board will vote on the credit line June 20.

Argentina’s economic plan “creates a solid basis for the $50 billion stand-by arrangement,” IMF Managing Director Christine Lagarde said in a statement. “The plan will also help reinforce Argentina’s institutional framework. For example, it has measures to improve the medium-term budget process and to ensure central bank independence.”

The peso fell 2 percent to end the session at 26.26 per dollar, a record low. It is down 29 percent this year, the worst performer in emerging markets.

Argentine bonds also fell, with the yield on the government’s bond due in 2117 surging 7 basis points to a record 8.6 percent after the Federal Reserve raised rates for the second time this year and upgraded their forecast to four total increases in 2018. Argentina’s central bank held its key rate at 40 percent Tuesday.

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