Argentina Welcomes U.S. Traders Back From Holiday With Controls

(Bloomberg) -- Welcome back from the long weekend. If you are invested in Argentina, you may have missed a few things.

Argentine President Mauricio Macri imposed some capital controls on Sunday which are reminiscent -- but not as draconian -- as those that he disabled upon taking office in late 2015. It’s hard to blame him given the fallout from his shock drubbing at the Aug. 11 primary election, which plunged Argentina into full-blown crisis and it was one of the last options he assessed to keep the wheels on between now and the Oct. 27 vote. Not to mention his wish to be the first non-Peronist to finish a term since 1928.

Though the move wasn’t exactly a surprise, the first reaction in markets was swift: Bond prices tumbled on Monday in European trading hours. Early indication in New York is that we’re heading to new lows as well with prices ranging from 35 to 40 cents and the yield on a dollar bond maturing in April 2021 now at 77%.

If you hadn’t exited your carry trade yet after the primary fiasco, it may be too late, or at least too late to do it through formal channels. Locals are already dusting off their “blue-chip swap” guidebooks and other old mechanisms on how to move money in and out of the country using financial instruments.

The peso didn’t tank on Monday, at least in part due to the U.S. holiday, but also due to the new controls, which will likely put a floor on the world’s worst currency. Only $84 million were negotiated in the spot, and investors may still need time to adjust to the new reality of local markets -- which Citigroup described as “uninvestable” in a note. The parallel exchange rate, which hasn’t been relevant for nearly four years, did resurface with the dormant Twitter account “Dolar Blue” breaking a long silence.

The government is waiting for bank proposals to begin talks with foreign creditors on extending maturities after unilaterally changing terms on local notes which earned the sovereign a restrictive default rating from Fitch. Here’s a list of those notes in case you or a trader in your firm had loaded up on them in a portfolio:

Here Are the Argentine Notes Affected by the Debt Reprofiling

Credit-default swaps are through the roof with chances of a non-payment over five years firmly above 90% and the odds over 12 months north of 50%. Those contracts shouldn’t trigger for now on the technical default, according to experts.

It remains to be seen whether Macri’s measures will actually work. Even after the controls were imposed Sunday, central bank reserves bled another $954 million to $53.1 billion, the lowest since December. The International Monetary Fund, which didn’t immediately criticize the decision to impose capital controls, is still mulling whether to disburse more money this month.

For voters who have been whiplashed by the sinking peso and dire headlines day-in and day-out, at least Macri granted a 35% minimum wage increase on Tuesday. I guess he hasn’t totally given up on his re-election chances.

©2019 Bloomberg L.P.

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