Argentine peso plunges after central bank pulls support
Argentina’s peso suffered its biggest one-day fall since a 2002 financial crisis after the country’s central bank scaled back support for the currency in an effort to preserve foreign exchange reserves that have fallen by almost a third over the past year.
The fall accelerated a long-running decline since president Cristina Fernández replaced her economic team in November. The currency plunged around 15 per cent at one stage although thin liquidity made it difficult to gauge its true level.
The peso rallied in late trading to around 7.88 to the dollar – around 10 per cent down on the day, according to Bloomberg data. Argentine press suggested the central bank might have made late-stage intervention.
The latest levels are still at some distance from the black market rate that most Argentines use, which has weakened 28 per cent since the start of the year to stand at around 12.85 to the dollar on Thursday.
“The risk of capital flight is rising by the minute. This will be very hard to control,” wrote Dirk Willer, strategist at Citigroup, adding that liquidity had “largely disappeared” with the risk of Venezuela-style capital controls.
The peso’s fall added to increased risk aversion on global markets. By the close, the S&P 500 equity index lost 0.9 per cent, while the CBOE Vix volatility index – Wall Street’s so-called “fear gauge” – was up 7 per cent. Yields on 10-year Treasuries fell 8 basis points to 2.78, hitting their lowest levels since early December, as investors flocked to safer assets.
Across the Atlantic, the FTSE Eurofirst 300 fell 1.1 per cent while the Nikkei 225 in Tokyo shed 0.8 per cent.
The fall in the currency was probably hastened by a broader sell-off in emerging markets, with weak data from China’s manufacturing sector adding to concerns over the effects of the Federal Reserve’s tapering plans. Turkey’s central bank was forced to intervene to prop up the lira, and the South African rand, Brazilian real and Chilean peso also fell sharply.
Argentina first introduced currency controls a week after Ms Fernández was re-elected president by a landslide in 2011. Since then the government has redoubled efforts to restrict transactions in foreign currency.
On Wednesday, it imposed new restrictions on online shopping in its latest attempt to curb capital flight and prevent a possible balance-of-payments crisis.
Jorge Capitanich, the head of Argentina’s cabinet of ministers, told reporters on Thursday that the central bank had not bought or sold dollars the previous day, “which tells you what its position is with respect to the exchange rate”. Earlier in the week, he used his Twitter account to urge businesses to “produce and invest, rather than worrying about the illegal dollar”.
Foreign currency reserves, which fell to $29.26bn on Thursday, are now at a seven-year low as the government drains its coffers to service debt and pay for rising energy imports. The central bank sold $5.9bn propping up the peso last year.
The government’s overriding objective will be to prevent further erosion of reserves. But it now risks a steep depreciation that would fuel inflation – which unofficial estimates put at 28 per cent, more than double the official rate.
Siobhan Morden of Jefferies said: “This is not an administration that respects or understands market pressure. They have been in the early stages of currency crisis since December, and yet their main strategy has been to pay off arrears and try to attract foreign direct investment.”
Luis Secco, Buenos Aires economist, said: “It is hard to figure out what is the logic behind the authorities’ decision to let the peso fall so abruptly, without any other accompanying macroeconomic policy. It’s possible that the authorities would rather see a strong rise in the dollar than lose, again, a large quantity of reserves.
“It is a potentially dangerous situation . . . not least because it could give the impression that the authorities don’t have a very clear idea of how to manage the situation.”
Ricardo Delgado, director of local consultancy Analytica Consultora, said on Wednesday: “The government faces a dilemma. It wants to stop reserves from falling. But that means less imports and thus lower growth, as the economy is very dependent on imports. So the question is: do you want more growth, or higher foreign reserves?”
The perception among some investors is that Argentina’s government has been allowing the peso to depreciate at a faster rate over the past few months, because it wants to narrow the gap between official and black market exchange rates. High inflation has undermined Argentines’ trust in the currency.
November 2013: As President Cristina Fernández’s rule appears to be coming to an end, investors are hopeful this will spur economic reform.
“In an environment of negative emerging markets sentiment, Argentina is among the worst of the worst,” wrote analysts at Brown Brothers Harriman, arguing that with inflation well above interest rates of 21 per cent, and devaluation setting in, “one can easily see why nobody would want to hold pesos”.
Neil Shearing of Capital Economics said the Argentine central bank appeared to have bowed to the inevitable.
“They have pulled the plug. The cost of intervention has become too great,” he said.
Mr Shearing said the risk now was that, with Argentina’s foreign exchange reserves down to a seven-year low, Thursday’s move could turn into a disorderly devaluation in which the central bank would lose control of the currency.
“The big issue is a lack of clarity over government policy,” he said.
Ramón Aracena, chief economist for Latin America at the Institute of International Finance, said: “If you look at Argentina’s evolution in the last couple of years this situation was impending. I think the trigger is that the international reserves have reached a minimum level that the government is unwilling to breach.
“The problem is that a devaluation per se is not going to fix the underlying situation in Argentina: it would also need a tightening of fiscal and monetary policy.
“There is a risk this will actually lead to an acceleration of inflation in Argentina to 30 or 40 per cent depending on the rate of depreciation of currency and the policy response. There is no magic here.”
Analysts say the devaluation is unlikely to have an immediate impact on Argentina’s inflation rate as many imported goods are bought with dollars obtained on the “blue” parallel market.
The reaction on bond markets was muted, with the yield on Argentina’s 2033 dollar-denominated bond climbing from 13 per cent to 13.6 per cent. The cost of insuring against a default on Argentina debt in the next five years – as measured by the country’s credit default swaps – rose by 280 basis points to 2,336bp, a very high level by global standards.