Argentina Hikes Rates To 40% To Stall Currency, Bond Market Collapse

Update: It appears - for now - that BCRA's drastic rate hike to 40% is working... ARS is up almost 5%...

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It may be time to cry for Argentina...

The Central Bank of Argentina (BCRA) just hiked its 7-day repo reference rate to 40.00% - up a stunning 1275bps in a week - in a desperate attempt to stall the collapse of the peso (and ARG bonds) this week.

BCRA hiked this week three times:

  • 4/27 +300bps to 30.25%
  • 5/03 +300bps to 33.25%
  • 5/04 +675bps to 40.00%

The central bank said it will continue to use all tools at its disposal to avoid disruptions in the markets and guarantee a slowdown in inflation. The bank is ready to act again if necessary, it said in the statement.

As The FT reports, appetite for Argentine assets has been waning in recent months as concerns grow over the country’s painfully high level of inflation and large trade and fiscal deficits. A severe drought is also complicating President Mauricio Macri’s efforts to revive Latin America’s third-largest economy. Agricultural exports are one of Argentina’s main sources of hard currency, but the worst drought in decades is expected to hit this year’s soybean and corn harvests. The country’s famed cattle industry is also predicted to rack up millions in losses.

And, of course, adding to Argentina’s woes is the return of US dollar strength.

The peso has now plunged over 17% this year against the dollar, and plunged yesterday by the most since it began its free-float in December 2015. ARS is very modestly stronger as it opens this morning after the hike.

Furthermore, Argentina's 'infamous' Century bonds have collapsed - selling off for 15 days straight as those who bought the 100-year bonds last year in the massively oversubscribed deal are likely regretting that 'reach for yield' choice now...

As we said at the time of issuance, while the bond was massively oversubscribed, investors questioned the wisdom of investing for a such a long term in a country as volatile as Argentina.

"It's awfully premature for Argentina to issue 100-year bonds," said Jorge Piedrahita, chief executive officer of Puma Investments. "When you look back in history, I'm not sure we can find a 20-year period where Argentina has not defaulted."

That bridge will be crossed in due course, meanwhile aside from the government, the biggest winners were Citigroup Inc and HSBC, who acted as lead book runners on the deal.

That bridge may just about to be burned once again.

Argentina's Treasury Secretary Dujovne is attempting to stabilize the narrative, stating alongside Finance Minister Caputo that the central bank's actions are meant to address volatility and reaffirms the government's commitment to tighten fiscal policy (which many have doubted).

Dujovne warns "we can't go on living on borrowings" saying that the country's fiscal deficit target will change to 4.9% of GDP, and warned that the rate-hikes may impact economic activity and "May inflation may be higher than expected."

Dujovne also spun the following narrative - that the plunge in the peso "isn't a reflection of local issues" but is "due to external factors."

Caputo claims that Argentina "wasn't caught unaware by the market" but a 1275bps hike in a week suggests they were!

However, as The FT concludes, for Argentina, cooling demand for its bonds can potentially become problematic because it needs to continue issuing hard currency debt to finance its fiscal deficits. The country has already raised $17.6bn so far this year via hard and local currency bonds as this chart from BNP Paribas illustrates.

“External vulnerability is high when compared to other Latin American countries,” noted analysts at the French bank. “Hard currency debt over net liquid international reserves is 275%. Any further ARS [peso] depreciation will put this number at even higher levels.”

Finally, the following images of banks beginning to ship dollars abroad are seeing alarms raised across Argentina...

The alarm signal went off well before December 2001, when the lorries hired by the banks began to come to Ezeiza in the middle of the night to flee abroad the dollars they had accumulated after years of financial operations.

As happened so many times throughout history, they were the first to notice that the country was dangerously close to an apocalyptic end. A few months later, the country exploded.

Comments

Sonny Brakes DownWithYogaPants Fri, 05/04/2018 - 10:51 Permalink

I'd settle for the laws of supply and demand. In this economy, when demand falls, products are resized and prices are raised. As an example, I was buying Noname instant coffee a year ago for $2.99/200g jar. For a while, the product was still on offer, but the shelves were kept marginally stocked. The price of the alternative Nestlé would be sitting there for $4.99/180g jar. The last time I was able to find the Noname brand it was $3.99/200g jar and the Nestlé was $6.99/180g jar. My point is that when we as consumers adjust our behaviour corporations do their darndest to undermine our efforts.

Just once I'd like to see the price of something fall without it being reformulated. A friend of mine in the marketing business once told me that anything on sale has an issue as to why it's on sale.

In reply to by DownWithYogaPants

FireBrander Sonny Brakes Fri, 05/04/2018 - 10:59 Permalink

If a person doesn't have the income to pay others, and they can't do it themselves, they have no business owning a home.

I see it all the time...no skills and no money...the house melts around them...people act like it's an apartment and somebody else's problem to fix it.

Local dumass in the news recently complaining about erosion on HIS property and how the city told him "not our problem".

Story...roofer driving through the neighborhood looking for roofs in need of repair...mine was due for replacement...I was outside and he stopped to talk with me and give a quote...$12,000!..LOL, Say What? Roof is 24 squares, he wanted $500 a square and another $1000 if I wanted the old shingles torn off. Did it myself, with premium materials and overkilled for ~$3500.

In reply to by Sonny Brakes

snblitz FireBrander Fri, 05/04/2018 - 13:56 Permalink

I went solar in 1998 and did everything myself down to the bolts, nuts, and washers.  Back then the electric company had not heard of home solar, nor the local government.

I know people who paid $35,000+ for $14,000 solar installs.

$14,000 or even $7500 installs can be done with components from reputable suppliers  using licensed and certified everything including labor.

https://www.finitespaces.com/2018/01/01/why-pay-35000-for-solar-for-your-home-when-you-can-pay-7500/

 

In reply to by FireBrander

AurorusBorealus NoDebt Fri, 05/04/2018 - 11:40 Permalink

Default?  Default on what?  The total external debt of Argentina's government at the beginning of 2018 was 143 million, with an M, USD.  Permit that fact to register for a moment in this conversation: $143 million in external debt.

This entire news story is a joke, and I am disappointed in Zerohedge for publishing this Wall-Street propaganda.  It is absurd for analysts from Wall Street hedge funds and banks, most of whom carry more debt than the entire nation of Argentina, to pontificate about the sins of Argentina, lecture the Macri government about what they think he should do, and post ridiculous pictures of armored cars on a highway in Buenos Aires, claiming that these are headed to Ezeiza to ship dollars out of the country.  Argentines are always expecting the next crisis, so the commentary and cell-phone video of a taxi driver in Buenos Aires is not evidence of a plan to ship dollars out of the country.  To make such a claim is worse than claiming that the Syrian government "gassed" people in Douma, based on White Helmet Youtube videos.

Having read this absurd news story, I begin to believe that the Chinese may not be responsible for this attack on the Peso, and that it is yet another attempt by a Wall-Street firm to manipulate the FX markets in an effort to discount a purchase of something in Argentina.

In reply to by NoDebt

AurorusBorealus AurorusBorealus Fri, 05/04/2018 - 12:19 Permalink

I do not think that it is a coincidence that the Financial Times has decided to push this story as its headline for several days, only 2 months after acquiring Longitude Research.  Are Barclays and other London banks trying to drive down Argentine bonds in order to discount a purchase of higher yielding debt?  Is the British Deep-state constantly trying to undermine Argentina's economy by rigging the FX markets (in London) against Argentina?  What possible reason would MI6 and the British government have to undermine Argentina's economy, except the 1 billion barrels of oil that BP is stealing from Argentina around the Malvinas?  Maybe Britbob can give us his opinions on whether or not rigging FX markets and publishing propaganda designed to destroy another nation's economy are acts of war or not.

In reply to by AurorusBorealus

tr123 AurorusBorealus Fri, 05/04/2018 - 14:22 Permalink

You're right that the people there are always pessimistic and dramatic about all things gov/banking, but they DID just raise their rates to 40% and the peso DID just fall big time. It's been falling for years, but rather than get better it got 2x worse in a week. 

It's a pre-determined fact that the politicians there steal. Nobody denies this, they just deny who stole more and from whom/why/when or how. They've been screwed so many times they think the US Dollar is Gold. 

Argentines know politicians lie all the time, but when they see armored trucks presumably loading cash onto private airplanes, those are real actions. Actions speak louder than words, and if you don't assume that they're doing this for a reason and determine the motive you're going to get f*ked, again...

 

In reply to by AurorusBorealus

foreignlander AurorusBorealus Sat, 05/05/2018 - 10:17 Permalink

"Default?  Default on what?  The total external debt of Argentina's government at the beginning of 2018 was 143 million, with an M, USD.  Permit that fact to register for a moment in this conversation: $143 million in external debt."

Nay nay nay.  Unless you want to turn math up on its head, it's Billion with a B.  $ 143 Million is what Hillary took (well $ 150 for the record) on her Clinton Global Initiative to approve the Uranium One deal for Rusatom.  It can also be, give or take, the average bribe a Minister of Public Works or such in Argie will get under the table to approve some bridge-to-nowhere contract.  In a chronically indebted country since its birth as Argentina, it can only be a rounding error in the foreign debt calculation. 

I could've told you outright from the back of the envelope calculation that Argentina was in the $ 90 to $150 BBBillion range debt EVEN after the Default, because NOT all debt was wiped out.

But just not to pull stuff out of my arse I went to Tradingeconomics.com and verified it:

"External Debt in Argentina averaged 149889.70 USD Million from 1994 until 2017, reaching an all time high of 232951.95 USD Million in the fourth quarter of 2017"  Check it yourself if you want:   https://tradingeconomics.com/argentina/external-debt.

I think that if you want to make a serious argument you first have to get the facts right.

Let go of these unfounded foreign machinations, if there's was/is an attack on the Peso, it's what vultures do to weak prey just like in the wild.  That's why is called "predatory capitalism".  And you got to look closer to home to find the culprit: your Newman Alum/Ayn Rand loving/white hope/Wall Street brown noser scumbag president Macri.  What do you expect from his disastrous policies, i.e., flood of Chinese crapola importation, artificial low dollar FX rate that bleeds hard currency in the pockets of tourists coming to Miami and everywhere else, the give away to Big Ag?  how did he fill that hole in the budget?  The loading up of a massive $ 100 Bn Bond issuance with a permanent Current Account Deficit?  How can foreign 'investors' expect to be paid?  

With more debt, that's how.  And a Carry Trade Shangrilah.  Stick a fork in it.  Argentina is done.  Again.  

In reply to by AurorusBorealus

foreignlander August Fri, 05/04/2018 - 11:31 Permalink

August, you're right on both counts.  But to me it's more like a has been "World Power" that can't feed/house or find work for its impoverished population and soon will be sucking goat fkrs dix for breakfast.  And this "world power" depended as much on a REAL World Power to take on the Argies as it did to take on the Krauts.  The world power thing has passed its expiration date.

In reply to by August