"The Only One Selling Dollars Is The Central Bank": Argentine Peso Crashes To New Record Low

Despite the US dollar's demise today (after spiking on the Fed rate-hike), and the rebound in the broad Emerging Market FX markets, the Argentine Peso plummeted - after a hopeful start - to fresh record lows as The IMF's biggest bailout ever appears to be not enough to quell investor capital flight.

Early in the day, Argentina’s Finance Ministry announced that the Central Bank plans to sell $7.5 billion in the foreign exchange market to help stabilize the peso and support its budget. That failed miserably as Bloomberg reports, 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."

But, as one local FX trader noted, commentary from a major market-maker was ominous:

"Like we mentioned previous days, there is no USD supply in the market. The only one selling dollars is the Central Bank. On the supply side the Agriculture exporters are selling dollars but not enough and the Foreign investors are mainly buyers."

All of which is very evident judging by the waterfall-like collapse the currency has suffered in the last few days...

 

You know it's bad when they wheel out the IMF Director to reassure those nasty speculators (well it must be speculators right?) to stop selling their pesos.

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.”

And even with the IMF bailout, things are not about to get better anytime soon. As the JPM chart below shows, the country’s total budget deficit, which includes interest payments on debt, was 6.5% of GDP last year, much of reflecting a debt binge of about $100 billion over the last two and a half years. The primary fiscal deficit in 2017 was 3.9%.

The IMF loan will have a minimum interest rate of 1.96% rising as high as 4.96%.

“We are convinced that we’re on the right path, that we’ve avoided a crisis,” Finance Minister Nicolás Dujovne said at a press conference in Buenos Aires. “This is aimed at building a normal economy.”

Judging by the market's behavior - Dujovne is alone in his "convinced" state.

As Martin Guzman and Joe Stiglitz wrote (via The Institute for New Economic Thinking) yesterday, the roots of Argentina's crisis run deep...

A change in macroeconomic policies will not be sufficient to set Argentina on a path of inclusive and sustained economic development. But, as last month’s currency scare showed, abandoning the approach adopted by President Mauricio Macri’s administration at the end of 2015 is a necessary step.

The currency scare that Argentina suffered last month caught many by surprise. In fact, a set of risky bets that Argentina’s government undertook starting in December 2015 increased the country’s vulnerability. What was not clear was when Argentina’s economy would be put to the test. When the test came, Argentina failed.

Argentina had to address a number of macroeconomic imbalances when President Mauricio Macri took office at the end of 2015. Early measures included the removal of exchange-rate and capital controls and the reduction of taxes on commodity exports. Argentina also recovered access to international credit markets following a settlement with so-called vulture funds over a debt dispute that had lasted more than a decade.

The government undertook a new macroeconomic approach based on two pillars: gradual reduction of the primary fiscal deficit, and an ambitious inflation-targeting regime that was supposed to bring annual price growth down to a single-digit rate in just three years.

Markets cheered. The prevailing view, eagerly promoted by Argentina’s government, was that the country had done what was necessary to achieve sustainably faster economic growth. Presumably, foreign direct investment would flow in. But it did not.

Instead, Argentina suffered stagflation in 2016, followed by a debt-based recovery in 2017. That led to a surge in imports that was not accompanied by a proportional increase in exports, widening the current-account deficit to 4.6% of GDP and sowing doubt about the virtues of the new approach.

Then, a few weeks ago, markets stopped cheering, expectations soured, and capital fled. The peso depreciated 19% against the US dollar in just the first three weeks of May.

Contrary to Macri’s hopes, his reforms attracted mainly short-term portfolio capital and financing in the form of bonds, both in foreign and domestic currency, rather than foreign direct investment. Argentina’s central bank bears a significant share of the responsibility; while its approach proved largely ineffective in reducing inflation to the target level (the annual rate is still at about 25%), high interest rates encouraged inflows of speculative capital, which worsened the external imbalances and heightened Argentina’s vulnerability to external shocks.

As part of their inflation-targeting approach, the central bank has been sterilizing a large share of the increases in the monetary base through the sale of central banks bonds (LEBACS). This means that the public sector has been effectively financing through short-run central bank debt issuance the largest part of the sizable primary fiscal deficit (4.2% and 3.83% of GDP in 2016 and 2017, respectively). The issuance of LEBACS has been massive, soaring by 345% since December 2015. This might have been sustainable had early expectations of Argentina’s prospects been validated.

There were obviously trade-offs. Less aggressive sterilization would have contained the growth in central bank debt that has now proven to be so risky, and it would have prevented upward pressure on the exchange rate; but it would have led to higher inflation. Nonetheless, attempting to reduce inflation and the fiscal deficit at similar speeds would have been a more prudent approach. After all, macroeconomic policy decisions should not be made on the basis of the most optimistic scenario when the cost of missed expectations is large.

The currency crisis finally revealed Argentina’s vulnerabilities. Looking ahead, the country will be exposed to several different sources of risk. First, there is still a large stock of LEBACS. And every time a significant portion of that debt falls due, Argentina will be a hostage of financial markets’ mood. This will increase the expected exchange-rate volatility, which may create opportunities for speculative financial investments, but will discourage investments in the real economy. Second, because the public sector’s foreign-currency-denominated debt is much higher than it was two years ago, the increase in exchange-rate risk will also call into question the sustainability of public-sector debt.

To assess where Argentina is heading after the crisis requires highlighting several salient elements of how the episode was managed. First, the central bank lost 10% of its total stock of foreign-exchange reserves in just a month. Second, the annual nominal interest rate on the LEBACS was raised to 40% – the highest in the world, and a move that risks creating a snowball of central-bank debt. Third, and most shocking for Argentines, Macri announced that the country would seek a stand-by agreement with the International Monetary Fund.

Thus, if Argentina’s public sector falls into a state of debt distress in the coming years, it will have to submit to the tutelage of the IMF – a creditor in itself, but also an institution that is dominated by international creditors. At that point, the conditionality that the IMF typically imposes in exchange for financing could cause severe damage.

Most worrisome is that the inflation-targeting approach that has exacerbated Argentina’s external imbalances has been reaffirmed. It would thus not be surprising if a new cycle of real exchange-rate appreciation starts in 2019. With a presidential election next year, that would be good news for Macri; but it would not bode well for Argentina’s future.

Ultimately, because Macri’s approach to putting Argentina’s economy on a sustained growth path has so far failed, and has increased the country’s dependence on international creditors, his administration still faces the challenge of avoiding a debt crisis. To protect economic activity and redress vulnerabilities, the strategy of gradually reducing the primary fiscal deficit should be maintained. But, to save Argentina from an increase in external imbalances affecting the sustainability of external public debt, monetary policy must change. That means finally recognizing that attempting to reduce inflation at a much faster rate than the fiscal deficit entails costly risks. The prudent path also requires a gradual reduction in the stock of LEBACS, recognizing that greater inflationary pressure in the short term is the price of minimizing the risk of higher external imbalances and larger exchange-rate depreciations down the road.

And it would certainly be a mistake to continue reducing the tax on soybean exports, as Macri’s administration has announced it will do. Further tax cuts would increase the deficit, while benefiting a sector that already enjoys rents.

A change in macroeconomic policies is not sufficient to set Argentina on a path of inclusive and sustained economic development; but it is necessary. At the outset of Macri’s administration, there were warnings that he had chosen a high-risk approach. Unfortunately, those warnings were ignored. The strategy we are recommending is not without its own risks. But we are convinced that it offers a viable and sounder path forward.

Comments

HRClinton Wed, 06/13/2018 - 20:13 Permalink

The only way that countries like Argentina Venezuela Brazil Etc can survive and eventually thrive, is to completely decouple from the Fiat chit scam that is the US dollar.

When they do decouple, they must create currencies based on real assets backed by real budgets, and not Fufu socialist left-wing BS budgets.

These countries also need to do it at the same time, or the US spy and Military machine will chew them up one at a time.

Do I expect them to do this? No, hell no! For they behave like all vassals and slaves behave... Too dumb, too cowardly, to corrupt, and too disorganized.

ravolla ll951983 Wed, 06/13/2018 - 21:47 Permalink

HELLO SPAM-LOVERS!!!   BIG UP from the SPAMMER BUNKHOUSE here in the Methfilled Valley Trailer Park in Methfilled Valley, PA.  Good to see my men Wadalt and   bobcatz and  cheoll and  Leakanthrophy and PrivetHedge  and our newbies  ll951983  and  gzcekkyret  out from under the couch sucking their own dicks and back on the threads SPAMMING like a Grease Fire!!!! 

Biblicism     AND    TodaysFox ("I made $7000 sucking cock on the Internet")  IT's ALL THE SAME SPAMMER!

THIS is an important week here in the SPAMMER's BUNKHOUSE (the leaking moldy single-wide in the trailer park).  This week I (we?) are celebrating SEVEN YEARS here on ZH, obsessively SPAMMING every thread we can with off-topic comments.  You see, there are dozens of "personalities" living in this one single sad SPAMMER's sick little mind, which he calls "Spammer's Bunkhouse."  How sick is that? 

Each of "us" (these innumerable fake log-on's) is represented by an ACTION FIGURE that Master Spammer ("DARWIN" is his name -- can you believe that?)  lines up on his kitchen counter and TALKS TO!!  WHACK JOB!!!

 

SAD BUT TRUE!!  I (we?) have wasted my (our) youth (or at least the last seven years) with at least one hand in my pants and the other hand SPAMMING ZH.  Yes, indeed.  DOZENS and DOZENS (maybe hundreds) of log-on's banned -- 
>>  "I made $7500 last week on the Internet sucking cock!": that's me.
>>  Biblicism: that's me.
>>  All the porn at Celebrity-leaks: that's me.
>>  Daily Westerner: that's me.

>>  "In the news....SPAMMER broomsticked by furious readers" -- registered in Nigeria) :: that's me TOO!! 

That's our life (all of us living in Master Spammer's Mind): mopping the floor at the Porn Cinema at 2am, working the French Frier at SONIC (demoted from the drive-thru window 'cuz my ZIT-covered face scared the customers), sucking cock on the Internet, and spamming ZH with an enormous Excel spreadsheet of the log-on's of dozens of "digital friends" who upvote one another and virtually suck my little micro penis..

MEET my current imaginary friends.  We all live in one SPAMMER's HEAD (and as ACTION FIGURES on his kitchen counter) but as for me, I have gone off the reservation.  These other "personalities" are pretty troubled.

ll951983  <<< NEWBIE  sucks cock on the Internet!
Wadalt
Leakanthrophy
PrivetHedge
bobcatz
Jumanji1959
Annunaki
Powow
  <<<  NEWBIE
Cheoll   <<<  NEWBIE

Mr Hankey  [R.I.P]   <<<  total utter WHACK JOB  -- joined "The Fallen"
gzcekkyret     <<<  NEWBIE

You know SPAMMERS never die on ZH -- here's just a sampling of the banned log-on's ("The Fallen Spammers") ---

 beepbop, pier, lloll, loebster, ergatz, armada, Mtnrunnr, Anonymous, luky luke, Cjgipper, winged, moimeme, macki mack, tchubby, sincerely_yours, HillaryOdor, winged, lexxus, kavlar, lhomme, letsit, tazs, techies-r-us, stizazz, lock-stock, beauticelli, Mano-A-Mano, mofio, santafe, Aristotle of Greece, Gargoyle, bleu, oops, lance-a-lot, Loftie, toro, Yippee Kiyay, lonnng, Nekoti, SumTing Wong, King Tut, evoila, rp2016, alt right dude, altright-girl, alt-right girl, Blufin, Schlomo Scheklestein, BraveForce, Mr Hankey, sandraloopz0, enf83

In reply to by ll951983

MoreSun Son of Captain Nemo Wed, 06/13/2018 - 22:55 Permalink

And while the jew supremacist controlled central banks sell the dollar their jew counterparts are:

Earlier this week, the Anti-Defamation League – one of the most subversive, anti-American organizations operating with impunity on American soil – released an official memo praising both the House and Senate for introducing the Anti-Semitism Awareness Act, a piece of legislation “which provides important guidance for the Department of Education and the Department of Justice for federal anti-discrimination investigations involving anti-Semitism, including on college campuses,” according to the press release.

It could not be more obvious that the United States federal government exists to serve the Jews and Israel, yet openly recognizing and stating this obvious fact is verboten in modern society.

http://therealistreport.com/adl-praises-congress-for-anti-semitism-awar…

In reply to by Son of Captain Nemo

DjangoCat HRClinton Wed, 06/13/2018 - 22:49 Permalink

Agree with the Bitcoin suggestion.

How is it we get all these spammers?

I will quote a well respected troll here (me)

"So, I got me my adblocker and it works pretty good.  Recommended.

Now I need the spam blocker, weed out anybody putting up these short named url links.  I don't want to take out the trolls because they are just too much fun.  Its the bots that need to go.

Any ideas?"

PS

Q quoting the Declaration of Independence "We hold these truths to be self evident..." after two missiles intercepted.  THIS IS WAR. 

THIS IS NOT A GAME.

Wakey wakey guys and gals, the inevitable is upon us.

WWG1WGA

In reply to by HRClinton

Yen Cross Wed, 06/13/2018 - 20:30 Permalink

 O/T. I still don't get those Federal Reserve >dot plots<

 I try and try, but always come back with the same question?

  Who When Where, at what time, decides that a few CHAD on an Kindergarten sized piece of vellum decides the outcome of 360mm [stated inhabitants] of the sovereign United States?

Yen Cross Silver Savior Wed, 06/13/2018 - 20:43 Permalink

    First of all, $'s vested in U.S. equity and bond markets are at ATH.

 The point I'm making, is that any rotation from U.S. equities will likely weaken the $usd.

 If you have massive vested inflows, assuming the inflows are hedged, all you get is a rotation from equities into bonds.

 Okay kiddies, here's the kicker.  At what point is it more advantageous to unwind those hedges? {cover for profit}   as opposed to keep paying for all those "puts" on an overbought $usd?

 

In reply to by Silver Savior

Bureau of compliance Wed, 06/13/2018 - 21:26 Permalink

“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.”

 

that'll fix er right up.

DanDaley Wed, 06/13/2018 - 21:36 Permalink

Ustedes son todos La Argentina, muy pronto (jajaja)...You are all Argentina, very soon (hahaha). Funny that Argentina means land of silver (argentum)...would that they had some.