Having endured his most difficult two weeks in office, President Mauricio Macri ended the week relieved after his economic team managed to take control of an ominous currency crisis that reminded many of the 2001-2 economic meltdown.
It didn’t come easy for the Cambiemos (Let’s Change) coalition, with the Central Bank forced to put a big number of precious foreign reserves into play, while fractures emerged among government allies and general opinion polls showed continued dissatisfaction.
“We’ve overcome the turbulence,” Macri said in a press conference on Wednesday, justifying his economic plan and indicating he was working on a “great pact” with governor and senators across the political spectrum to “balance” the country.
The President did acknowledge that their economic targets were “too ambitious” and that coordination between his economic team and the Central Bank had been “clearly” problematic. “We are all working together know, we’ve improved,” he added.
The government’s economic team clearly has the support of IMF Managing Director Christine Lagarde who presented Argentina’s request for an “exceptional access Stand-By Arrangement” to the Fund’s board on Friday, noting, “this will be Argentina’s economic programme, one that has the full ownership of President Macri and his government.”
Macri also garnered support from his “friend,” US President Donald Trump. “Great talk with my friend Presdient Mauricio Macri of Argentina this week.
He is doing such a good job for Argentina. I support his vision for transforming his country’s economy and unleashing its potential,” tweeted out the US President on Thursday. Sources indicated the Presidents held a 10 minute phone call on Monday that was part of a “global strategy to show the political support of the main global leaders,” Perfil reported.
Action in the markets were nerve-wracking throughout the week. The Central Bank under Federico Sturzenegger refinanced US$26.84 billion worth of short-term Lebac notes on Tuesday and auctioned new debt to the tune of US$200 million. The previous day the Central Bank had called the market’s bluff by offering US$5 billion worth of reserves at an exchange rate of 25 pesos after the dollar had started the week by surging over 50 cents beyond that level. Only US$ 408 million of this offer was accepted as speculators suspected that the greenback was peaking.
The bank’s strategy has calmed nerves about Argentina’s short-term economic scenario after three weeks of market volatility.
The peso plunged 7.5 percent on Tuesday in the wake of the successful Lebac renewal but rebounded to end the day at 24.67 against the dollar, as the Central Bank sold an additional US$ 791 million in reserves. It was the first time in 16 days that the peso has strengthened against the greenback.
However, the trend was short-lived. By Wednesday, the dollar was demanding 24.80 pesos although no Central Bank sales of reserves were needed to defend the new 25-peso ceiling set this week.
The next day the dollar crept up to 24.91 pesos while the Central Bank repeated its Monday offer of US$5 billion to prevent any further advance.
The entity headed by Sturzenegger confirmed in a statement on Tuesday that it had refinanced all expiring pesodenominated securities with interest rates ranging from 40 percent for the 36-day Lebac to 38 percent for the 154-day note.
Not only were all 612 billion pesos of Lebacs renewed on Tuesday but bond issue totalled almost 621 billion with the new debt. But the previous week a figure of 670 billion had been given for the Lebacs up for renewal.
This success was due to two key factors. Firstly, the Central Bank was hyper-active in previous days buying up in advance as many Lebacs as it could on secondary and futures markets in order to reduce the gigantic sum up for renewal (over half of all foreign currency reserves), acquiring almost half. Secondly, the lead given by such top global asset management funds as BlackRock and Templeton in renewing their Lebacs was undoubtedly decisive in swaying smaller investors to follow their example.
These funds were doing Macri a huge political favour by calming markets but this may not have been their motive – renewing Lebacs bought a short time ago for around 20 pesos at a value of about 25 also represented a highly profitable deal.
The government is currently negotiating a line of financing with the IMF. Informal talks on the details began yesterday in Washington after President Macri first announced on May 8 that he was resorting to the IMF to end the currency crisis with Treasury Minister Nicolás Dujovne formally meeting IMF Managing Director Christine Lagarde to launch the negotiations two days later.
Observers believe Argentina will seek around US$30 billion but Argentina’s special drawing rights entitle it to around US$20 billion. Whatever the sum, it would significantly boost Central Bank reserves to confront future runs on the currency but the highly negative image of the IMF in Argentina also represents a huge political risk.
Opinions are divided as to the conditions likely to accompany the package. Some say that the IMF will not be imposing any specific devaluation percentage but simply demand that the peso float freely, which was the Macri government’s official policy until the multi-billion Central Bank interventions of recent weeks. According to these more benign expectations, the IMF will also accept Macri’s “gradualist” timetable of fiscal deficit reduction, as well as government policies in general.
But other IMF-watchers point out that no stand-by loan ever comes without strict austerity conditions.