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ECONOMY | 28-08-2019 07:30

Peso drops, country risk up after volatile day led by IMF visit

Argentine markets sink anew after initial start to week dominated by IMF mission team's visit and Alberto Fernandez’s criticism of Fund and Mauricio Macri's government.

The peso depreciated by almost 2.5 percent against the dollar on Tuesday, a day after the International Monetary Fund met with presidential election frontrunner Alberto Fernández.

Meanwhile some leading stocks lost up to 13 percent of their value in a volatile day in the markets that saw the currency lose value despite the Central Bank buying US$300 million in pesos in a bid for stability.

The markets had panicked in the immediate aftermath of Fernandez's resounding party primaries election victory two weeks ago, when he polled 47 percent of the vote and crushed liberal pro-business President Mauricio Macri, who managed only 32 percent.

The peso sat at 46.55 to the dollar before that vote – a de facto opinion poll ahead of the October 27 general election – but closed at 58.66 on Tuesday.

"What we can expect is pretty negative. The economy is very fragile and has become a lot more fragile since the primaries," Matias Rajnerman from consultants Ecolatina told AFP.

The peso depreciated by 20 percent alone in the week after the primaries while the Buenos Aires stock exchange dropped by 30 percent.

Fernández and his financial advisers met with the IMF in Buenos Aires on Monday, after which the presidential frontrunner issued a statement highly critical of the global financial body that last year provided Macri's government with a US$56 billion bail-out loan in return for a strict austerity program.

"The loan received by the country and the set of conditions associated with it have failed to generate any of the desired results," his team said in a statement on Monday. "There has been no letup in the contraction of the economy, a worsening of employment and the situation of businesses and families. There hasn't been a sustained drop in inflation and public debt hasn't ceased to grow."

Argentina has been in recession since last year, and inflation over the last 12 months has been 55 percent, one of the highest rates in the world. A third of the population lives in poverty.

The IMF delegation's visit this week is aimed at reviewing the bail-out loan and discussing the next disbursement of US$5.4 billion, due next month.

Slump

Argentina bond spreads widened to the most in 14 years on Tuesday after opposition leader Fernández lashed out.

The spread over Treasuries widened 182 basis points to 2,003 basis points, the highest country risk rating since June 2005, after Fernandez said much of the IMF loan had been wasted on financing capital flight out of the country. The peso fell 1.8 percent, while stocks extended three days of losses.

The decline in the peso could have been worse if the Central Bank hadn’t carried out its biggest intervention in the spot market since Guido Sandleris took over at the bank in September, 2018. Policy makers sold US$302 million into the market through seven auctions, according to people with knowledge of the matter.

A technical team from the IMF is in Buenos Aires to decide whether to give out the next disbursement of a US$56-billion loan deal. In a statement following a meeting with IMF officials, Fernández said he agreed with the objectives of the IMF deal, but added that the IMF and the current government generated the current crisis and are now responsible for reversing the “social catastrophe.”

“Alberto Fernández’s statements after the IMF meeting created noise,” said Joaquín Gonzalez Gale, FX trader at INTL FCStone in Buenos Aires. “Today, anything he says is blown out of proportion.“

If the IMF decides to give the next disbursement, that would reassure the market and lead the interest rate on short-term dollar notes known as Letes to drop sharply, González Gale said. Until then, traders worry about what the contingency plan might be.

“The problem is now banks are wondering what will happen if the Treasury doesn’t receive these dollars” from the IMF, he said.

The government is selling 35-day and 140-day Letes today, as well as 35-day peso-denominated Lecaps on August 28.

– TIMES/BLOOMBERG/AFP

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