Flash Report /
Argentina

Argentina: No easy option to avoid another (currency) crisis

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Hasnain Malik
    Hasnain Malik

    Strategy & Head of Equity Research

    Tellimer Research
    12 August 2019
    Published by

    The Argentinian Peso (ARS) fell to 61/US$ in early trading (down 26% from Friday's close), but has since recovered a bit to 55. 

    It looks like the authorities have not intervened too much this morning, by letting the currency fall as far as it has. Why resist that pressure? But it is a difficult, if not impossible, job for them now. The central bank has some ammunition, but probably not enough if it keeps on like this. 

    The options:

    1. Let the currency go, and maybe it overshoots (80?), but at least it will find a natural level and the central bank won’t waste money intervening. In the near-term, inflation would rocket. It is already at nearly 56% yoy, so inflation would go much higher. And that further destroys Macri politically. We think it would also derail the assumptions under the IMF programme. 
    2. Hike interest rates. Policy rate (Leliq) is c64%, so how much higher should it be? Lessons from currency crises are that it’s never high enough. So, 100%? However, higher interest rates will also kill any chance of growth over the next two-and-a-half months (although the PASO result may have done that already). And that further destroys Macri politically.
    3. Intervene, given the risk to near-term economic stability of a much weaker ARS. But with 55 days to go to the election, and let’s say the central bank spends US$250mn a day on average (the allowable limit under the IMF programme, although they can do more under certain conditions), that’s about US$14bn of reserves until then. Sure, pressure on FX could die down as those that want to leave, do leave, so future interventions may fall. But still, that’s a big amount – out of reserves currently of US$66bn, the net usable for intervention is only about US$20bn anyway. Recall, the central bank spent US$6bn over about two weeks last April, which ultimately forced Argentina to go to the Fund. The trouble is that might bridge to the election in October, but what happens then? By spending so much now, they would have nothing left after the election. This could force Fernandez to the Fund much sooner, or force him to default/declare a moratorium (through lack of reserves or to save the huge debt service on the bonds). 
    4. Capital controls. The central bank may not have a choice. Controls might buy the authorities some time during the election period, but they are not ideal. However, it might be better for the Fund than spending US$20bn of IMF money to finance private money to exit.  

    But the best economic intervention would be political. However, that requires a much greater degree of political maturity and cooperation than we’ve ever seen in Argentina.

    Alberto Fernandez could present himself as more economically credible and competent to limit the collapse. One might argue, what’s his incentive? The deeper the crisis he inherits, the harder it will be to rebuild the country (as Macri found in 2015), risking his own popular support later on. 

    What about Macri? If he’s going to lose, does he care about another currency crisis? His legacy (such as it is) is damaged anyway. But he might still think he’s got a fighting chance in October, so if he doesn’t want the country to suffer another crisis, he might have to take some action – even reach an economic accord with the opposition – even if the opposition also benefit. This would be politically challenging. Or, he could speak to the IMF to get more firepower (although they would be wary of throwing good money after bad, assuming a Fernandez victory).