BUENOS AIRES (Reuters) – Argentinian bond prices fell to record lows on Monday and the official and black market pesos diverged after the country imposed capital controls in a bid to stem a currency rout that is accentuating the risk of default.
Sunday’s decision by President Mauricio Macri, a free markets advocate who abolished capital controls after he came to power in 2015, was a sharp about-face for his administration after the conservative leader was beaten in the primary elections in August.
The country’s peso, bonds and stocks have since fallen, forcing Macri to unveil plans to delay payments on around $100 billion in debt as well as exchange controls limiting the purchase of dollars.
The peso closed 0.88% higher in the official markets, but closed 0.79% lower on the black market at 63.5 to the dollar, a divergence pointing to a loss of confidence in the official price that was also helped by a holiday in the United States.
“The dollar at this level is now strong enough,” Treasury Minister Hernan Lacunza told a news conference. “All of these measures have stability as their central objective.”
Central bank president Guido Sandleris on Monday called Argentina’s financial system “strong” and said the bank would stick to its tight monetary policy, despite currency restrictions.
Sandleris, speaking at a press conference, said the bank was in talks with the IMF to ‘reset’ the objectives of its $57 billion financing deal for September, although there are no haven’t had any changes yet.
The official peso had lost more than 23% since primary elections on August 11 shook up the country’s politics, with incumbent President Macri defeated by his populist-leaning opponent Alberto Fernandez.
The currency has lost more than a third so far this year, after falling more than 50% last year. The central bank has burned nearly $1 billion in reserves since Wednesday, but failed to stem the peso’s slide.
(Argentina Risk Graph: )
(Currency control: )
Fernandez is the clear favorite ahead of the October 27 general election. His running mate is former President Cristina Fernandez de Kirchner, a spendthrift populist who enforced trade and currency controls during her two terms from 2007 to 2015.
His presence on the ticket raised concerns that the interventionist left would return to power, although the more moderate Alberto Fernandez said he would set policy alone.
LONG LINES IN BANKS
Unusually long queues formed at banks in Buenos Aires on Monday as depositors sought to withdraw dollars or pesos from their accounts, although the government said the financial system remained sound.
“All these people are withdrawing what they have, or part of what they have, because they prefer to keep their money at home at this point,” Julio Novoa, a 61-year-old depositor, told Reuters.
After announcing changes to Argentina’s bond payment schedule last week, enforcing exchange controls was Macri’s second move that violated his promise to use orthodox policies to revive the economy by chronic difficulty. Macri’s new checks could be difficult to undo later, analysts said.
“The problem with restrictive emergency measures is that they are easier to apply than to withdraw,” said Buenos Aires-based financial analyst Christian Buteler in a tweet.
Further peso weakness was expected in the future. “The game has changed for the forex market,” said Sabrina Corujo, an analyst at Buenos Aires-based brokerage Portfolio Personal, warning that local stocks and bonds would also weaken.
The central bank was allowed to restrict dollar purchases as it burns through its reserves to prop up the peso.
Macri won the presidency in 2015 on a promise to “normalize” Latin America’s third-largest economy by abandoning the controls favored by the previous administration.
Argentina’s international benchmark 2028 dollar bonds fell more than 2 cents to a new low of 36.5 cents, according to Refinitiv data. Bonds maturing in 2038 saw similar losses.
Argentina’s euro-denominated sovereign bonds also suffered heavy losses to reach record highs. The 2022 bond fell more than 10 cents to 34.45 cents while the 2027 issue fell 7.2 cents to 33.501 cents, according to Refinitiv data.
American certificates of deposit (ADR) of Argentine financial institutions have also come under pressure. Grupo Financiero Galicia’s Frankfurt listing fell 9.15% while Banco Macro SA fell 6.5%.
Monday was a U.S. holiday, which could help control Argentinian asset price losses by reducing trading volumes, Buteler tweeted.
The risk premiums demanded by investors to hold Argentine dollar bonds over safe-haven US Treasuries soared to 2,534 basis points on the JP Morgan Index of Emerging Market Hard Currency Bonds. These levels were last seen following a major fault in 2001.
Capital controls are “a sign of distress in the market and reflect that the new metrics on Argentina are weak and when the peso weakens further it weighs on the credit profile,” said Michael Bolliger, chief executive. asset allocation for emerging markets at UBS Wealth Management. .
“There’s still a lot of pressure on the currency… There’s a limit to what they can do without capital controls.”
Reporting by Karin Strohecker, Eliana Raszewski, Walter Bianchi, Marina Lammertyn and Hugh Bronstein; Additional reporting by Tom Arnold and Marc Jones; Written by Cassandra Garrison; Editing by Steve Orlofsky, Nick Zieminski, Peter Cooney and David Gregorio