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Argentine peso collapses as Macri goes to IMF

posted onAugust 31, 2018
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The Argentinian peso lost 20 percent in value against the dollar in just two days. The slide came after President Mauricio Macri on Wednesday surprised the markets by asking the International Monetary Fund  (IMF) to speed up the disbursement of a $50 billion bailout package it arranged earlier this year. 

On Thursday, the Central Bank of Argentina unexpectedly raised interest rates to 60% from 45% aiming at halting the currency from collapsing further. The bank said the move was in "response to the foreign exchange rate situation and the risk of greater inflation." The regulator has increased interest rates four times since April. 

Despite the bank's latest move, the currency ended a dramatic trading session down almost 12 per cent at 38.53 pesos to the US dollar on Thursday. Early Friday, the peso was trading at 38.3 pesos per dollar. 

Credit rating agency Moody's called the move "a clear signal that economic policy approaches have not been sufficient to contain the financial pressures facing Argentina."

In  Latin America's third-largest economy, inflation reached an annual rate of 31.2 percent in July.

The IMF in a statement said it would look to “revise the government’s economic plan with a focus on better insulating Argentina from recent shifts in global financial markets.”

Macri in a televised address said: "We have agreed with the IMF to advance all the necessary funds to guarantee compliance with the financial program next year."

"This decision aims to eliminate any uncertainty … Over the last week we have seen new expressions of lack of confidence in the markets, specifically over our financing capacity in 2019." Attempting to calm the public he added:  “I know that these tumultuous situations generate anxiety among many of you... I understand this, and I want you to know I am making all decisions necessary to protect you.” 

Some analysts have criticised the decision to speed up the IMF bailout, saying it smacks of desperation CNBC reported.

The last time Buenos Aires had a standby agreement with the IMF- nearly 20 years ago- the country's unemployment rate rose to 20 percent, wages shrank and people withdrew large sums of pesos from their bank accounts to exchange them for U.S. dollars.  

The average yield spread of Argentine sovereign dollar bonds over  U.S. Treasuries on the JPMorgan EMBI Global Diversified index leapt 35 basis points (bps) from Wednesday’s close to 759 bps, jumping to levels not seen since January 2015 according to Reuters.