MercoPress. South Atlantic News Agency

Argentine prepared to let the Peso and central bank reserves slide

Central bank president Mercedes Marco del Pont said reserve levels are more than “adequate”

Argentina's international reserves have been declining for weeks as the central bank tries to stem the peso's slide against the US dollar, but policymakers have signaled that they intend to keep dipping into reserves to prevent an even swifter depreciation.

This week reserves fell below the psychologically important level of 50 billion dollars for the first time since August 2010. Reserves totaled 52.15 billion at the end of 2010.

President Cristina Fernandez administration policy has been to gradually administer an orderly depreciation of the Peso, intervening heavily when needed.

This is particularly true since the administration doesn't want any sharp movements in the exchange rate, given that this is an election year.

President Cristina Kirchner is widely expected to win a second term after receiving just over 50% of the vote in the country's first open primary election last month.

The currency was quoted trading on Argentina's MAE foreign-exchange wholesale market at 4.2085 Pesos to the U.S. dollar bringing its year-to-date loss to 5.5%.

Central bank president Mercedes Marco del Pont said reserve levels are more than “adequate,” though the monetary authority doesn't have a specific target.

The central bank plans to stay the course. While some are speculating that there will be a sharper depreciation after the October vote that “isn't going to happen” Marco del Pont told reporters last week in a public statement.

Though a faster depreciation of the Peso would benefit exporters, it would also add to inflation that most economists say runs above 20% and risks spooking voters.

Argentines still view the dollar as a safe haven currency given their country's long history of economic crisis, including a bout of hyperinflation in the late 1980s, and devaluations.

The central bank stepped up its intervention in the foreign exchange market during the third quarter amid an increase in capital flight and lower dollar inflows from grain exports during the southern hemisphere winter.

Grain export dollars are substantial, totaling more than 18 billion dollars during January-August alone, and tend to support the Peso. Indeed, those inflows allowed the central bank to gradually build its reserves during the first half of the year even after it transferred 7.5 billion dollars to the government to pay creditors.

But with grain exports in a lull and capital flight accelerating, the central bank has been forced to dip into its reserves to keep the peso under control.

A measure of capital flight tracked by the central bank rose to 6.13 billion dollars in the second quarter, from 3.68 billion in the first quarter and 2.24 billion in the fourth quarter of 2010.