MercoPress. South Atlantic News Agency

Argentina's “L” Day challenge: US$ 25bn in Peso bonds mature on Tuesday

On Tuesday holders of Lebac Peso-denominated bonds issued by Argentina's Central Bank are maturing, sparking a potential US$ 25 billion payout

The Argentine Peso plummeted to a new low on Monday despite government attempts to curb losses in recent weeks by hiking interest rates and shedding billions in foreign reserves. The Peso fell sharply on opening Monday and closed down 6.2%, trading at 25.52 against the dollar, having lost close to 33% so far this year.

 The new losses come at an ominous moment: on Tuesday, holders of Lebac Peso-denominated bonds (“L”) issued by Argentina's Central Bank are maturing and allowed to demand settlement -- sparking a potential US$ 25 billion payout. However under the latest raft of measures financial institution are only allowed to hold 10% reserves in US dollars.

Macri last week began negotiations with the International Monetary Fund requesting an aid package to stem the currency run, of allegedly US$ 30bn. However the IMF spokesperson said on Monday that an informal meeting on the issue will be held next Friday, 18 May.

“This will be an informal meeting as part of our usual process of briefing the Board on negotiations for high access IMF programs,” Gerry Rice said in a statement.

It means a decision on Buenos Aires' request is unlikely to be made this week. The amount and terms of the loan will still have to be discussed. Likewise the IMF spokesperson said the Fund had not discussed any specific target for the exchange rate with Argentine authorities during negotiations in Washington.

“Argentina has a floating, market-determined exchange rate, and we fully support that,” the spokesman said. “The exchange rate should continue to be determined by market forces, with the central bank continuing to use all the policy tools that are at its disposal.”

Argentina is seeking a high access “stand by” financing arrangement that would provide funds above the normal loan amount. Finance minister Luis Caputo advanced that besides the IMF package, Argentina will receive extra support from the World Bank, Inter-American Development Bank and the region's Financial Corporation.

As US interest rates rise, investors in recent weeks have been fleeing developing countries and in the particular case of a vulnerable Argentina, driving up demand for US dollars, and driving the Peso down.
Monday's drop means the currency has devalued by 20% in the last six weeks, despite efforts by the central bank to prop up its value, burning through more than US$ 8 billion in reserves and hiking the benchmark interest rate to 40%. Argentine economists now believe the central bank will push interest rates to as high as 50% to protect the Peso.

After taking office in December 2015, the market-friendly Macri floated the Argentine peso, ending the strict controls in place under the government of Cristina Kirchner.

With a budget deficit of almost 10% of GDP inherited from the populist years of the Kirchner couple, Macri's government has struggled to halt inflation, which soared to 25% in 2017. Talks with the Washington-based lender come 17 years after the country last defaulted on its debt and 12 years after it cut ties with the IMF.

The IMF negotiations carry political risks for President Macri and his reelection plans for 2019. Many Argentines blame IMF-backed policies of the late 1990s for the country’s 2001-2002 economic meltdown. Some opposition politicians and activists have voiced concerns that the IMF deal being drawn up in Washington will require painful fiscal belt tightening.

According to pollsters CEOP, Macri has only 37% support among Argentines, the lowest ranking of his presidency. “We have to take into account that the collective memory feeds on the bad memories associated with the dreaded IMF,” said Roberto Bacman, CEOP's director.