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Argentine Peso and markets end the week positively; “sufficient financing in 2019” says central bank

Saturday, September 8th 2018 - 09:11 UTC
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Central bank governor Luis Caputo affirmed that government financing for 2019 was more than sufficient Central bank governor Luis Caputo affirmed that government financing for 2019 was more than sufficient

Argentina’s central bank governor, Luis Caputo, said on Friday that government financing for 2019 was more than sufficient and that high yields on the country’s sovereign debt were “exaggerated,” prompting the peso currency to reverse earlier

 The peso opened down 0.93% at 37.80 per U.S. dollar, following two straight days of gains as authorities’ negotiated changes to a US$ 50 billion loan program with the International Monetary Fund, but turned positive after Caputo’s comments to trade up 0.94% at 37.10 and ended Friday at 37.81 recovering 5% in the first week of September.

The peso plunged 16% last week after President Mauricio Macri announced that the country would seek early disbursements from the stand-by deal to assuage concerns about sustainability of its debt.

“There is no doubt that there is an over-exaggeration. This is going to correct itself quicker than markets believe,” Caputo said at a conference of finance executives. “Financing will be more than sufficient for 2019,” he said, but did not give details about the sources of financing.

Markets have shown optimism in Argentina after the IMF said on Thursday it aimed to wrap up ongoing talks in Washington to strengthen the Argentina deal as soon as possible. Macri earlier this week announced austerity measures to balance the budget next year.

That comes as a risk to Macri in a country where many blame IMF-imposed austerity for exacerbating a 2001-02 economic crisis that plunged millions into poverty. Analysts expect the economy to contract 1.9% this year, with inflation topping 40%.

Last month, the central bank hiked its interest rate to 60% to try to halt the run on the peso and calm inflation, a move that could hurt economic activity. High rates are a factor behind what construction executives expect to be massive layoffs in the coming months.

Caputo described the current rate as a “crisis rate” and said it was “not viable” in the medium or long term.

Argentine bonds also rose after his comments, with over-the-counter bonds up 0.6% on average and country risk- a measure of how much higher Argentine bond yields are compared to less risky alternatives - down 18 basis points at 710 basis points.

Economist Mauro Roca said he expected country risk would continue to decline and “the valuation of risks was and is exaggerated.”

Likewise, although the Buenos Aires stock index Merval was down 0.4% on Friday, at the end of the week it was up 1.7%.

Categories: Economy, Politics, Argentina.

Top Comments

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  • Enrique Massot

    “Markets have shown optimism in Argentina...”

    So good to read some positive interpretations of the country's current economic reality. Unfortunately, one swallow does not make a summer, and bad news continue to rain instead of Macri's much-touted but unfulfilled “rain of investments.”

    While there are still attempts to blame the government that ceased to exist almost three years ago, the fact is, we are witnessing the results of free-market policies applied without regard for its effects on the population.

    International media coverage, however, has been more than friendly as investors welcomed the possibility of investing at Argentina's high interest rates, make a quick back and then take off thanks to Macri's absolute relaxation of capital flight controls.

    On June 29, Forbes was still reporting Argentina's inflation targets as “17% for 2019, 13% for 2020 and 9% for 2021.”

    Now, Moody's believes economic activity in 2018 will fall by 3 per cent while the Argentine government's estimates the contraction at 2.4 per cent.

    “...the central bank hiked its interest rate to 60%...a move that could hurt economic activity,” notes the MP story above.

    Could hurt?

    In Argentina, a reference rate of 60 per cent translates into rates of 100 per cent and more for any entrepreneur cashing a supplier's cheque--rendering any economic activity impossible.

    Which for any serious economic analyst would raise numerous flags regarding the sustainability of the Macrist model.

    Sep 08th, 2018 - 02:19 pm -1
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