MercoPress. South Atlantic News Agency

Argentine bonds fall to record lows; long queues to withdraw dollar funds

The peso closed 0.88% stronger in official markets, but closed 0.79% weaker in the black market at 63.5 per dollar

Argentine 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 sharpening the risk of default.

The move on Sunday 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 pummeled in primary elections in August.

The country's peso, bonds and equities have since tumbled, forcing Macri to unveil plans to delay payments on around US$ 100 billion of debts as well as the currency controls restricting the purchase of dollars.

The peso closed 0.88% stronger in official markets, but closed 0.79% weaker in the black market at 63.5 per dollar, a divergence underscoring a loss of trust in the official price that was also helped by a market holiday in the United States.

“The dollar at this level is now strong enough,” Treasury Minister Hernan Lacunza told a news conference. “All these measures have the central objective of stability.”

The official peso has lost more than 23% since the Aug. 11 primary election turned the country's politics on its head, with incumbent Macri getting thrashed by his populist-leaning opponent Alberto Fernandez.

The currency is down more than a third so far this year, following a more than 50% drop last year. The central bank has burned through nearly US$ 1 billion in reserves since Wednesday, but has failed to stem the peso's slide.

Fernandez is the clear front-runner ahead of the Oct. 27 general election. His vice presidential running mate is former President Cristina Fernandez de Kirchner, a free-spending populist who applied trade and currency controls during her two terms from 2007-2015.

Her presence on the ticket has caused concern about the return of the interventionist left to power, although the more moderate Alberto Fernandez has said he alone will set policy.

Unusually long lines formed at banks in Buenos Aires on Monday, with depositors looking to withdraw dollars or pesos from their account, despite the government saying the financial system remains solid.

Having announced changes to Argentina's bond payment schedule last week, the application of currency controls was the second measure by Macri that flew in the face of his promise to use orthodox policies to straighten out the chronically troubled economy. Macri's new controls may be difficult to back out of later, analysts said.

“The problem with restrictive, emergency measures is that they are easier to apply than to retract,” said Buenos Aires-based financial analyst Christian Buteler in a tweet.

More peso weakness was expected ahead. “The game has changed for the foreign exchange market,” said Sabrina Corujo, an analyst with Buenos Aires brokerage Portfolio Personal, warning local stocks and bonds were set to weaken as well.

The central bank has been authorized to restrict purchases of dollars as it burns through its reserves to prop up the peso.

Argentina's benchmark international 2028 dollar bonds dropped more than 2 cents to a new low of 36.5 cents, according to Refinitiv data. Bonds maturing in 2038 recorded similar losses.