Argentine short-term interest rates soared Wednesday as the government stepped up efforts to defend the peso, deepening a cash crunch that\u2019s throttling an already fragile economy.<\/p>\n
The yield on local government Lecap notes due November 28 jumped to 87 percent from 74 percent on Tuesday and from 51 percent at the end of last week. That surge came as the Treasury sold dollars for a seventh straight session, burning through at least US$320 million, according to two people with direct knowledge of the matter.\u00a0<\/p>\n
As the crisis has mounted in recent weeks, President Javier Milei\u2019s government has been intervening on several fronts to stave off a devaluation, reinstating some foreign-exchange controls and selling dollars in the futures market. But the more the government has to do to prop up the peso, the more apparent it becomes that the current exchange rate is unsustainable.<\/p>\n
Milei wants to avoid a peso devaluation because it would fuel inflation just ahead of midterm elections on October 26, in which half of the seats in Congress are up for grabs. Milei needs to gain support in both chambers to advance his most challenging free-market economic reforms.<\/p>\n
\u201cThe market seems to be pricing in an FX regime change the day after the elections, which means that the closer we get to the date, the more pressure builds up on the exchange rate,\u201d said Santiago Resico, an economist at brokerage firm one618. \u201cThe fact that the Treasury is selling large amounts of dollars every day clearly doesn\u2019t help.\u201d<\/p>\n
The Central Bank, which burned through US$1.1 billion in reserves last month to prop up the currency, has been relying on Treasury cash to keep it stable lately. Those Treasury sales have totalled roughly US$1.8 billion over the past seven sessions. While the Central Bank can also step into the market, it can only do so if the peso breaches the trading band set as part of Argentina\u2019s deal with the International Monetary Fund.\u00a0<\/p>\n
The outlook for Argentina deteriorated after Milei suffered a heavy setback in a local vote in Buenos Aires Province in early September amid growing economic woes and as corruption scandals tarnish some of his closest allies. A pledge of aid from the United States helped halt the sell-off, but not reverse the slump. IMF Managing Director Kristalina Georgieva told Reuters on Wednesday she expects a decision soon on fresh assistance.<\/p>\n
For now, the most popular base case scenario is for the government to get between 34 percent and 37 percent of votes in the upcoming election, Barclays economist Ivan Stambulsky said in a report to investors last week. Under those circumstances, Milei is still expected to be able to keep governing by veto and decree.\u00a0<\/p>\n
But lawmakers in the lower house Chamber of Deputies approved legislation late Wednesday that would limit the use of presidential decrees. The bill, which now returns to the Senate for final approval following some modifications, could further crimp Milei\u2019s ability to push through reforms in the second half of his term.\u00a0<\/p>\n
Dollar sales and election jitters have fueled volatility in the bond market, said Paula Gandara, chief investment officer at Adcap Asset Management in Buenos Aires.\u00a0<\/p>\n
After posting a strong rally on Monday, notes maturing in 2035 fell over a cent the following day as the government continued to inject greenbacks into currency markets. The bonds were down across the curve for most of Wednesday, but rose in afternoon trading after Georgieva\u2019s remarks were published.<\/p>\n
\u201cMarkets want them to devalue the currency and allow it to be a free floating rate. No more bands, no more intervention,\u201d said David Austerweil, emerging-markets deputy portfolio manager at VanEck in New York. \u201cIt\u2019s going to happen one way or the other.\u201d<\/p>\n
by Nicolle Yapur, Bloomberg<\/p>\n
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