UPDATE 4-Argentina's peso slides on first day of new currency rules

Mon Jan 27, 2014 4:05pm EST

By Brad Haynes and Hugh Bronstein
    BUENOS AIRES, Jan 27 (Reuters) - Argentina set monthly
limits on dollar purchases on Monday, widening the gap between
the official and parallel exchange rates with an erratic
currency policy that has battered the peso and rattled global
financial markets.
    By limiting the purchases of U.S. dollars to a fifth of a
worker's monthly wages, the government revived doubts about its
commitment to a more open currency market under measures
announced on Friday.
    The concerns circling the peso, which posted its biggest
daily drop in a decade last week, added to fears of an
emerging-market selloff hitting currencies from the Turkish lira
to the Polish zloty.  
    Argentina's ostracism from international credit markets
since a 2002 debt default has limited the risks to the global
financial system. However, the plunging peso could hurt trade
with neighbors such as Brazil, whose currency closed at a
five-month low on Monday.
    Argentina's central bank stabilized the official peso by
pumping $100 million of its waning reserves into the interbank
market. But private traders wary of the government restrictions
weakened the peso nearly 4 percent in parallel trading.
    Due to excess demand for dollars, the peso trades on the
parallel black market at a discount of more than 40 percent to
the tightly controlled official exchange rate.
    "This is a relief, but it is not freedom. In practice, it
gives just a little escape," said economist Rodolfo Rossi in
Buenos Aires. "The pressure on the (black-market peso) is going
to continue."
    The local currency weakened on the black market to
12.15 pesos per U.S. dollar, while the official exchange rate
 was unchanged at 8 per dollar in thin trading. Last
week, the official peso slid nearly 20 percent as investors
scrambled to make sense of the new currency regime.
    
    The rapid depreciation has raised credit risks for Argentine
banks, insurers and companies with foreign debts, analysts from
Moody's Investors Service warned in a research note to
investors.
    "It remains unclear what policies the government plans to
pursue to address the underlying causes of capital flight, curb
inflation and restore investor confidence," the ratings agency
said in a statement. "Hence, Argentina's credit quality will
likely continue to face negative pressure."
    Moody's forecast a further 50 percent devaluation of the
peso by the end of the year, with price pressures from imports
pushing inflation upward to over 30 percent in 2014, from what
is already one of the world's highest inflation rates.
    Argentine officials were quick to dismiss such risks.
    "There is no reason that the exchange rate should distort
consumer prices," said Cabinet Chief Jorge Capitanich in a press
conference detailing the new regulations. "Lots of businesses
just raise their prices out of uncertainty."
    Shopkeepers over the weekend hurriedly replaced price tags
on imported items, from Cuban cigars to Asian televisions.
    The price surge followed the government's decision to lift
two-year-old restrictions on Argentines buying foreign currency,
allowing savers access to coveted U.S. dollars.
    The relaxation of controls came as the central bank's
foreign exchange reserves dipped under $30 billion - a level
suggesting its interventions in support of the anemic peso had
become unsustainable.  
    Allowing average wage-earners to access U.S. dollars should
pressure reserves as well, because the central bank is the
economy's main source of foreign exchange.
    Conditioned by previous financial crises to hold savings in
dollars, Argentines are obsessed with the greenback. The
currency controls regime ending on Monday forced many people to
go to the black market for dollars to protect against the weak
peso and fast-rising consumer prices. 
    
    INFLATION RISKS
    Consumer prices rose about 25 percent in 2013, according to
private analyst estimates. Official data, which many economists
dispute, clocks inflation at less than half that rate. A new
government consumer price index, ordered by the International
Monetary Fund, is expected to be unveiled next month. 
    While inflationary, President Cristina Fernandez's policies
were seen by most voters as the key to economic recovery from
the 2002 debacle. She easily won re-election in 2011, promising
deeper market interventions and more stimulus spending
unencumbered by inflation targeting.
    The effect of peso volatility on other countries' markets
should be limited by the fact that Argentina has been unable to
issue international bonds since its 2002 sovereign default.
    Since then, the government's unorthodox policies -
underscored by its 2012 seizure of energy company YPF 
- have kept all but the most risk-hungry investors at bay.
    The peso's recent slide added to risk aversion in global
financial markets, but foreign officials played down concerns.
    "The troubles in Argentina today find a European Union that
is much more solid and a euro that is much more solid and a
better ability to deal with this kind of concern," Italian Prime
Minister Enrico Letta told journalists on Monday.
    Consumer prices remain a big worry on the streets of
Argentina, but the issue has not sparked mass protests lately.
Tensions may rise in the coming weeks as labor unions demand
that pay increase in line with private inflation estimates.
    If Argentina suffers 30 percent inflation this year, as
private analysts expect, it would mark the fastest rate since
the 2002 crisis, when inflation reached 41 percent.
    Fernandez has mentioned neither consumer prices nor the
peso's plight in recent speeches, leaving her cabinet to
announce policy changes. The next presidential election is in
2015, with Fernandez constitutionally barred from a third term.
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Comments (4)
Shirokami wrote:
This is all the fault of the CFK goverment taking such a peaceful approach to the issue, they’ve should just struck down Clarín’s group long ago to prevent them destroying the country once again by using people’s needs.
Dollar black market? Clarín group is behind that. Apparently, the group gained a lot of power during the country’s last coup d’etat a couple of years ago by murdering powerful people who didn’t side with them and robbing their goods.
Right now there are two candidates for 2015 who are allied with Clarín, they go after the name PRO and +A.
May any of them get in the power, Argentina’s dark times will be back.
Gladly I can get the hell out of this place if that happens.

Jan 27, 2014 2:43pm EST  --  Report as abuse
Shirokami wrote:
This is all the fault of the CFK goverment taking such a peaceful approach to the issue, they’ve should just struck down Clarín’s group long ago to prevent them destroying the country once again by using people’s needs.
Dollar black market? Clarín group is behind that. Apparently, the group gained a lot of power during the country’s last coup d’etat a couple of years ago by murdering powerful people who didn’t side with them and robbing their goods.
Right now there are two candidates for 2015 who are allied with Clarín, they go after the name PRO and +A.
May any of them get in the power, Argentina’s dark times will be back.
Gladly I can get the hell out of this place if that happens.

Jan 27, 2014 2:43pm EST  --  Report as abuse
GermanHoldout wrote:
President Kirchner (by the way a beautiful women) should end this since 2002 ongoing HORROR-Default and solve the holdout problem NOW!

President Obama and the IMF should help and talk to President Kirchner to end Argentina’s Horror-Default.
Beyond the U.S. Hedge Funds there are still tens of thousands retail Holdouts worldwide, most of them from Italy and Germany.

Most of the Holdouts are “before default buyer”, who have bought their bonds at an average of 100% or even higher.
We, the holdouts, have been suffering for more than a decade!!!

Since 2002, Argentina has not paid a cent to the holdouts!

Reconciliation with the holdouts would improve Argentina’s ratings; initiate a firework of investments and also cheaper credits for argentine companies.

If Argentina and the holdouts made NOW A BINDING AGREEMENT with respect to the “time after” (end of the “Rights Upon Future Offers (RUFO) clause in December 2014), seizure risks and a technical Default would be immediately averted. Argentina could immediately return to the capital market and thus Argentina could refinance the payments to the holdouts, without using reserves.

Holdouts want a simple, clear, secure and an ACCEPTABLE solution.

Holdouts DO NOT want such exotic financial constructs, as they were the swap conditions in 2005 and 2010, with an exorbitant Haircut, with many new bonds, with only Discount bonds above $50000, GDP Warrants etc., and with maturities in the eternity. Such “shares like” financial constructs are inacceptable.

A swap from the defaulted old bonds to new bonds is unacceptable also for tax reasons. In Germany, for example, if you would accept a swap, then you would have to pay for the new bonds 30% extra tax…

Following simple conditions might be acceptable for the Holdouts on the basis of the old bonds.(Without swapping from old to new bonds, also because of tax reason)

- at the latest, on 01/01/2015 (end of RUFO clause) Argentina should repay in CASH 100% of the nominal value of the defaulted bonds, which became due before 2015.

- For the accrued interest between 2002-2015´Argentina should emit new bonds with 50% discount, and with a maturity of 5 years.

Jan 27, 2014 4:47pm EST  --  Report as abuse
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