Argentina seeks to reassure markets after peso crisis

The Argentine peso has lost 34 percent of its value against the US dollar since the start of the year, leaving it at a record low - a blow to Latin America's third-largest economy

Buenos Aires (AFP) – Argentina sought to inject some confidence back into its beleaguered currency and calm markets on Friday after the peso plunged more than 6.0 percent against the dollar, leaving it at a record low.

Economy Minister Nicolas Dujovne, speaking a day after the shock resignation of Argentina’s Central Bank governor, told reporters he understood the turbulence of the last few days concerned investors in Latin America’s third-largest economy.

He said President Mauricio Macri’s market friendly center-right government would aim to restore stability on the foreign exchange markets with some of the first tranche of a $50 billion (43 billion euro) loan negotiated with the International Monetary Fund.

“The liquidity that we will be pouring into the market in the coming weeks will contribute to significantly reduce those turbulences that we have seen in the foreign exchange market,” Dujovne said.

The minister said that once the IMF board rubber stamps the loan agreement on Wednesday, Argentina will get the first $15 billion of the loan, and will immediately put it to work defending the peso.

“$7.5 billion will go to strengthen the reserves of the Central Bank,” Dujovne said.

The government replaced Central Bank governor Federico Sturzenegger late Thursday after a recent hike in interest rates to 40 percent and billions in foreign reserves failed to revive the peso, which has lost 34 percent against the dollar since the start of the year.

The reshuffle was announced after Dujovne held a crisis meeting with Macri.

Sturzenegger’s replacement, finance minister Luis Caputo, will be tasked with laying out a path ahead amid investor complaints of an incoherent strategy.

Dujovne told reporters that his ministry is working with Caputo to strengthen the Central Bank by replacing bills “that have very high rates and short-term maturity with longer-term treasury bills, a process that will be gradually carried out.”

– External factors –

The minister pointed out that external factors this year, such as rising interest rates and oil prices, had contributed to weakening the Argentine economy.

“There are internal reasons, the fiscal and trade imbalances, and there is an international context, with an appreciating dollar across the world,” said former Central Bank chief Aldo Pignanelli.

Annual inflation at more than 20 percent and a balance of trade deficit still stifle economic reform efforts in an economy whose annual growth was 2.8 percent in 2017.

But growth slowed after a crisis of confidence in May that resulted in the loss of more than $10 billion of Central Bank reserves.

“Even with the agreement with the IMF, the foreign exchange supply remains weak,” wrote economist Amilcar Collante in the daily La Nacion.

“It must be put in the context of a global market with rising interest rates that hit us because we are among the most vulnerable countries.”

That led Argentina to ask for IMF assistance to help it face mounting inflation, budget deficits and a weakening currency — an unpopular move in a country in which many associate the financial institution with painful memories of past economic and social crises.

“We are working to normalize the exchange market and smooth the fluctuations we have seen in the last few days, always based on the currency floatation program,” said Dujovne.

“Even in this program it is possible to have a currency scheme with soft fluctuations, and we think that we are on the way to being able to put it into practice.”