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Investors are betting that Argentina will sharply devalue its currency after midterm elections this weekend, despite the US’s $40bn rescue package for President Javier Milei.
Offshore bets on the Argentine peso imply a 12 per cent drop in the currency over the next three months, which would signal an end to Milei’s efforts to bring down inflation by propping up the currency — a cornerstone of his efforts to overhaul the country’s economy.
Sunday’s elections are viewed as make or break for Milei’s economic reform programme.
If the president’s La Libertad Avanza performs poorly — winning less than 35 per cent of the vote — analysts say it will be harder for him to convince opposition parties to support the tax and labour reforms he had promised in the second half of his term.
His currency policy has drained the country of many of its dollar reserves — despite extensive aid from the IMF as well as the US — raising fears that the serial defaulter will renege on its foreign debt once again.
Big foreign investors in Argentine bonds include Pimco and BlackRock.
BlackRock declined to comment and Pimco did not immediately respond to a request for a comment.
A depreciation would come in spite of the efforts of Scott Bessent, the US Treasury secretary who had masterminded Washington’s aid package, and the IMF, which has allotted more than a third of its outstanding loan portfolio to the Latin American country.
Luis Caputo, Argentina’s economy minister, said in a post on X on Wednesday that “there will be no change to the current scheme”.
But fund managers and analysts now expect the Argentine authorities to abandon the official trading band for the peso which links its value to the US dollar.
Graham Stock, senior sovereign strategist at RBC Global Asset Management, said he expected the currency regime to be jettisoned soon after the elections because it was unsustainable, arguing that inflation could instead be kept low through higher interest rates.
But he added that abandoning the currency policy before Sunday’s vote “would cement the impression in voters’ minds that the Milei plan isn’t working”.
Investor concern has grown this week after Argentina’s central bank and Bessent announced an agreement on a US credit line of up to $20bn to swap pesos for dollars, but did not provide details of its terms.
Markets are also waiting for details on Bessent’s separate promise of a $20bn package of support for Argentina’s debt payments that is to be led by private investors.
Argentina’s dollar bonds rallied from below 30 cents on the dollar before Milei’s 2023 election to more than 80 cents on some debts this year, making them one of the best emerging market trades of recent years.
But a bad loss for Milei’s party in a provincial poll in September stunned investors, sending the rally into reverse until the US Treasury secretary provided a financial lifeline. Debts maturing in 2029 and 2035 currently trade at 76 cents and 56 cents respectively.
“The central bank has been unable to attract sufficient private supply of US dollars to service and repay external debt,” said Thierry Larose of asset manager Vontobel.
Another big holder of Argentine debt has been Rob Citrone, who has known Bessent for years since both were influential macro hedge fund managers. Citrone’s hedge fund, Discovery Capital Management, declined to comment.
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