On Wednesday, the Argentine peso careened more than 7% lower in a harrowing session that proved, beyond a shadow of a doubt, that the best way to shore up confidence during a currency crisis is not to let the market know you’re begging the IMF to accelerate bailout payments.
“The market did not react well to President Macri’s announcement given, among other things, the lack of specifics and also because it was seen a somewhat desperate measure”, Goldman’s Alberto Ramos writes, in a note out this morning.
By most accounts, Argentina is doing the “right” things in its efforts to turn things around, but given a backdrop defined by ongoing emerging market jitters tied to the Fed’s hiking cycle, stabilizing the situation is proving to be quite difficult. Illiquidity isn’t helping and really, the peso’s woes are a reflection of what happens when sour sentiment starts snowballing on itself.
Earlier this month, as the bottom fell out for the Turkish lira, BCRA hiked another 500bps, taking the 7-day rate to 45%. They also moved to wind down their short-term bill program in what was billed (get it?) as an attempt to rein in inflation and reduce FX volatility.
As a reminder, in the week through May 4, the central bank hiked a Tony Montana-ish 1275bps in an (ultimately futile) attempt to get a handle on things. Paradoxically, the IMF program ended up being a negative for the currency as it effectively meant less intervention.
Well, on Thursday, Argentina hiked rates to 60%. And no, that’s not a typo. The peso hit a truly laughable 40, although honestly, I’m not sure you can divine anything from this chart given that there is obviously no liquidity here:
Clearly, this is a disaster. Rates at 60% are going to plunge Argentina into a recession. On top of that, one wonders what comes next in the event this doesn’t arrest the slide in the currency.
LOL. Argentina: "The policy rate will now be 15,000%"
— Walter White (@heisenbergrpt) August 30, 2018
For his part, the above-mentioned Alberto Ramos thinks it’s time for some fiscal shock therapy. Here are some other excerpts from his note:
While frontloading of the IMF disbursements is a step in the right direction, in our view it is not altogether clear that this will be enough to stabilize markets. The gradual fiscal adjustment strategy seems to have outlived its usefulness. In our assessment, rather than a gradual approach the authorities should now consider a fiscal adjustment shock therapy (rapid reduction of the fiscal funding needs) as the antidote for the market’s lack of confidence in the gradualist approach. However, given how impaired market sentiment is, particularly among locals, at this stage, there are no costless options.Therefore, rather than the programmed reduction of the primary fiscal deficit to 1.3% of GDP in 2019, we believe that it would be helpful to redouble the effort and commit to a zero primary deficit already in 2019 (if not a small surplus) in order to further reduce the funding needs and turn around expectations.That would require deeper cuts in politically sensitive spending items.
Good luck with that.
Meanwhile, as Tracy quips, “if you liked 100-year Argentine bonds at 7%, you’ll love them at 10%!”