In Argentina: ‘Emergency’

On Sunday evening, we noted that Argentina will spend the next couple of days trying to figure out how to restore confidence after President Mauricio Macri accidentally triggered a fresh leg lower for the peso with an epic communications kerfuffle last week.

The currency (which went into free fall earlier this year), dove more than 7% last Wednesday when Macri suggested IMF disbursements need to be accelerated. He should have known better. Obviously, 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 next day, the central bank hiked rates to a cartoonish 60% in an effort to get a handle on things as the peso careened through 40.

On Sunday, reports suggested Macri will shutter as many as a dozen ministries in an effort at fiscal retrenchment and on Monday, the market got the full scoop on what exactly they’re planning on doing down there to keep this from spiraling any further.

Long story short, Argentina is going to tax exporters as part of an effort to raise revenue on the way to balancing the budget by 2019 and achieving a surplus by 2020. Here are some quotes from Macri’s speech:

To cover the shortfall during this transition we are going to ask those who have the greatest ability to contribute to pay. It is a failure to not reach a balanced budget. This isn’t any other crisis. It has to be our last one. We must confront a fundamental problem: to not spend more than we have, to make efforts to balance the state’s accounts.

The market doesn’t seem convinced that the measures announced on Monday are going to cut it. Liquidity is thinner than usual due to Labor Day, but the peso traded through 38 after closing at 36.85 on Friday. You can see Monday’s trading on the far-right in the chart below which is the ticker for the real-time trades today during the U.S. holiday:



And here’s a simple one-month of USDARS for anyone who needs to be reminded of how acute this situation really is:



For his part, Capital Economics’ Edward Glossop isn’t impressed with Treasury Minister Nicholas Dujovne’s “package.”

“The package announced by Treasury Minister Nicholas Dujovne will speed up the pace of austerity, but the measures ultimately fell short of expectations,” Edward wrote in a report today, adding that the export tax “harkens back to more interventionist policymaking” and isn’t generally consistent with Macri’s promise to liberalize export and import markets. On that latter point, Macri had this to say:

We ask those who have more capacity to contribute, those who export, that they make a greater contribution. We know it’s a bad tax, but I ask you to understand that it’s an emergency.


IMF talks will start tomorrow and we’ll see if the fund is convinced by the country’s efforts to craft an appropriate strategy.

Specifics aside, the bottom line here is that Argentina is staring down a currency crisis, inflation, and interest rates that look like something you’d see in the fine print of a payday lender term sheet, and now they’re piling austerity on top of it.

You don’t have to be a doomsayer to know what comes next for the economy given that setup. (Hint: probably a deep recession)




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