Long Lines And ‘That Fear Of Not Knowing’: Argentina Stares Into Abyss As Capital Controls Implemented

Predictably, depositors queued up around the corner in Buenos Aires on Monday, looking to withdraw their savings following the imposition of currency controls, announced on Sunday.

Although this is not new for many Argentines, the uncertainty surrounding the latest chapter in the country’s at times dubious financial history is disconcerting.

“The instability and the lack of information generate fear, and I think that many of us are acting because of that fear of not knowing what could happen”, one twentysomething who spoke to Reuters on Monday said. “I prefer to be cautious and not regret it later”, she explained, while waiting to pull money from a downtown bank.

Read more: Argentina Imposes Currency Controls As End Game Beckons

The country’s euro-denominated notes fell further on Monday, and as for the peso, futures showed less implied depreciation. Liquidity was obviously an issue given the US holiday. Ultimately, the measures announced Sunday may succeed in stabilizing the currency but that comes at a steep cost. This is a veritable catastrophe for the market-friendly Mauricio Macri, whose stunning landslide primary loss triggered the fast-moving crisis, just a year after the country was forced into the arms of the IMF – again.

“The market reaction in the spot and futures ARS market (Rofex) was positive [Monday] morning”, Credit Suisse remarked, adding that while “individuals could step up their demand for dollars (up to the new limit) the new regulation for banks that reduces the limit for their dollar position to 4% of their net worth should force some dollar selling in the near term”.

Once the initial shock wears off, the bank says this could be a marginally positive development for bondholders. “Even though sovereign bonds are likely to react negatively in the near term given how fast the situation has been deteriorating in the country, these measures aim to preserve international reserves and therefore might conceivably be credit positive for holders of foreign currency bonds”, the same piece reads.

While September peso futures had the currency trading at 56.7 per dollar versus 65 on Friday, Bloomberg notes that “the blue-chip exchange rate, which indicates where the peso would be without currency controls, was trading at about 66 per dollar”.

Credit Suisse expects the spread to widen materially.

“Last week this spread started to move and on Friday the official exchange rate closed at USDARS 59.5 while the BCS closed at 64―a 6.5% gap”, the bank wrote Monday, in the course of reminding folks that “the spread widened during the capital controls of 2011-15, by as much as 70-80%”.

(Credit Suisse)

“The bluechip parallel ARS will likely be a reference for some price-setters in Argentina, putting pressure on inflation”, BofA said.

Capital Economics called all of this “another worrying sign that history is repeating itself” and warned that “a prolonged period of capital controls would be very concerning”. Peso futures seem to be suggesting that the measures aren’t likely to be lifted anytime soon.

Vice-presidential candidate Miguel Angel Pichetto told La Cornisa on Monday that Macri would lift the currency controls “the day after he wins the elections”. The measures were necessary to stanch the bleeding in the peso and safeguard reserves, he added.

One 60-year-old retiree who spoke to Reuters seemingly learned her lesson long ago. “I have no dollars deposited. I have savings in dollars that are not in the bank”, she said. “I began to get a whiff of this situation two years ago”.

BNP was out with yet another in-depth assessment of dollarization on Monday. “Gross demand for USD notes amounted to USD2.2bn during July, distributed among 1.58mn clients”, the bank wrote, commenting on a lack of limitations on companies and savers who want to withdraw dollars in cash from their USD accounts. “Orders for up to USD10,000 per month (per client) accounted for 69% of the total demand [and] the average value requested by each client was USD1,38mn in July”, the bank went on to say, suggesting folks were still dollarizing their portfolios.

(BNP)

On Monday afternoon, Finance Secretary Santiago Bausili told an event in Buenos Aires that the country could reconsider the decision, announced last week, to delay payments on short-term notes. It all depends on “if the financial system or the main variables stabilize”, Bausili said, adding that “goal number 1 is to maintain exchange and financial stability and protect savers”.

As far as Macri goes, Bloomberg’s Sebastian Boyd was out with a great assessment. We’ll leave you with a short excerpt:

But Macri’s experiment with orthodox economics has ended in failure and surrender amid an escalating financial crisis. Ironically, the collapse of `Macrinomics’ has been triggered by the realization that he wasn’t going to win in October, but his opponents will take is as evidence that orthodox economics was never going to work anyway. Many voters will remember Macri’s administration of U.S.-trained technocrats, not for what they hoped to achieve, but for what they did achieve — higher unemployment, poverty, currency collapse and a likely default.