Argentina is nearing economic collapse

by Shaun Richards

Sometimes an economy can really stand out and in this instance I do not mean in a good way. Let me give you an example where this week I have looked at the Bank of England with its official interest-rate of 0.1% and the European Central Bank or ECB with its -0.5% one. This morning the Norges Bank of Norway has confirmed a 0% rate and the Swiss National Bank one of -0.75%. The latter looks ever more permanent lasting as it has for over 5 years now. But as a group they are the world in which we live except not everyone does.

The gradual decline in the monetary policy rate continues
Thursday, March 5, 2020. Today, the BCRA’s Board of Directors ordered a new reduction in the lower limit of the LELIQ interest rate of 2 points, from 40% to 38% in annual nominal terms.

We have looked at the problems of Argentina several times before but at this moment we simply note the interest-rate which is 38% above what we have come to consider the norm. They seem uncomfortable with the wider world knowing this as they have stopped producing English updates on the central bank website. One area where they have been ahead is the size of the interest-rate cuts they have made as they have been 12%  in 2020. But in spite of what are unthinkable moves elsewhere we are left withan interest-rate of 38% which would be described by Taylor Swift as a sign of.

Now I’m lyin’ on the cold hard ground
Oh, oh
Trouble, trouble, trouble
Oh, oh
Trouble, trouble, trouble

Actually it is even worse than that according to the BCRA.

With this reduction, the reference rate in effective terms stands at 45.4% per year. This keeps it in sufficient positive territory to promote saving in pesos and at the same time rebuild the credit situation of families and companies through the reactivation of credit.

So you reactivate credit with a 45% interest-rate do you?

I note the reference above to the Peso and see that the BCRA is also looking to mandate or centrally control savings rates in Pesos.

Following the policy to safeguard savings in domestic currency, the BCRA decided to raise, as from August,
the floor of interest rates that financial institutions must pay for natural persons’ time deposits in pesos for
up to $1 million, from 79% to 87% of the monetary policy rate. This way, retail depositors will have a
minimum return of 33.06% APR (38.57% EAR). In addition, the BCRA increased to 0.75 the coefficient to
determine the fixed interest rate on UVA deposits with an early-payment option, from 26.6% to 28.5%.

The Exchange Rate

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I noted this being reported which is not entirely reassuring.

Today Uruguay’s famous exchange houses priced the Argentine peso exchange at $0.

Actually that is not quite right as some exchanges simply do not want Pesos and therefore offer nothing for them which is revealing in itself as @JavierdeHaedo explains below.

The BROU slate is 0.14 – 0.60 and the arbitrage 0.314 pesos per Argentine (AR $ 135 in the blue).

This is really rather different to the official exchange rate of 75.65 to the US Dollar which itself has fallen by 33% over the past 12 months. So let me hand you over to the Buenos Aires Times.

“Right now you can’t buy or sell dollars,” Banco Galicia says in a notice that appears for retail clients. “We apologise. We are adapting to the new rules.”

The technical problems are another roadblock for Argentines who have been furiously converting their pesos into dollars amid speculation that the local currency is due for a crash. The government and Central Bank, seeking to hold onto hard currency, slapped a new 35 percent tax on dollar purchases, which already faced a separate 30 percent levy. They also limited the ability of people receiving government assistance to obtain greenbacks, while keeping a monthly limit of no more than US$200 in purchases.

Okay so we have a currency which has either fallen heavily ( the official version) or pretty much collapsed ( the unofficial market version) with the US Dollar the currency of choice.

Along the way we get a lesson in perspectives as we see the US Dollar described as a “hard currency”. We do not hear that often and it is an arrow in the eye for those saying it role as the world’s reserve currency is weakening.

Bonds

This is a section that can be described as you really couldn’t make it up.

Argentina’s new dollar bonds have plunged back into distressed territory just two weeks after the nation restructured almost US$65 billion in debt.

The securities fell for the fourth consecutive day Monday to an average 39 cents on the dollar. The US$16.1 billion in bonds maturing 2030 tumbled 3.1 cents to 40.3 cents, the lowest since they began trading on September 8 at about 50 cents.

Let me take you back to June 2017 when Reuters reported this.

Argentina sold $2.75 billion of a hotly demanded 100-year bond in U.S. dollars on Monday, just over a year after emerging from its latest default, according to the government.

The South American country received $9.75 billion in orders for the bond, as investors eyed a yield of 7.9 percent in an otherwise low yielding fixed income market where pension funds need to lock in long-term returns.

So investors worth US $7 billion were very lucky. Anyway yesterday the Buenos Aires Times had something which made me laugh, albeit in a gallows humour type of way.

Less than a month after Argentina’s US$65-billion debt restructuring, bond prices show growing concern the government may struggle to pay its obligations.

Comment

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We see a financial system which is in almost complete disarray. Interest-rates are very high both in absolute and relative terms with the exchange-rate either heading south quickly ( the official version) or more realistically having pretty much collapsed. If you were unwise enough to invest in an Argentine bond you have singed fingers.

Now let us switch to the real economy and see the impact.

Economic activity declined 16.2 percent in the second quarter compared to the first, reflecting the full impact of a nationwide Covid-19 lockdown implemented in late March. Economists had forecast a 16.6 percent quarterly decline.

From a year ago, economic activity dropped 19.1 percent in the quarter, the largest drop since at least 2004. Investment fell nearly 40 percent from a year earlier.

In the six-month comparison, activity fell 12.6 percent, compared to the same period in 2019, INDEC said. ( Buenos Aires Times)

That compares to Uruguay at -9% and Brazil at -9.7% for GDP on the second quarter.The latter provides food for thought for those who consider Brazil to be mismanaged. Yesterday brought more bad news.

Unemployment in Argentina rose a 16-year high to 13.1 percent in the second quarter of 2020, the INDEC national statistics bureau revealed Wednesday, pushed higher by economic turmoil and the coronavirus pandemic.

At this time we know that the international definition of unemployment has failed so the real position is likely to be much worse.

The situation was summed up back in the day by the Beatles.

You never give me your money
You only give me your funny paper
And in the middle of negotiations
You break down

Also they went onto the real economy.

Out of college, money spent
See no future, pay no rent
All the money’s gone, nowhere to go
Any jobber got the sack

Meanwhile supporters of Modern Monetary Theory or MMT have a problem because turning the monetary taps on like this has led to quite a disaster. Although I do have some sympathy with their new view that higher interest-rates can weaken a currency although by a different route in that they are rarely raised by enough to be material.

My sympathies go to the Argentines as I note that the Corona Virus outbreak also looks out of control as deaths peak.