One of the rules of modern life is that the higher up the chain you are or as Yes Prime Minster put it “the greasy pole” the less responsible you are for anything. A clear example of that is currently Christine Lagarde who is on here way to becoming the next President of the European Central Bank and found her competence being praised to the heavens in some quarters. Yet the largest ever IMF programme she left behind continues to fold like a deckchair. From the Argentina central bank or BCRA this morning via Google Translate.
Measures to protect exchange-rate stability and the saver
There are two immediate perspectives. The first is that we need to translate the announcement which suggests as a minimum a modicum of embarrassment. Next when central banks tell you that you are being protected it is time to think of the strap line of the film The Fly.
Be Afraid, Be Very Afraid
Let us look at the detail.
The measure establishes that exporters of goods and services must liquidate their foreign exchange earnings in the local market……Resident legal entities may purchase foreign currency without restrictions for the importation or payment of debts upon expiration, but they will need compliance from the Central Bank of the Argentine Republic to purchase foreign exchange for the formation of external assets, for the precancelation of debts, to turn abroad profits and dividends and make transfers abroad.
So some restrictions on businesses and here are the ones on the public.
Humans will not have any limitations to buy up to USD 10,000 per month and will need authorization to buy amounts greater than that amount. Transactions that exceed USD 1,000 must be made with a debit to an account in pesos, since they cannot be carried out in cash. Nor will it be allowed to transfer funds from accounts abroad of more than USD 10,000 per person per month. Except between accounts of the same owner: in this case there will be no limitations.
If you are not Argentinian then the noose is a fair bit tighter.
Non-resident human and legal persons may purchase up to USD 1,000 per month and may not transfer funds from dollar accounts abroad.
What about the debt?
We need a bit of reprogramming here after all it has been party-time for bondholders in most of the world. However as Reuters points out not in Argentina.
Standard & Poors announced on Thursday that it was slashing Argentina’s long-term credit rating another three notches into the deepest area of junk debt, saying the government’s plan to “unilaterally” extend maturities had triggered a brief default. The ratings agency said it would consider Argentina’s long-term foreign and local currency issue ratings as CCC- “vulnerable to nonpayment” – starting on Friday following the government’s Wednesday announcement that it wants to “re-profile” some $100 billion in debt.
That’s more than a bit awkward for those who bought the 100 year bond which was issued in 2017. It was also rather difficult for the IMF which seems to have found itself in quicksand.
By the time Treasury Minister Hernan Lacunza said on Wednesday that the government wanted to extend maturities of short-term debt, and would negotiate new time periods for loans to be paid back to the International Monetary Fund, a debt revamp was already widely expected.
We will have to see how the century ( now 98 year ) bond does but after being issued at 85 it traded at 38 last week. In a sign of the times even the benchmark bond which in theory pays back 100 in 2028 did this.
The January 2028 benchmark briefly dropped under 40 cents for the first time ever before edging up to trade at 40.3.
For perspective Austria also issued a century bond at a similar time and traded at 202 last week.
Back on August 12th I pointed out that it took 48.5 Pesos to buy a single US Dollar ahead of the official opening. Things went from bad to worse after the official opening with the currency falling into the mid-50s in a volatile market. On Friday it closed at 59.5 and that was after this.
The central bank has burnt through nearly $1 billion in reserves since Wednesday in an effort to prop up the peso. But the intervention did not have the desired impact and risk spreads blew out to levels not seen since 2005, while the local peso currency extended its year-to-date swoon to 36%. ( Reuters ).
If we stay with the issue of reserves I note that the BCRA itself tells us that as of last Wednesday it had US $57 billion left as opposed to this from my post on August 12th.
But staying with the central bank maybe it will be needing the US $66.4 billion of foreign exchange reserves.
I was right and the nuance here is shown by how little of the reserves were actually deployable in a crisis. We know 14% were used and at most 20% have now been used yet policy has been forced to change. That is a common theme of a foreign exchange crisis you only end up being able to use if I an generous half of your reserves before either you press the panic button or someone does it for you.
Here we see another departure from the world-wide trend as rather than falls we are seeing some eye-watering levels. Back on August 12th I noted an interest-rate of 63.71% whereas now it is 83.26%. This provides another perspective on the currency fall because you get quite decent return for these times if you can merely stay in the Peso for a week or two.
As for the domestic economy such an interest-rate must be doing a lot of damage because of the length of time this has lasted for as well as the number now.
As recently as June 7th last year the IMF announced this.
The Argentine authorities and IMF staff have reached an agreement on a 36-month Stand-By Arrangement (SBA) amounting to US$50 billion (equivalent to about SDR 35.379 billion or about 1,110 percent of Argentina’s quota in the IMF).
The amount has been raised since presumably because of the rate of access of funds. If you look at the IMF website it has already loaned just short of 33 billion SDRs. Meanwhile here is some gallows humour from back then.
The authorities have indicated that they intend to draw on the first tranche of the arrangement but subsequently treat the loan as precautionary.
As Christine Lagarde was cheerleading for this she did get one thing right.
I congratulate the Argentine authorities on reaching this agreement
They kept themselves in power with the help of IMF funds. That has not gone so well for the Argentine people not the shareholders of the IMF. There are similarities here with the debacle in Greece where of course Christine Lagarde was heavily involved in the “shock and awe” bailout that contributed to an economic depression. For example as 2018 opened the IMF forecast 2.5% economic growth for it and 2.8% this year as opposed to the reality of the numbers for the first quarter being 5.8% lower than a year before.
Yet as recently as April she was telling us this.
When the IMF completed its third review of Argentina’s economy in early April, managing director Christine Lagarde boasted that the government policies linked to the country’s record $56bn bailout from the fund were “bearing fruit”.
It is not an entirely isolated event as we look at other IMF programmes.
Pakistan Rupee -4.83% seems IMF’s (Lagarde’s) lesser-known second success story. Eurozone you are next up ( @Sunchartist )
But the official view has been given by Justin Trudeau of Canada who has described Christine Lagarde as a “great global leader.”