World Economy

Argentina Seeks to Reassure Markets After Peso Crisis

The Argentine peso has lost 34% of its value against  the US dollar since the start of the year.
The Argentine peso has lost 34% of its value against  the US dollar since the start of the year.

Argentina sought to inject some confidence back into its beleaguered currency and calm markets on Friday after the peso plunged more than 6% against the US dollar, leaving it at a record low.

Economy Minister Nicolas Dujovne, speaking a day after Argentina replaced its Central Bank governor, told reporters he understood the turbulence of the last few days concerned investors in Latin America’s third-largest economy, AFP reported.

The peso weakened to 28.44 pesos to the dollar on Thursday, before recovering slightly in trading Friday.

Dujovne said President Mauricio Macri’s market-friendly, center-right government would aim to restore stability on the foreign exchange markets with some of the first tranche of a $50 billion loan negotiated with the International Monetary Fund.

“The liquidity that we will be pouring into the market in the coming weeks will contribute to significantly reduce those turbulences that we have seen in the foreign exchange market,” Dujovne said.

The minister said that once the IMF board rubberstamps the loan agreement on Wednesday, Argentina will get the first $15 billion of the loan, and will immediately put it to work defending the peso.

Half will go to finance the budget and “the other $7.5 billion will go to strengthen the reserves of the Central Bank,” Dujovne said.

  Reshuffle at Central Bank

Macri sought to stem the damage late Thursday by replacing Central Bank governor Federico Sturzenegger, who last month hiked interest rates to 40% and spent billions in foreign reserves to try to revive the peso, which has lost 34% against the dollar since the start of the year.

The reshuffle was announced after Dujovne held a crisis meeting with Macri.

Sturzenegger’s replacement, finance minister Luis Caputo, will be tasked with laying out a path ahead amid investor complaints of an incoherent strategy.

“Pressures to change part of the economic team had been intensifying, with a lot of that pressure focused on Sturzenegger. The sense in the presidential palace is that he had no credibility left,” said Eurasia Group’s Daniel Kerner.

“With the currency weakened … and inflationary dynamics worsening, it was hard to defend Sturzenegger.”

Dujovne told reporters that his ministry is working with Caputo to strengthen the Central Bank by replacing bills “that have very high rates and short-term maturity with longer-term treasury bills, a process that will be gradually carried out.”

   External Factors

The minister pointed out that external factors this year, such as rising interest rates and oil prices, had contributed to weakening the Argentine economy.

“There are internal reasons, the fiscal and trade imbalances, and there is an international context, with an appreciating dollar across the world,” said former Central Bank chief Aldo Pignanelli.

Annual inflation at more than 20% and a balance of trade deficit still stifle economic reform efforts in an economy whose annual growth was 2.8% in 2017.

But growth slowed after a crisis of confidence in May that resulted in the loss of more than $10 billion of Central Bank reserves.


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