Mauricio Macri faces a looming recession, rising consumer prices and a weakening peso and the IMF have just agreed to revise the nation’s bailout terms.
The IMF fund has agreed to revise the terms of its $50bn Argentina bailout package after the peso faced its biggest tumble in more than three years. The currency has weakened by about 25% against the dollar since the start of the month and more than 45% from the beginning of 2018. The peso fell a further 7.9% to a record low just below 34 against the dollar on Wednesday, despite renewed central bank intervention.
The fall was most likely due to the manner in which Mr Macri publicised the sense of urgency over a YouTube in a desperate plea to the IMF which markets took as the nation as being at a disadvantage and pushed the peso to the limits. In a message broadcast to Argentines on YouTube, Mr Macri said he had requested “all the resources that should be necessary” to guarantee the country’s 2019 financing programme after the fund disbursed the first tranche of $15bn in June.
“In consideration of the more adverse international market conditions, which had not been fully anticipated in the original programme with Argentina, the authorities will be working to revise the government’s economic plan with a focus on better insulating Argentina from the recent shifts in global financial markets, including through stronger monetary and fiscal policies and a deepening of efforts to support the most vulnerable in society,” Ms Lagarde said in a statement.
She added: “I have instructed IMF staff to work with the Argentine authorities to strengthen the Fund-supported arrangement and to re-examine the phasing of the financial program.”
“We have agreed with the IMF to speed up all the necessary resources to guarantee the fulfilment of next year’s financing programme,” said Mr Macri, who has resorted to heavy borrowing on international markets in foreign currency.
Mr Macri said the decision to accelerate the IMF payments was aimed at “eliminating any uncertainty that might have been caused by the worsening of the international context. Guaranteeing to finance for 2019 will enable us to strengthen confidence and resume the path of growth as soon as possible.”
Just as we were starting to see some interim stability, there is now even more focus on the emerging markets as a result of this sell-off in the Argentinan and Turkish Lira and the contagion has already spread to Lebanon, Columbia and South Africa, according to an Institute of Financial Research (IIF) report. “The EM selloff has been large for Argentina and Turkey, which raises the risk of contagion to the broader EM complex”¦ Concentration risk exists in Lebanon, Colombia and South Africa, and could be a channel for contagion to the broader EM complex,” the report said. Emerging market countries with the highest levels of foreign cash flows are most likely to be hit by contagion.
Currency action
The greenback, yen and CHF are going to where markets will look to de-risk positions in emerging markets as investors panic over higher funding costs among such nations as Argentina and Turkey with high external financing needs:
USD/ARS = 41.24730. Again, the euro is suffering and EUR/GBP’s positive Brexit headlines related drop has just extended even further below the key 21-D SMA. AUD/JPY, the market risk barometer is also plummeting whereby the Aussie acts as a proxy to such risk. The Chinese Yuan was also sent higher with USD/CNH now as high as 6.8641. USD/ZAR is higher to 14.8377. USD/TRY now on the way towards record highs again, current high for the day is at 6.8500.
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