Just over a year ago on the 3rd of May 2018 I gave some advice on here to Argentina about its ongoing economic and currency crisis.
The problem is twofold. Firstly you can end up chasing your own tail like a dog. What I mean by this is that markets can expect more interest-rate rises each time the currency falls and usually that is exactly what it does next. Why is this? Well if anticipating a 27,25%% return on your money is not doing the job is 30.25% going to do it? Unlikely in my view as we note that the currency has fallen 5% this week.
Events accelerated later that day as the Argentine central bank the BCRA did this.
This article came to late for the BCRA it would appear as just before 5 pm UK time they raised interest-rates to 33.25%. I would place a link bit nobody seems to have told the English version of their website yet.
That backed up my point and that theme just carried on as this from Reuters on April Fools Day highlights.
Argentina has established an interest rate floor of 62.5 percent, the central bank said in a statement on Monday, as the country looks to rein in stubborn inflation and ease concerns about a run on the local peso currency.
As of yesterday the interest-rate was 71.44% which must feel somewhat bizarre to ordinary Argentine’s in a world of low and indeed negative interest-rates. Another sign of trouble is the gap to deposit rates which were 51.94% yesterday.
The Argentine Peso
Let me hand you over to the Buenos Aires Times.
Argentina’s peso, the worst-performing emerging-market currency this year, could see more volatility as investors learn how to connect the latest pieces of the country’s complex political puzzle……..So far this year, the peso has slumped by about 16 percent against the US dollar and equity assets have been shaky.
As you can see the situation has continued to deteriorate. In fact there has been something of a double-whammy as interest-rates have soared above 70% and the Peso has gone from 21.52 versus the US Dollar when I wrote my post to 45.2 as I type this. Indeed things are so bad that even Bitcoin supporters are trolling the situation.
If an Argentinian had bought Bitcoin at the highest point of the “biggest bubble in history”, in 2017, he would have been better off than leaving his money in his Argentinian bank account. So tell me again how Bitcoin is a horrible store of value. ( @josusanmartin )
Of course you can look at that the other way which is that he has gone to the outer limits of cherry-picking by choosing the Argentine Peso.
The currency fall was always going to led to inflation and the situation is such that as the Buenos Aires Times reports the government has resorted to direct controls.
The government agreed with leading supermarkets that the price of 60 essential products of the food basket will be frozen for at least six months.
The list includes 16 manufacturing companies of rice, sugar, milk, yoghurt, flour, tea and coffee, among others, whose products will be available at 2,500 outlets as from April 22.
At the same time, the Macri administration agreed with slaughterhouses to offer beef cuts at 149 pesos per kilo (120,000 kilos weekly), which will be available at the Central Market and at other retail outlets.
I am pleased that they are focusing on such an important area that is regarded by central bankers as non-core. I fear however that this is a sign that some people are in real trouble.
However the statement below is something of a hostage to fortune.
“We are entering into a new phase. Currency instability is now something of the past, which guarantees a lower inflation rate,” Economy Minister Nicolás Dujovne said at a press conference
Moving to the present situation there is this.
The government plan was announced in the same week as March’s inflation data of 4.7 percent was revealed, sending alarm-bells ringing among Macri administration officials. Prices have now increased 11.8 percent increase in the first quarter of the year and 54.7 percent in the last 12 months.
As you can see we now have a triple-play of economic woe with high interest-rates, a devalued currency and high inflation
Let us advance on the economic situation with trepidation and an apology to Manchester City for appropriating their current punchline. A chill is in the air from this.
Consumption in supermarkets also dropped 8.7 percent in March compared to the same period last year, accumulating a 7.3 percent decline so far this year, according to a report by the consultancy Scentia. ( Buenos Aires Times)
The OECD has updated its economic forecasts this morning and in spite of its efforts to cheer lead for the present IMF programme it has downgraded economic growth from the -1.5% of March to -1.8% now. This is something we have become familiar with in IMF programmes as we note that last summer the government was forecasting 1.5% growth for this year. This comes on top of the 2.5% contraction in 2018. So recession and depression.
Consequently the OECD finds itself reporting that the unemployment rate has risen by 2% since 2017 to 9.1%.
100 Year Bond
Here is Bloomberg from yesterday.
Argentine bond spreads against US Treasuries rose 19 basis points to 962, double the average for Latin America……..The country’s five-year credit default swaps also rose 1.3 percent to 1,274 basis points.
There was a bit of a rally today but in general the bonds of Argentina trade about 9.3% over their US equivalents. However bonds in Peso’s yield more highly with the 9-year being at 23%.
The 100 year bond is trading at 68.5, but I suppose you have 98 or so years left to get back to 100.
Those who have followed the recent history of the International Monetary Fund will find the statement below awfully familiar.
The authorities’ policies that underly the Fund-supported arrangement are bearing fruit. The high fiscal and current account deficits – two major vulnerabilities that led to the financial crisis last year – are falling. Economic activity contracted in 2018 but there are signs that the recession has bottomed out, and a gradual recovery is expected to take hold in the coming quarters. ( Managing Director Christine Lagarde)
There are similarities with her “shock and awe” description for Greece as I note the OECD 2.1% economic growth forecast for next year is the same number as was forecast for it at this stage. I also note that the “exports fairy” is expected to make an appearance although so far the trade adjustment in the first quarter of 2019 has involved them falling slightly and imports falling by around 27%. Again familiar and as Japan showed us yesterday the import plunge will flatter the next set of GDP numbers. There is a different situation in that the currency has devalued although Argentina rather than defaulting on some of its debt is finding the foreign currency part of it ever more expensive whilst it is in the teeth of a fiscal contraction.
Even the Financial Times is questioning the IMF and Christine Lagarde.
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”.
The IMF has strongly supported the present government.
Even former senior fund officials are concerned by the organisation’s exposure to Argentina, and the potential fallout should its biggest ever programme implode.
Of course we do not know who will win the election in October but we face a situation of economic crisis which follows other crises in Argentina. Also most of us unlike the FT live in a world where Lagarde lost her credibility years ago.
In truth this was always going to be a really difficult gig along the lines of when Neil Young decided to stop playing his hits and just play his new (unpopular) album. As the comment below suggests what is really needed is long-term reform which is exactly what the IMF has not provided in Greece.
“Argentina has signed 22 agreements with the IMF, most of which ended with bitterness on both sides.”
Clearly neither side has heard the phrase ‘once bitten, twice shy’! ( Donald in the FT)