The yield on Argentina’s century bond widened on Thursday to 10.15% after the country’s peso plunged to roughly ARS39.5 per dollar, forcing the central bank to hike interest rates by 15%.
That drop in the peso represented about 15% during the early hours of New York trading, on top of Wednesday’s 7% drop.
“Everything is in the red,” one DCM banker in New York said.
Argentina’s central bank reacted immediately, lifting the benchmark interest rate to 60% to shore up the currency. The bank also committed to not lower the policy rate at least until December.
“The move has provided some support, but our sense is that maintaining investor confidence for a sustained period will require more input from government,” said Edward Glossop, Latin America economist at Capital Economics. “Particularly details on how [Argentina] plans to meet the IMF’s fiscal targets.”
Around the region, Chilean, Brazilian and Mexican sovereign bonds traded wider across their curves, feeling the effects of a weaker peso. “There will be some contagion, which is not great for the region, but these economies have isolated concerns as well, so you cannot attribute it solely to the weaker Argentine peso,” a bond buyer in New York said.
Neighboring currencies, such as the Mexican peso, Brazilian real and Chilean peso were all down throughout Thursday morning’s trading.
One investor said Ecuador was particularly sensitive to fallout from Argentina’s currency woes.
“Ecuador is not doing well at all because it is the next natural sovereign after Argentina that will have financing difficulties and their bonds are quite liquid,” she said.
The DCM banker played down concerns of contagion, but added that investors were bound to “take money off the table.”
The latest plunge in the peso came after President Mauricio Macri asked the IMF on Wednesday to speed up disbursements of a $50bn credit agreement Argentina signed with the multilateral in June to shore up the peso.
A second investor who spoke to LatinFinance on Thursday morning welcomed the decision to hike rates.
“You need to make it obscenely expensive to short this currency,” an investor in London said. “Raising rates and restricting fiscal spending is the correct response.”
Control over domestic liquidity is key to reinforce the anti-inflationary bias, according to Alberto Ramos, an economist with Goldman Sachs.
“The fight to anchor the currency and support market sentiment is a battle the central bank cannot win alone,” Ramos said in an emailed note on Thursday. “A clear and decisive fiscal response is also needed, for at the root of the current market distress is chiefly the large fiscal financing requirements and the market’s uneasiness with the country’s ability to fund them under normal market conditions.”
Argentina’s agreement with the IMF helps it avoid the debt capital markets, but it must maintain strict fiscal policy requirements.
To satisfy the IMF, Argentina’s must hit a fiscal target of 2.7% of GDP this year and 1.3% in 2019 before reaching a fiscal balance in 2020.
“While this should be viewed as positive, it demonstrates how fragile Argentina remains, just two months after its IMF agreement,” Exotix Research said.