Monday, August 12, 2019

Letter from Argentina

My friend Alejandro Rodriguez, at Universidad del CEMA, sends the following report:
Oops we did it again. Macri (the current president) lost in the open primary elections (all parties present their candidates in an open  general election so it is like a very big poll). The formula Alberto Fernandez- Cristina Fernandez (the ex president who ruled between 2007 and 2015 is the candidate to vice president) is expected to win in October. 
The peso is falling like a rock (down 25%) and interest rates are up by 1000 bps. The Central Bank has to 1.3 trillion ARS (22 billion USD at the current FX) in short term debt (all expires in the next 5 days). Today it has to roll 250 billion ARS and in the first round it only managed to roll 14 billion ARS. Argentine. 
Argentina stocks in NY are down 50% to 60% and President Macri will adress the nation at 16:30 local time. The Central Bank has a lot of internatinal reserves (over 60 billion USD) but nearly 1/4 are the counterpart of dollar deposits at commercial banks. The remaining reserves are mostly borrowed from the IMF and China... We can surely screw over the IMF but I don't think that messing up with the Chinese is a smart move... so nobody knows how much fire power the Central Bank has to hold the FX. I don't know what can be done to stop a major currency crisis which might in turn into a debt crisis (if we are not in one already).


  1. Why not let the exchange rate do what it pleases, and save the energy to worry about real things? After all, how many decades has this been going on for? Two, three?

    1. Some debts in Argentina are denominated in dollars. The depreciation of their currency would be ruinous.

    2. Because whatever the usd/ars goes up, it will go almost automatically to prices. Hence the central bank trying to stop the raise

    3. Current real debt might be ruinous, but not its denomination. E.g., maintain the current nominal exchange rate by a drop in nominal wages.

  2. I think the Fed's decisions are being driven by the international Market. With the German and Japanese long bonds carrying sub zero coupons, the temptation for investors to go into the carry trade is irresistible. The currency flows and movements of bonds must be extraordinary.

    If I were Powell I would be pointing at that. Of course it would only strengthen Trump's hand in pushing for lower rates. I wonder if there is some expedient that could be implemented to control the carry trade without crashing US bond markets such as a withholding tax.

  3. Oh sorry, Jon. that comment was really for the previous post on the Fed.

  4. It seems default is inevitable.

  5. Macri inherited an awful situation. The Kirchners' economic policies were disastrous. The markets' responses to his loss in what we Americans would consider a primary election signals how much worse things will become again if the Fernandez-Kirchner ticket wins back the presidency.


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