Argentina Devaluation Gambit Backfires in Worst Bond Rout

Argentina’s bond losses are deepening on concern the nation’s efforts to stem a plunge in foreign reserves will backfire in the absence of a reduction in government spending and higher interest rates.

The country’s dollar-denominated debt has tumbled 4 percent since Jan. 23, when the government devalued the peso by the most in 12 years. The selloff was the biggest among 58 developing nations tracked by JPMorgan Chase & Co.

Argentina’s move to scale back support for the peso may accelerate the fastest drop in foreign reserves in a decade if the country doesn’t double its 22 percent interest rate to ease demand for dollars and rein in government largess that’s stoking inflation, according to Bank of America Corp. President Cristina Fernandez de Kirchner eased a ban on purchases of foreign currency for savings instituted in July 2012 as she seeks to preserve dollars the country uses to pay debt.

“The market is saying these measures aren’t enough to stabilize reserves,” Marcos Buscaglia, an economist at Bank of America, said in a telephone interview from New York. “With the peso and interest rates at current levels, Argentines will continue seeking to dollarize their portfolios.”

Economy Ministry press official Jesica Rey declined to comment on the effects of the latest currency measures.

Peso Plunge

The peso has plunged 14 percent since Jan. 23, the most in the world, to 8 per dollar. The central bank, which controls the currency by buying and selling dollars in the spot market daily, has allowed it to weaken. The peso dropped 0.1 percent to 8.0076 per dollar today.

The government authorized yesterday foreign-currency purchases for people earning a monthly wage of at least 7,200 pesos ($900) with a limit of $2,000 a month.

For people who qualify, the tax agency known as Afip will allow them to buy as much as 20 percent of their average monthly salary in the past year.

The moves comes as Fernandez seeks to rebuild reserves that have fallen to a seven-year low of $28.9 billion. Argentina, which hasn’t borrowed in international bond markets since its $95 billion default in 2001, has used $178 billion of reserves to pay debt in the past decade.

“The peso devaluation is not a panacea for Argentina’s credit problem,” Moody’s Investors Service analysts Gabriel Torres and Ariane Ortiz Marrufo said in a report yesterday. “Although the devaluation may temporarily stem the pressure on foreign-currency reserves, it remains unclear what policies the government plans to pursue to address the underlying causes of capital flight, curb inflation and restore investor confidence.”

Badlar Rate

If the nearly 3 million people eligible to participate buy the maximum amount they are permitted, it could cost about $757 million of reserves per month and $9.1 billion per year at today’s exchange rate, according to a Credit Suisse Group AG report e-mailed today. The 12-month total is equivalent to 31.4 percent of gross international reserves.

Consumer prices soared 28.4 percent last month from a year ago, according to opposition lawmakers. The government boosted spending by 35 percent last year.

While the benchmark Badlar, or the rate banks pay on 30-day deposits of 1 million pesos, has climbed 1.38 percentage point in the past month to 22 percent, it would need to be closer to 40 percent to curb demand for dollars, according to Bank of America’s Buscaglia. He said the peso would also need to slide to around 9 per dollar.

‘Right Direction’

The central bank increased rates on notes to be auctioned today, offering a fixed rate of 25.89 percent on peso-denominated debt due in 98 days. That’s a 6 percentage-point increase from the rate offered last week.

Mauro Roca, a senior Latin America economist at Goldman Sachs Group Inc., said the government’s measures may help shore up reserves in the short term.

“These measures go in the right direction, both the acceleration in the pace of depreciation, the lifting of some restrictions and in particular the announced raise in interest rates,” Roca said in a telephone interview from New York. “Until you have a more structural approach that begins to attack the sources of macroeconomic imbalances, you may hope for the measures to have temporary effects at best.”

Economy Minister Axel Kicillof said Jan. 26 the peso has now reached an “acceptable level” at about 8 per dollar, a signal the central bank may continue to spend reserves to keep the rate in check. The bank yesterday sold as much as $100 million in the official currency market to defend the peso. The peso in the black market weakened 3.9 percent to 12.2 per dollar.

Dollar Peg

The government’s measures will deepen the decline in reserves, said Domingo Cavallo, who as economy minister in 1991 linked the peso to the dollar at one-to-one.

“The only thing they could do and would have a serious positive effect is to let the parallel dollar trade freely by making the black market legal,” Cavallo said in a telephone interview from Cordoba, Argentina. “This measure taken today is totally contradictory and will mean further loss of reserves.”

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