Did Alberto Fernández try to trigger a run against the peso?

1st August 2019

By Ignacio Portes

Did Alberto Fernández try to trigger a run against the peso?

“Leliq” was yet again the buzzword this week in Argentine markets.

Opposition presidential candidate Alberto Fernández was accused of trying to trigger a run against the country’s currency due to a proposal to lower the interest rates paid by the Central Bank 7-day note, the cornerstone of its monetary policy.

</p> <p>With President Mauricio Macri placing a significant part of his re-election hopes on the stability of the peso, the Central Bank is playing alongside him through high interest rates and the threat of dollar sales. But Fernández came out strongly this week saying multiple times that his government would instead bet on a “high dollar” and “lower interest rates” to become more competitive.</p> <p>Currently, Leliq notes pay around 4.7 percent in interests per month, significantly above the country&#8217;s latest inflation figures.</p> <h2><strong>A late Sunday interview</strong></h2> <p>“[The government] thinks that containing the value of the dollar is enough. But they are barely managing to stop the Argentine economy from blowing up in the air. All Argentines know that the dollar is currently cheap and will eventually move up,” Fernández said during an <a href="">interview</a> with Kirchnerite website El Destape late on Sunday. “We need a high dollar to produce and export. How are we going to pay back our debts without exporting?”</p> <p>But what really sparked controversy was what came after, when speaking about how to finance a campaign promise to subsidize medications for pensioners. “We&#8217;ll do it by not paying the high interest rates of the Leliq notes. [The government] told me the subsidy for pensioners was a crazy idea because it will cost 19 billion pesos a year. That’s the same amount we spend on Leliq interest payments in a mere ten days”.</p> <p>Fernández&#8217;s “stop paying” wording triggered headlines in the home pages of La Nación and Clarín, the country’s two leading newspapers, saying that the presidential candidate was suggesting a default on the Leliqs. Although Fernández’s camp quickly came out to clarify this didn’t mean he was planning to default (instead, they say, the idea is to offer lower interest rates for their renewal), his words continued to get backlash.</p> <p>The second wave of criticism argued that Fernández&#8217;s words also seemed to imply that Central Bank assets would be used to finance the Treasury yet again, increasing inflationary pressure. &#8220;It seems like Alberto Fernández discovered the happiness-making machine: the money printer,&#8221; Buenos Aires province Economy Minister Hernán Lacunza said.</p> <h2>Market reaction</h2> <p>Before Monday’s market open, Fernández’s words were the talk of all analysts, and the peso dropped 1 percent in the first hour of trading. The Central Bank tried to contain the rise of the peso-dollar pair by selling many of the <a href="">futures contracts</a> it had bought earlier this year, but the trend continued throughout the week, aided by a selloff in emerging market currencies.</p> <p>Although the Central Bank&#8217;s intervention in futures markets was done at a profit (the contracts were bought earlier this year, when the peso-dollar pair was trading lower), it also meant that the monetary authority will now have less ammunition to fight further pressure against the peso if the selloff continues.</p> <p>However, Central Bank chief Guido Sandleris could still resort to selling some of the loaned dollars that the <a href="">IMF authorized him to use</a> if pressure against the peso remains.</p> <h2><strong>A deliberate strategy?</strong></h2> <p>As the markets processed the news, the controversy moved on to Twitter. On Monday morning, Fernández quoted the words from opposition economist Pablo Gerchunoff, who said Clarín blew the presidential candidate’s words out of proportion with its headline about a default on the Leliqs.</p> <p>But Gerchunoff quickly <a href="">replied</a> to Fernández: “I am saying two things. On the one hand, that you never said default. But on the other hand, that your wording was aimed at creating turmoil and a drop in salaries’ purchasing power.”</p> <blockquote class="twitter-tweet" data-width="550" data-dnt="true"> <p lang="es" dir="ltr">Yo digo dos cosas. Una, que no dijiste default; la otra , que el fraseo estuvo destinado a provocar turbulencias y una caída de los salarios reales. De hecho, te compare con Menem de 1989. También dije que no te va a salir. <a href=""></a></p> <p>&mdash; Pablo Gerchunoff (@pgerchunoff) <a href="">July 29, 2019</a></p></blockquote> <p><script async src="" charset="utf-8"></script></p> <p>Gerchunoff compared Fernández’s strategy to that of Peronist Carlos Menem in Argentina’s 1989 presidential race, when the country was undergoing a significantly harsher inflationary spiral.</p> <p>Menem’s populist promises, as well as words from his advisers speaking about plans for an “ultra-high” exchange rate, made the 1989 run against the Argentine currency even sharper than it already was, ending in a 3000 percent yearly inflation rate.</p> <p>Although the magnitudes can’t be compared, the economist said the schemes were similar. In both instances, the candidates are betting on a deterioration of the incumbent’s approval ratings in line with the declining value of the peso, as investors sell the country’s currency in anticipation of the policies they are suggesting. “But I don’t think it is going to work this time,” Gerchunoff quipped to conclude.</p> <h2><strong>The precedent of Cristina Kirchner</strong></h2> <p>In any case, Fernández didn’t back down from his words after the controversy.</p> <p>“We have the biggest harvest registered in Argentina but the proceeds are being withheld by exporters because everyone knows the dollar is undervalued. We can lie to people and tell them the economy is fine because the exchange rate is not moving but the truth is this,” Fernández insisted in a press conference on Tuesday.</p> <p>Him and some of his advisers continued with this line of argument throughout the week, with Former Finance Secretary Guillermo Nielsen accusing Macri late on Wednesday of practicing “exchange-rate populism.”</p> <p>While the case that the <a href="">Argentine peso was overvalued</a> was not a hard one to make, it is hard to overlook how a similar process also took place under the stewardship of Fernández’s running mate, Cristina Kirchner, during the 2011 and 2015 presidential campaigns.</p> <p>Through massive Central Bank dollar sales in 2011 and a strict limit on imports and the free exchange of currency in 2015, Cristina Kirchner’s government kept the official value of the peso artificially up in order to prop up consumption during the campaign year, leaving unpopular measures for the day after.</p> <p>During those days, it was also common to see Kirchnerite officials arguing that spikes in the exchange rate were explained by attempts to destabilize the government, and accusing farmers of withholding grain to damage the administration.</p> <p>&#8220;When Kirchnerites speak about artificially lowering the exchange rate with the election in mind, they are attacking their most sacred traditions,&#8221; Federico Moll, an economist from the Ecolatina consultancy agency (close to presidential hopeful Roberto Lavagna) said on Tuesday.</p> <blockquote class="twitter-tweet" data-width="550" data-dnt="true"> <p lang="es" dir="ltr">Cuando el kirchnerismo habla de &quot;atrasar el tipo de cambio artificialmente con fines electorales&quot; está atacando sus tradiciones más sagradas. <a href=""></a></p> <p>&mdash; Federico Moll (@mollfederico) <a href="">July 29, 2019</a></p></blockquote> <p><script async src="" charset="utf-8"></script></p> <h2><strong>The Fed Factor</strong></h2> <p>In this tense scenario for the peso, the government was expecting some relief coming from the US Federal Reserve on Wednesday, with Fed Chair Jerome Powell announcing a cut in interest rates for the first time in years, a decision that usually helps emerging markets as well as those struggling with debt, such as Argentina.</p> <p>But although the rate cut came, it was already priced in by the markets. In addition, Powell’s words after the announcement sounded much more hawkish than expected, as the Fed Chair said this was “not the beginning of a lengthy cutting cycle.”</p> <p>Powell’s words ended up causing a jump in the international value of the dollar, with the DXY index, which measures the US dollar against a basket of currencies, reaching its highest value since 2017.</p> <p>Other currencies around the globe, in contrast, depreciated immediately after Powell’s words, with the Euro losing almost 1 percent in a day and the Brazilian real down by 2 percent in the first hour since Powell&#8217;s press conference.</p> <p>The Fed will be key for Argentina looking forward, not only due to its effect on the global value of the dollar. Argentina will need to renew billions in maturities in the coming years, and the end of its easy money policy could hamper its attempts to roll them over, as more debtors around the globe chase less and more expensive credit.

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Ignacio Portes

Ignacio Portes is The Essential's General Editor. Former Economy editor at the Buenos Aires Herald, he has also written for publications such as Naked Capitalism, NSFWCorp and Revista Debate.