Argentina central bank faces peso test ahead of October election

Argentina central bank faces peso test ahead of October election

Argentina’s central bank must toe a politically fraught line between supporting the peso without blasting through the bank’s reserves, as policymakers seek to salvage the currency ahead of October’s presidential election, analysts said on Friday, Trend reports citing Reuters.

The peso was in free-fall for most of this week after a shock primary election result on Sunday, when center-left presidential candidate Alberto Fernandez trounced center-right President Mauricio Macri.

The scale of Fernandez’s victory suggested he could win the upcoming ballot in the first round, but potentially be left as leader of a country that has very few foreign reserves left, raising the chances of a debt default.

On Friday afternoon, in a fresh headache for Argentine policymakers, Fitch downgraded Argentina’s sovereign debt rating from “B” to “CCC,” flagging an increased likelihood of a default.

“One strategic element for the government and the opposition is how the current reserves of the central bank are used,” consultancy Fundacion Mediterranea said in a note. “The opposition does not want the current administration to leave the central bank with very few reserves, and it is convenient for the government that the proposals announced by the opposition are reasonable for the markets.”

The peso’s collapse, which comes amid growing fears of a global recession, forced the central bank to sell dollars and oblige private banks to trim their dollar holdings in order to provide liquidity to the market. The new dollar holdings rule unleashed about $400 million, traders said, and helped stabilize the peso on Thursday and Friday.

Since Sunday’s vote, the central bank has auctioned a total of $503 million.

The central bank, which is nominally independent but has long been prone to executive interference, has about $66 billion in reserves, of which about $20 billion are free resources that can used to pay debt and stabilize the peso, according to an Argentine government official.

In its statement, Fitch said the central bank’s interventions had so far been modest, allowing for more aggressive action down the road if needed.

“Nevertheless, the recent currency run and risks of further pressure and volatility are detrimental for sovereign debt sustainability, which had previously been predicated on expectations of a real peso appreciation,” Fitch warned, while also highlighting risks to growth and inflation.

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