(Updates prices throughout.)
Aug. 22 (Bloomberg) -- First came the default, then a proposed debt swap aimed at circumventing a U.S. court ruling that could normalize Argentina’s relations with foreign investors. Now traders foresee a devaluation for the second time this year.
Argentina’s peso sank 1.5 percent this week to 8.4025 per dollar, the biggest drop since the government devalued the currency 15 percent in the week ended Jan. 24. In the black market, where Argentines go to avoid government limits on purchases of U.S. currency, the peso weakened to a record 13.95 per dollar yesterday.
Argentines are demanding more hard currency after the government proposed exchanging overseas debt into notes governed by local law. The plan means it’s less likely President Cristina Fernandez de Kirchner will negotiate a deal with holdout creditors that would lift the court order that has prevented the country from servicing its obligations, according to Bank of America Corp. Prolonging the default would then restrict Argentine borrowers’ access to international markets, putting pressure on policy makers to allow the peso to weaken as dollars become scarce.
“The default, and now this initiative, lower expectations that they could come to an agreement in January,” said Belen Olaiz, an economist at Abeceb.com, an economic research firm in Buenos Aires. “This whole situation generates expectations of a devaluation because you’ll have little foreign currency inflows.”
Argentina’s deputy economy minister, Emanuel Alvarez Agis, rejected the idea that the country is heading for another devaluation.
“We won’t apply that program,” Alvarez Agis said in an interview with Radio Del Plata yesterday. “The exchange rate has to be competitive enough to benefit regional economies, but not so high that it makes imports too expensive.”
Economy Ministry spokeswoman Jesica Rey didn’t respond to an e-mail and telephone call seeking comment about another possible devaluation this year.
Argentina’s central bank controls the peso rate by buying and selling dollars in the spot and futures markets almost daily, as well as limiting foreign exchange purchases. Yesterday the bank sold $10 million, according to preliminary data.
The peso is poised for further declines, Alan Ruskin, the global head of Deutsche Bank AG’s Group of 10 foreign exchange in New York, said in an interview on “Bloomberg Surveillance.”
“Guys like ourselves are saying the currency could still lose something like 25 percent,” Ruskin said. “It still is one of the big shorts on the currency side.”
Argentina’s benchmark dollar bonds due in 2033 have fallen 4.4 cents on the dollar since Fernandez unveiled the local swap plan on Aug. 19 to a two-month low of 78.35 cents as of 3:15 p.m. in Buenos Aires.
The move would allow the government to get around a ruling by U.S. District Judge Thomas Griesa that forbids the country from paying overseas investors until it transfers $1.5 billion to holders of debt from the country’s 2001 default that sued for better terms. Argentina defaulted for the second time in 13 years on July 30 when it was blocked from making a $539 million interest payment.
Griesa ordered Argentina not to go ahead with the plan to pay its foreign debts locally at an emergency hearing in Manhattan yesterday.
“It is illegal and cannot be carried out,” he said.
The plaintiffs in the case, led by hedge funds including Elliott Management Corp., had rejected offers in 2005 and 2010 to accept about 30 cents on the dollar for their investments.
Fernandez says she can’t improve those terms since it would violate a clause in the bonds that says she would have to make the same offer to investors who entered the exchange. The Rights Upon Future Offers clause expires Dec. 31.
Argentines are also on pace to buy a record amount of dollars through official channels this month for savings. There have been $201.5 million sold to Argentines at the official rate as of Aug. 21 through a system created in January as part of an easing of currency controls. That compares with $205.7 million for the month of July, and brings the year-to-date figure to $1.3 billion, according to tax agency data.
Registered workers and taxpayers can exchange up to 20 percent of their monthly salary into dollars through the plan. The purchases are at the official rate if deposited in an account for one year, or slapped with a 20 percent tax if the person takes the cash home with them.
The peso in the blue-chip swap market, used by investors who buy peso securities and sell their dollar equivalent abroad to skirt currency controls, weakened to 12.2657 today, the lowest since Feb. 4, according to a Bloomberg index of eight Argentine stocks and American depositary receipts.
The U.S. court ruling blocked Bank of New York Mellon Corp., the trustee for Argentina’s restructured debt, and other intermediaries from distributing Argentina’s bond payments. While the government hasn’t sold bonds overseas since the 2001 default, the court restrictions will make it harder for local governments and companies to raise funds, according to Ray Zucaro, a money manager at SW Asset Management LLC.
“This effectively locks out companies and provinces,” said Zucaro, whose firm owns Argentine provincial and corporate debt.
Dollar demand is contributing to a drop in the country’s international reserves, which it depends on to pay debt. The central bank’s funds have fallen $1.6 billion this year to $28.9 billion. Marcos Buscaglia, the chief Latin America economist at Bank of America, said reserves will drop to $25.4 billion by year-end.
“People have seen this before and they know there will be fewer and fewer dollars, while more pesos flow into the economy as the government increases spending,” Buscaglia said in an interview from Buenos Aires. “The natural reaction is to buy more dollars.”
Government spending surged 56.5 percent in June from a year earlier.
Peso forwards showing trader expectations for the currency in three months declined 2.2 percent this week to 9.3 pesos per dollar.
The perception that Fernandez is radicalizing her policies is also driving investors to the dollar on concern she’ll tighten existing currency controls, according to Olaiz.
Since defaulting, Fernandez has said she will use an anti- terrorism law to file a legal case against the local unit of Chicago-based RR Donnelley & Sons Co. for “upsetting economic and financial order” after the printing company filed for bankruptcy and wrote off its assets in Argentina.
RR Donnelley said in a statement on Aug. 16 distributed by Globe Newswire that its Argentine unit wasn’t solvent and faced rising labor costs, inflation, materials price increases, devaluation, inability to pay debts and other issues that led to its decision to file for bankruptcy.
After Fernandez’s speech, securities regulator Alejandro Vanoli later said Argentina would seek to reverse the bankruptcy using a law against economic crimes.
Fernandez is also attempting to change a supply law that would seek to regulate prices and profit margins of goods.
“There has been a turn back in the direction of more intervention” in the economy, Olaiz said.
--With assistance from Bob Van Voris in federal court in Manhattan.