President Javier Milei’s administration announced its intention to intervene in support of the national currency, as an escalating political scandal undermines investor confidence and poses a potential challenge for him in the upcoming legislative elections next month. The decision signifies a departure for a government that has previously advocated for free-market principles and permitted the peso to fluctuate within predetermined ranges. This move represents the most recent effort to curb a selloff that has unsettled its financial markets. In response to the withdrawal of investors from Argentine assets, the government has implemented various measures aimed at stabilizing the peso’s depreciation.
These measures include imposing liquidity restrictions on banks and offering interest rates as high as 76 percent to incentivize investors to renew maturing government debt. Nevertheless, none of that alleviated the downward pressure on the peso, which persisted in its decline on Tuesday, notwithstanding the government’s intervention plans. Bond prices experienced a decline, with notes maturing in 2035 decreasing by nearly two cents to 61 cents on the US dollar, marking the lowest level since April, as indicated by pricing data. The declines indicate a growing apprehension among investors regarding Milei’s capacity to sustain the momentum of reforms. This is partly attributable to allegations of a bribery scandal involving Milei’s sister, which is casting a shadow over his reputation just before a crucial local election on Sunday. This election is perceived by investors as a significant indicator for the upcoming national midterms on October 26.
Walter Stoeppelwerth, wrote in a report on Tuesday that it is “an example of the fragility of investor confidence. A significant portion of investors perceives this electoral period as a judgment on President Milei’s efficacy during the initial two years of his administration.” The recent developments signify a significant transformation for Milei, a libertarian economist who assumed office in December 2023 and garnered international attention for implementing substantial spending cuts and reforms designed to revitalize an economy that has been entrenched in crises for decades. This generated optimism throughout markets, resulting in an increase in bond and stock prices. However, the government has recently faced significant challenges in Congress and a public outcry regarding reports of potential corruption. While a judge prohibited journalists from disseminating damaging audio recordings on Monday, this development has adversely affected his reputation among voters as the upcoming elections approach next month. Local elections perceived as indicative of upcoming legislative contests have heightened apprehensions regarding a potential setback for the president. On Sunday, the candidate supported by the government secured a fourth-place finish in a local election held in the Corrientes Province.
Focus is now directed towards the impending electoral decision in Buenos Aires Province, which accounts for almost 40 percent of the national populace and has a historical tendency to support the opposition Peronist movement. Investors are interpreting this as a crucial indicator of future developments in October, when the entire Argentine electorate will cast their votes to renew a significant portion of Congress. On Tuesday, Secretary of Finance Pablo Quirno caught markets off guard by announcing on his X account that the Treasury will engage in the foreign-exchange market to enhance its “liquidity and normal functioning.” The action did not succeed in stopping the decline of the peso, which experienced a decrease of 1.6 percent on Tuesday. The decision exacerbates investors’ apprehensions regarding the nation’s capacity to accumulate international reserves prior to the impending payments on dollar-denominated bonds scheduled for January.
Argentina’s Treasury possesses US$1.7 billion in foreign-currency deposits available for intervention in the currency market, reflecting a decline of nearly US$300 million since August 11, as reported by the Central Bank. Nevertheless, it is anticipated that the government’s interventions will be short-lived, primarily focused on stabilizing financial markets in anticipation of the upcoming elections. “Today’s move is a new chapter in the strategy they’ve been implementing — increasing reserve requirements and intervening in futures to keep FX below the upper band,” stated Pedro Siaba Serrate, Head of Research & Strategy of PPI Argentina. “It inherently possesses a short-term aim leading up to the midterms.”