Traders in Argentina are falling over themselves to snap up local government notes that are linked to the US dollar.
Officials sold almost US$1.7 billion in dollar-linked securities at an auction last week, accounting for about half its total fund raising. That comes on top of a US$1.8-billion sale earlier in October, and there may be more coming as part of local debt sales planned for November.
The surging demand for the securities has little to do with confidence in government policy and everything to do with the potential payout if – and for many, when – President Alberto Fernández is forced to devalue the currency. Despite the government’s insistence it won’t pursue a big one-time devaluation, investors are buying up the notes on consensus that the peso will need to weaken over coming months to fix economic imbalances.
The trend could cost the government a fortune if Argentina is forced to pick up the pace on peso devaluation. The notes are purchased in pesos, but they are tied to the US dollar and pay out in local currency at the exchange rate of the day when the securities mature.
“It could be extremely costly for the government if they do a one-off devaluation,” said Walter Stoeppelwerth, the chief investment officer at Portfolio Personal Inversiones in Buenos Aires. “But when you don’t have financing, you have to sell what you have.”
Stairway to heaven
The peso has already lost almost 25 percent against the dollar this year, but many investors are bracing for an outright crash. They say the government has kept the exchange rate artificially strong amid a shortage of dollars, with the currency’s value ranging from 78 pesos per dollar through official channels to over 170 pesos per dollar in sales on the parallel market, the widest exchange-rate gap in more than three decades.
Investors had moved away from dollar-linked notes in September on speculation the government would pursue parallel exchange rate regimes rather than devalue. Now, dollar futures contracts are pricing in an almost 80 percent devaluation over the next year, according to economist Marcos Buscaglia at Alberdi Partners in Buenos Aires. That means that if the peso were to tumble in line with market expectations, the government could be on the hook for an additional 267 billion pesos, or around US$1.9 billion when the bonds issued in October and November mature.
The government announced Monday it would seek to rollover the rest of its local debt obligations for the remainder of the year. Argentina is planning five more local peso debt sales over the course of November. Government officials typically announce the format of the sale – whether dollar-linked, inflation adjusted, or sold at a a discount – in the days before each auction. An Economy Ministry spokesman declined to comment.
To be sure, some have argued Argentina can sort its currency woes without an outright devaluation. Former economy minister Domingo Cavallo called for a less-regulated parallel rate to avoid the political and social consequences of a crash in the spot peso.
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Dollar-linked notes represent just one debt-related dilemma for Argentina. Mere months after it won US$38 billion of relief from overseas creditors, prices of its restructured bonds tumbled to distressed levels in the absence of what investors see as a credible economic plan.
The economy is expected to contract around 12 percent amid the coronavirus pandemic and inflation is expected to end the year at around 40%. The central bank’s net reserves have dwindled to about US$4 billion, according to Buenos Aires based consultancy Eco Go.
“We will see the real cost of this issuance in the event a one-off devaluation occurs,” said Fernando Marull, economist and director at FMyA, a consulting firm in Buenos Aires. “Even if it’s more expensive than selling fixed-rate bonds in pesos, they’re going to keep selling these bonds because it’s the asset everybody wants.”
by Scott Squires & Ignacio Olivera Doll, Bloomberg