In Argentina, the gap between the dollar price on the official foreign exchange market – very controlled and restricted – and in parallel has grown to 100% in recent weeks. The bill with the highest denomination, thousand pesos, is exchanged for $5.2 in the first and $2.6 in the second. Amid this sharp informal market devaluation of the currency, which is being read as a sign of danger by a crisis-stricken populace, the government has unexpectedly announced a 1,000 million foreign debt buyback. The aim of the measure is to stabilize the foreign exchange market and improve the country’s economic image in 2023, when Argentina is called to vote for the next president.
Economy Minister Sergio Massa announced this Wednesday in a recorded message that it was decided to “authorize or delegate the Central Bank of Argentina (BCRA) to conduct this repurchase process on behalf of the Ministry of Finance in order to further improve Argentina’s external debt profile and further reduce sovereign risk”.
Since we took over @Economia_Ar We are setting clear targets to normalize our micro and macro economies and improve our debt profile.
That’s why today we are announcing a buyback of more than $1,000 million in Argentina’s foreign debt. pic.twitter.com/2TrYgUfFV4— Sergio Massa (@SergioMassa) January 18, 2023
The measure will be implemented in global bonds with a maturity of 2029 (GD29) and 2030 (GD30). There are two deeds issued to private creditors in September 2020 after the debt restructuring. They are relevant in the market because they are most commonly used for stock transactions that allow companies to receive dollars through what is known as the MEP dollar or “Cash with Settlement” (CCL). The government is attempting to both contain prices and cap the peso’s devaluation in the informal market.
The $1 trillion is a small percentage of Argentina’s $135 trillion debt in the hands of the private sector, but it’s a signal welcomed by investors.
Argentine dollar-denominated government bonds rose 11% in New York and Argentina’s sovereign risk fell to its lowest level since May last year, hitting 1,800 points. Nevertheless, this index is well above that of other Latin American economies, such as Brazil’s 259 or Peru’s 165.
Technically, sovereign risk is the difference in the interest a country has to pay on its debt — the mark-up fee — compared to the interest paid on Federal Reserve bonds. The higher it is, the greater the risk that investors perceive of lending money to a state. Argentina’s history – with nine defaults, including the largest in history in 2001 – explains the distrust. If it improves its image and manages to lower this index, it would be easier to go back to the capital market.
Mauricio Macri’s government received the largest loan granted by the International Monetary Fund in 2018 – $57 billion – but shortly afterwards it became clear that it could not be repaid within the agreed term. His successor in Argentina’s presidency, Alberto Fernández, agreed in March 2022 on a debt restructuring with the IMF in extremis, but the international organization’s disbursements are dependent on Argentina getting its accounts in order, increasing its reserves and reducing the budget deficit.
Most economists expected Massa’s decision to ease exchange rate tensions over the past few weeks, but cautioned that the government had not explained how it would fund the operation. In 2022, the international reserves of the Central Bank of the Argentine Republic increased by $5,006 million to $44,588 million. However, the panorama seems more complicated this year 2023 due to the drought affecting the country’s crops and for which a drop of at least $10,000 million is expected in the settlement of foreign exchange from agriculture. according to the forecasts of the Rosario Stock Exchange.
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