Political talks sweeten Argentina markets after grim rout

Argentine markets on Thursday reacted positively to signs that political leaders from both parties were determined to control an economic crisis sparked by a shock primary-election result that wiped out around a quarter of the peso’s value.

The peso began to fall on Monday after presidential candidate Alberto Fernandez, running alongside former leftist President Cristina Fernandez de Kirchner, unexpectedly trounced center-right President Mauricio Macri, whose austerity measures turned off voters in Sunday’s primary vote.

That prompted fears of a return to protectionist policies and the end of free-market economic reforms should Fernandez triumph in October’s election, as now seems likely.

Argentina, Latin America’s No. 3 economy, is no stranger to financial crisis. But its latest lurch comes amid widespread volatility and fears of a global recession sparked by the trade war between China and the United States, and ongoing protests in Hong Kong.

There had been few signs of rapprochement between Macri and Fernandez in the immediate aftermath of the vote but as markets continued to tumble on Wednesday, they met, agreeing to try to calm volatility.

Fernandez later said his economic plans did not contemplate a debt default.

“The conversation was cordial and didn’t lead to any concrete announcements, but at least for the first time it showed a desire for both sides to cooperate,” broker SBS said in a note. “These gestures will probably serve to calm the spirits of investors but we’ll have to see if they are enough or if more specific measures are needed.” The peso rose as much as 7% earlier on Thursday, ending the day around 5% higher at 57.4 pesos per dollar, according to traders, who said the chance to snap up rock-bottom pesos had also contributed to its jump. Argentina’s Merval stock index was up more than 3% on Thursday afternoon.

Thursday was also the first day this week that the central bank did not undertake dollar auctions from its own reserves to prop up the peso. Since Sunday’s vote, the central bank has auctioned a total of $503 million.

Speaking earlier on Thursday in a radio interview, Fernandez said he was comfortable with an exchange rate of 60 pesos to the dollar.

Macri announced a series of welfare subsidies and tax cuts for lower-income workers on Wednesday, an awkward about-turn for a president who took office in 2015 vowing to slash public subsidies and to correct what he called years of leftist economic mismanagement.

Macri promised to raise the minimum wage, temporarily freeze gasoline prices and increase the income tax bracket floor by 20%. The new measures, which would cost about $678 million, would allow a tax cut for 2 million workers worth some 2,000 pesos ($33) per month per person, the government said.

Education Minister Alejandro Finocchiaro said at a news conference on Thursday that the government was studying new measures to help people with inflation-linked mortgages.

The government still has breathing space for more dollar auctions if the peso begins to fall again. The central bank has about $66 billion in reserves, of which about $20 billion are free resources that can be used to pay debt and stabilize the peso, according to an Argentine government official.

Debt payments for the remainder of 2019 are estimated at between $5 billion to $10 billion, depending on Argentina’s ability to roll over domestic Treasury bills.

There is an additional $27 billion in maturities in 2020, according to government data.

Argentina’s century bond traded in thin volumes on Thursday, with prices just above 50 cents on the dollar or some 4 points above Wednesday’s close. The January 2028 bond last traded Wednesday according to MarketAxess data, at around 46 cents on the dollar.