Argentina’s Central Bank Is Running Out Of Money

The IMF’s poster child in Latin America is going broke, and the central bank is fast approaching single digits in terms of its foreign currency reserves. The central bank has just $10 billion left, having rifled through roughly $8 billion in the last month alone to shore up the peso.

The International Monetary Fund has a $56 billion standby loan agreement with Argentina, their biggest ever aid package. Despite the historic financial aid package, Argentina’s unable to pay short-term lenders and is extending the life of its peso-denominated notes, which pay quasi-usurous rates of more than 60%. There is little chance the Argentina economy gets back on its feet with interest rates at that level.

Next month’s election is seen as a return to the status quo, pre-Mauricio Macri, who faces impossible odds at getting reelected. Macri took Argentina two steps forward and two steps backward.

Alberto Fernandez, a career bureaucrat, is seen taking the helm when elections are over in November. There is a very real chance that Fernandez beats Macri in the first round in October, garnering over 50% of the popular vote.

Argentina’s Money Woes Worsen

Argentina is a distressed asset once again. Vulture funds might not find much meat left on these bones.

The recent $400 million daily draw-down in reserves is not sustainable considering Argentina has interest payments coming due between this month into December.

They also have around $2 billion in short-term peso-denominated Treasury notes (LETES in the local acronym) maturing.

Argentina’s cash flow stress will become even more complicated if the IMF withholds a planned $5.4 billion disbursement this month. The IMF is in a bind as it looks like Argentina needs that money to pay off bondholders and banks, something for which IMF money is not intended.

“The IMF like everyone else needs clarity on the economic program from the Fernandez team,” says Siobhan Morden, head of Latin America fixed-income strategy for Amherst Pierpont Securities in New York. 

“It would require a huge positive shock post- election to stabilize investor confidence, including commitment to an IMF program,” she says.

Such a commitment would not sit well with the bulk of Fernandez voters who see the Fund as too austere for their current needs.

The Argentina economy has been a slow-moving train wreck for the past four years. Macri took too long to bring in the IMF, knowing the decision would be unpopular.

The market liked the IMF deal, but most in Argentina did not. Politically, it became even easier for everyone to vilify Macri, from nationalist Peronistas to left-wing politicians itching for a fight.

The IMF is arguably the most hated foreign institution in the country. They now find themselves once again in the position of having to renegotiate loans with an unfriendly Argentina government.

“Our base-case scenario assumes that the Fernandez team will renegotiate an IMF program as a preferential alternative than the forced austerity of inward isolation,” Morden says, doubting Fernandez, who is more centrist and practical than his running mate Cristina Kirchner, will stick to currency controls for big corporations. 

Next year won’t be much better than this one. This is especially true if the IMF is stuck in a game of chicken with Fernandez.

Wall Street is bracing for Fernandez, hoping Cristina Kirchner is merely used to calm the public in the eventuality of a prolonged relationship with the IMF.

For now, investors are waiting for more economic plans to come out of the Fernandez team.

Fernandez currently has a massive lead in the polls and is expected to win in the first round on October 27. 

Any overtures to delay or postpone IMF support will send Argentina bond prices even lower in the months head. Amherst Pierpont estimates recovery value as low as 25 to as high as 50 based on par prices of 100.

The Argentina peso has held in the 50s and is now trading at 55.93 to the dollar.