by Libby George and Jorge Otaola
LONDON/BUENOS AIRES (Reuters) – Argentina’s peso collapsed on Wednesday after President Javier Milei’s government presented the first details of a shock economic therapy aimed at reviving the struggling local economy.
At 3:00 p.m. GMT, the peso lost more than 50% to 800 pesos to the dollar.
Late Tuesday, Economy Minister Luis Caputo announced a series of reforms, including a devaluation of more than 50% of the peso’s official exchange rate, a reduction in energy subsidies and the cancellation of several calls for tenders for public works.
“This news is positive,” said Bruno Gennari, Argentina expert at KNG Securities. “The budgetary effort is massive, with spending reductions reaching 3 points of GDP, while additional revenues represent 2.2 points of GDP.”
Argentina’s dollar-denominated sovereign bonds rebounded to trade between 35.7 and 41.25 cents on the dollar, a high since 2021 for many of these securities. The US-listed stock of state oil group YPF rose more than 1% at the open before falling more than 1%.
“Non-deliverable” currency futures have shifted sharply, showing that markets are betting on an even greater devaluation of the peso forward. One-year futures reached a level of 1,687 pesos per dollar.
Argentina has controlled the convertibility of the peso since 2019, and there is a significant gap between the official and informal exchange rate. The official exchange rate was set at 366 pesos to the dollar, before Luis Caputo announced that it would be lowered to 800 pesos to the dollar, and that a 2% monthly devaluation of the exchange rate could be implemented. place. Informal rates reached 1,000 pesos to the dollar at the start of the week.
“The dollar at 800 pesos is at its strongest since the end of free convertibility” in the 1990s, a period during which the peso was at par with the dollar, underlined analyst Salvador Vitelli, noting that the devaluation “is a little larger than what the market expected.
The IMF also welcomed the “bold” changes that could help stabilize the economy and boost growth.
Jimena Blanco, chief analyst at Verisk Maplecroft, says the government is trying to cushion an inevitable economic crash.
“He promised a very bitter potion, and he is pouring it. The question is how long the people will be willing to wait before seeing results.”
In a note, Barclays writes that the “governability” of the reforms will be the main challenge, as they could sharply accelerate inflation and trigger a recession.
On Wednesday, the central bank said it would keep interest rates at 133% and put the peso on a 2% monthly devaluation path.
Luis Caputo also unveiled a reduction in public spending of 2.9% of GDP, of which almost a percentage point would come from reduced energy and transport subsidies, as well as some new taxes.
(Reporting by Libby George in London, Jorge Otaola and Walter Bianchi in Buenos Aires, with the support of Bansari Mayur Kamdar in Bangalore and Rodrigo Campos in New York, French version Corentin Chappron, edited by Blandine Hénault)
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