Argentina Devaluation Sends Currency Tumbling Most in 12 Years

Argentina devalued the peso the most in 12 years after the central bank scaled back its intervention in a bid to preserve international reserves that have fallen to a seven-year low.

The peso has plunged 12.7 percent over the last two days to 7.8825 per dollar at 3:45 p.m. in Buenos Aires, after falling to as low as 8.2435, according to data compiled by Bloomberg. The decline in the peso marks a policy turn for Argentina, which had been selling dollars in the market to manage the foreign- exchange rate since abandoning a one-to-one peg with the U.S. dollar in 2002.

President Cristina Fernandez de Kirchner, who said May 6 that the government wouldn’t devalue the peso, is struggling to hold onto dollar reserves which have fallen 31 percent to $29.4 billion amid annual inflation of more than 28 percent. Reserves are the government’s only source to pay foreign creditors. Since changing her economy minister, cabinet chief and the head of the central bank on Nov. 18, the peso has fallen 25 percent, the most in the world, according to data compiled by Bloomberg.

“They’re running out of cash and they’re sitting in the corner at the moment,” Phillip Blackwood, who oversees $3.5 billion in emerging market assets as a managing partner at EM Quest Capital LLP, said in a phone interview from London. “There’s a feeling in the market that they’re not going to intervene any more.”

The tumble in the currency is the biggest since March 2002, the year the government abandoned a one-to-one peg with the U.S. dollar following a record $95 billion default.

Bonds Tumble

Dollar-denominated bonds due 2033 sank 2.7 cents on the dollar to 66.6 cents. The extra yield investors demand to own Argentine bonds over U.S. Treasuries surged 24 basis points to 975. Argentina’s dollar bonds have plunged 8.2 percent this year, the biggest loss in emerging markets, according to JPMorgan Chase & Co.’s EMBIG Diversified index.

Yesterday, the peso declined 3.5 percent to 7.14 per dollar after the central bank abstained from intervening in the market.

Cabinet Chief Jorge Capitanich told reporters earlier today the government isn’t intervening in the peso’s decline, allowing the market, which is mostly closed to buyers of dollars, to adjust prices.

“It wasn’t a devaluation induced by the state,” Capitanich said. “For the lovers of free markets, supply and demand was expressed in the capital markets yesterday.”

The central bank’s press office didn’t answer phone calls seeking comment on plans to depreciate the peso or a targeted exchange rate.

The government has changed its strategy which is leaving the market confused on the direction of their policies, Gustavo Quintana, a trader at Rabello & Cia in Buenos Aires said.

‘Deliberate Strategy’

“There’s no doubt this is a deliberate strategy,” Quintana said in a telephone interview. “All of this is really hard to predict. No one saw the dollar at 8 pesos in January so it’s difficult to speculate where it will end up.”

The central bank intervened briefly when the rate hit 8.50, Quintana said.

A free-floating peso may fall as low as 14 per dollar, Citigroup Inc. strategist Dirk Willer wrote in a report today. The central bank sold a net $5.9 billion over the last year in the foreign-exchange market to help bolster the peso.

Since her re-election in 2011 when capital flight almost doubled to $21.5 billion, Fernandez has put into effect more than 30 measures to keep money from leaving the country. Her policies have included blocking most purchases of foreign currencies, taxing vacations abroad and online purchases, banning units of foreign companies from remitting dividends, and restricting imports.

Black Market

The controls cut the total amount traded last year in the local foreign-exchange market in half from 2010, according to data compiled by Argentina’s Mercado Abierto Electronico automated trading system.

Banned from purchasing dollars for savings to protect against inflation, Argentines have turned to an illegal currency market, where the price per dollar soared to a record 12.75 per dollar, according to Buenos Aires-based newspaper Ambito.

Argentina posted the largest current account deficit in the first three quarters of 2013 since 2001, when a crisis in South America’s second-largest economy led to the default. International reserves have fallen or remained unchanged for 14 consecutive business days and fell $80 million yesterday, according to central bank data.

As dollars vanish from the central bank, the government has sought to normalize relations with foreign creditors.

Foreign Creditors

On Jan. 20, Argentina presented a proposal to the Paris Club of creditors to seek a negotiated resolution to outstanding debt of about $10 billion. The government also has begun talks to compensate Repsol SA for the stake in oil company YPF SA it nationalized in 2012, and is preparing to unveil new inflation and growth data to address International Monetary Fund concerns over the accuracy of official statistics.

The government reported inflation was less than half of the 28.4 percent estimate by private economists in 2013.

In addition to devaluing the peso, Argentina must boost interest rates to stem outflows, according to JPMorgan economist Vladimir Werning.Argentina’s benchmark deposit rate, known as the badlar, is 21.5 percent.

“Longer term, it’s a question of inflation, it’s out of control,” EM’s Blackwood, who recently sold Argentine bonds, said. “They need to clear up the holdouts and open access to the international capital market. We don’t think they’ll take that route. They have a range of options but politicians always have better ideas.”