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TO RUEHC/SECSTATE WASHDC IMMEDIATE 2419
INFO RUCNMRC/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS IMMEDIATE
RUEHSO/AMCONSUL SAO PAULO IMMEDIATE 3827
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UNCLAS SECTION 01 OF 03 BUENOS AIRES 001529
SIPDIS
ARGENTINE MARKETS RECOVER, BUT WITH RISING APPREHENSION
ABOUT DEPOSIT OUTFLOWS AND WEAKENING OF THE PESO
E.O. 12958: N/A
TAGS: EFIN ECON ETRD PREL AR
SUBJECT: ARGENTINE MARKETS RECOVER, BUT WITH RISING
APPREHENSION ABOUT DEPOSIT OUTFLOWS AND WEAKENING OF THE
PESO
REF: BUENOS AIRES 1521
1. (U) This document is sensitive but unclassified. It
should not be disseminated outside of USG channels or in any
public forum without the written concurrence of the
originator. It should not be posted on the internet.
-------
Summary
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2. (SBU) After two weeks of financial market turmoil
following the Argentine government's October 21 proposal to
nationalize Argentina's private pension funds, local stock
and bond prices have stabilized and even rebounded in recent
days, in part due to GoA and Central Bank direct intervention
in the markets. However, the level of uncertainty remains
high, as investors await the outcome of the Congressional
debate over the GoA's initiative and concerns mount over
worrisome levels of deposit withdrawals and the peso's
continued weakness (despite increasingly aggressive GoA and
BCRA tactics to fortify the currency). End Summary.
-------------------------
Argentine Markets Recover
-------------------------
3. (SBU) Local stock and bond prices have stabilized and even
rebounded somewhat in recent days, in line with the global
rebound, after plummeting precipitously following the GoA's
October 21 announcement regarding its plans to propose to
Congress the nationalization of the country's private pension
funds (reftel). After closing down 27% for the week ending
October 24, the Buenos Aires Stock Market (MERVAL) rebounded
roughly 36% from its low between October 29 and November 4
(including a 6% jump on November 4). The Merval is still
down roughly one-third from a month ago and is about 50%
below its 2008 high.
4. (SBU) Bond markets have also recovered dramatically,
particularly during the last few trading days. Yields on
benchmark dollar denominated 2033 Discount and Par bonds
(issued under New York law as part of the 2005 debt exchange)
fell 24.4% and 10%, respectively, from their October 29 highs
through market close November 3. JPMorgan uses these two
bonds to calculate its Emerging Markets Bond Index (EMBI )
country risk premium for Argentina. After peaking at over
2,000 basis points (20%) following the pension
nationalization announcement, Argentina's EMBI rating fell
to about 15% at mid-day trading November 4. Short-term peso
and dollar bonds were still trading on November 4 at
phenomenal yield levels of 45-70%, but were down from yields
between 60 and 90% on October 29.
--------------------------------------------- -----------
With a Helping Hand from the Government and Central Bank
--------------------------------------------- -----------
5. (SBU) Official intervention has likely played a role in
buoying both Argentine bond and equity markets since October
20. According to Post's banking sector contacts, the GoA and
possibly the BCRA are reputed to have intervened directly in
equity markets in recent weeks, with the aim of halting the
slide in stock prices. The GoA's intervention was reportedly
heaviest last week, when through government-owned Banco
Nacion it intervened (buying or posting buy offers on stocks)
in local equity markets on a daily basis (generally in the
afternoon), with the goal of capping broad market declines in
the range of market movements in Brazil and other neighboring
countries.
6. (SBU) The GoA and Central Bank (BCRA) have also reportedly
both intervened to buy GoA debt instruments in recent weeks
in order to take advantage of bargain-basement prices to
retire expensive debt prior to maturity (reaping enormous
fiscal savings in the process) and also to support prices and
counter the massive loss of confidence in Argentina's debt
markets. The BCRA, in particular, has intervened heavily by
purchasing dollar-denominated GoA bonds, particularly the
Boden 12, the GoA's shortest maturity dollar bond. (This is
in contrast to the BCRA's purchases of roughly $2 to 2.5
billion in peso Discount bonds during the farming conflict
earlier this year, which hit peso-denominated bond prices
much harder than the GoA's dollar bonds.) While the BCRA's
BUENOS AIR 00001529 002 OF 003
interventions from October 20-31 aimed to prevent further
bond price declines, BCRA Boden 12 purchases this week have
just reinforced an upward trend that was already in play.
--------------------------
But High Anxiety Continues
--------------------------
7. (SBU) Despite Argentine financial assets gains of the last
few days, Post's financial sector contacts report that there
is great uncertainty and fear about the direction of the
Argentine economy. While most observers expect the Argentine
Congress to pass the GoA's pension nationalization bill
fairly rapidly with only minor modifications, local markets
will stay highly volatile as long as final Congressional
approval remains pending. Furthermore, there is increasing
apprehension that the Argentine economy will decelerate
faster than expected, with many economists and financial
sector analysts predicting a recession in 2009, and even
optimistic real growth assessments in the range of 2-4%.
8. (SBU) Post's contacts among local and foreign banks are
extremely worried about the levels of peso-denominated
deposit outflows from the financial system. The chief
economist of one of the largest private Argentine banks told
Econoff October 31 that the top 10 or so banks operating in
Argentina did an informal poll on deposit outflows in
October, which resulted in an estimate of a 7-8% outflow for
the month. This is about the same level or slightly worse
than in May, the worst month of the March-July farm strike,
and the outflow accelerated during the second half of the
month after the GoA announced its initiative. (The Argentine
Central Bank reports deposit numbers with a 7-10 day lag, so
the exact figures for the month are not yet available.
However, through October 24, the Central Bank reported about
a 6% decline in peso deposits.)
9. (SBU) Demand for dollars has increased in tandem, causing
the peso to depreciate by about 7-8% during October, despite
heavy intervention (selling dollars) by the BCRA. According
to press reports, in addition to BCRA activity in the futures
market, the BCRA sold over $1 billion spot during the week of
October 20-24, and an additional $1 to 1.5 billion last week,
succeeding in keeping the peso just below 3.4 pesos/USD. At
one point, on Wednesday, October 29, pressure on the peso
grew so intense that the BCRA responded with an unprecedented
offer to sell $1 billion in the spot market. While the BCRA
ended up selling in the range of $400 million that day
(followed by similar or slightly higher amounts on October 30
and 31), this demonstration of its preparedness to defend the
peso helped stabilize the nominal exchange rate in the
3.37/3.38 peso/USD range on November 3.
--------------------------------------------- --
BCRA and GoA Unveil New Tactics to Support Peso
--------------------------------------------- --
10. (SBU) The peso actually strengthened November 4 from 3.38
to 3.28 pesos/USD. However, this seems to have been the
result of an all-court-press by the BCRA and various GOA
regulatory agencies (including tax authority AFIP,
Argentina's equivalent of the SEC -- the CNV -- and infamous
Internal Trade Secretary Guillermo Moreno, who is reputed to
be behind enforcement of the GoA's price controls and
manipulation of inflation statistics.) According to press
reports and anecdotal reports from Post's contacts among
banks and the private sector, BCRA and GoA inspectors
descended on banks and currency exchange houses, forcing them
to reduce their listed exchange rates under threat of audits
for tax evasion.
--------------------------------------------- --------
Comment: Hard Currency Market Numbers Hard To Come By
--------------------------------------------- --------
11. (SBU) Post's contacts point out that no level of BCRA
reserves is sufficient to counter a full-blown run on the
peso if the situation eventually deteriorates to that point.
As for Post's analysis of BCRA market interventions, it is
important to clarify that the BCRA publishes data on changes
to reserve levels with a 7-10 day delay and does not publish
any data on its dollar sales (which it does through blind
trades), so Post's estimates of BCRA currency trading volumes
come from our informal contacts with bank traders. While
BUENOS AIR 00001529 003 OF 003
these contacts have proven generally reliable, their
estimates are guesswork based on trading patterns and known
BCRA methods and objectives.
KELLY