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Argentina's currency the Peso collapsed Monday 9% to an all time low against the US Dollar. Nervous investors continued to dump the Peso carry trade ahead of bond repayments and an IMF meeting in fear of another Argentine Currency Crisis.

Argentina Peso Collapse

Just a year ago Argentina was lauded as the comeback economy that shifted from government overspending to one that relied on debt issuance. Now the comeback is on the brink.

When the the new President Macri took office two years ago he inherited 40% inflation and a fixed exchange rate. In his first hours taking office he  ended to capital controls and began a global campaign to repair Argentina's terrible reputation with foreign investors. He promised to bring down inflation by curbing public spending. The problem was Argentina had a terrible reputation from finacial crisis so to attract investors the yields had to be high to be acctive. 

With that came fast money, volatile foreign investors.Investors The ARS became a carry trade where investors would switch their dollars for pesos and invest in Lebac bonds  with maturities as short as 35 days with an annual interest rate of 29%.

The world had become very blase about risk with the massive money printing around the world, what happened though the ARS became a very crowded trade. Thinks weren't looking up ththough the US dolla had turned from it's long slump and was shifting higher as the Fed raised rates. The bigger issue was inflation was not falling in Argentina and the risk of a currency crisis was real. The smart money cashed out and all the smaller or late investors were one way. The central bank intervened over the past week to stem the slide but too no avail.

Then as the Argentina went to obtain liquidity financing from the International Monetary Fund with reports that establishing a target exchange rate for the peso would not be a condition for obtaining financing from the IM. What this meant was there will be no artifical floor set for the decline in the currency, and the.USDARS rate jumped 9% in the session as the spiggots opened.

Why today? Tomorrow, Tuesday, $30bn (£22bn) in Argentine bonds are due for payment. The Argentina government has to convince investors to roll their bonds, if not the run on the peso and bonds will gather even more steam. The IMF will also respond to Argentina's request for fresh loans which they applied for last week. Nervous investors remember 2001, when the IMF pulled the backstop from Argentina and denied it financial support. 

Argentina has been throwing good money after bad using reserves to try and support up its currency in recent weeks. Argentina’s central bank has raised interest rates on pesos to 40 percent from 27.25 percent with no affect. The government has applied for a line of credit with the IMF last week Tuesday. An IMF board meeting on Argentina was scheduled for Friday, May 18. Its a nervous wait ahead for Argentina.

Source: BBC

 

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