Return to capital controls sends Argentina assets tumbling

Buenos Aires: Argentina’s international dollar and euro-denominated bonds fell to record lows on Monday while its financial stocks tumbled and risk premiums shot up after President Mauricio Macri reimposed capital controls on Sunday as the country’s debt crisis spirals.

The about-face by Macri, who had previously reversed many protectionist practices of his predecessor, Cristina Fernandez de Kirchner, came after the government failed to stem heavy investment outflows and to shore up its tumbling currency.

The central bank has been authorised to restrict purchases of dollars as it burns through its reserves to prop up the peso.

Investors fretted that once the controls are in place, they will be difficult to end, possibly leaving Argentina with an economy once again distorted by government intervention.

Sharp turnaround for Macri

The reintroduction of controls was a sharp turnaround for Macri, a free-trade advocate who won the presidency in 2015 on promises of “normalising” Latin America’s No. 3 economy by ditching the heavy-handed currency and trader controls favoured by the previous administration.

“The problem with restrictive, emergency measures is that they are easier to apply than to retract,” said Buenos Aires-based financial analyst Christian Buteler in a tweet.

Argentina’s benchmark international 2028 dollar bonds dropped more than 2 cents to a new low of 36.58 cents, according to Refinitiv data. Bonds maturing in 2023 and 2038 recorded similar losses.

Argentina’s euro-denominated sovereign bonds also suffered hefty losses to hit record lows on Monday. The 2022 bond dropped 9.2 cents to 35.8 cents while the 2027 issue tumbled 7.5 cents to 33.218 cents, according to Refinitiv data.

American depository receipts (ADRs) of Argentina’s financial institutions also came under pressure. Grupo Financiero Galicia’s Frankfurt-listing tumbled 9.15 per cent while Banco Macro SA fell 6.5 per cent.

Monday was an official holiday in the United States, which could help control losses in Argentine asset prices by reducing trading volumes, Buteler tweeted.

Sign of distress

The risk premiums demanded by investors to hold Argentina’s dollar bonds over safe-haven US Treasuries rocketed to 2,534 basis points on J.P. Morgan’s index of hard-currency emerging market bonds — levels last seen in the wake of a major 2001 default.

“[Capital controls are] a sign of distress in the market and reflect that the new parameters on Argentina are weak and when the peso weakens further it weighs on the credit profile,” said Michael Bolliger, head of asset allocation for emerging markets at UBS Wealth Management.

“There remains a lot of pressure on the currency … There’s a limit to what they can do without capital controls.” The peso has lost more than a third of its value year-to-date, following a more than 50 per cent drop last year. The central bank has burnt through nearly $1 billion in reserves since Wednesday but failed to stem the peso’s slide.

“The key is to watch how the local market reacts today,” said Graham Stack at BlueBay Asset Management. “Will it reassure locals that their dollar deposits are safe or will it lead to attempts to get around the controls?”