Caged by controls, Argentina’s markets strain beneath the surface

Argentina’s volatile markets appear to have been tempered by capital controls imposed by President Mauricio Macri after a sharp sell-off in August. Underneath the surface, however, signs suggest problems are mounting.

This mitigated bond volatility and bond sovereignty and kept a dollar flowing as investors await the outcome of an Oct. 27 general election vote and boost opposition leader Alberto Fernandez’s potential policy stance.

However, economists say that calm on the surface masks tensions below as closed markets struggle against controls. Black market dollar trades are on the rise, banks are reducing the risk on short-term loans, and key fiscal targets seem shaky.

Since August 11, start-up banks, increasingly risk averse, have begun to turn to shorter 1-day debt instruments known as “passive passivos”, similar to reverse repos, in their financial dealings with the bank central.

This has led some rating agencies like Moody’s to cut their forecasts to reflect on how the country will try to meet its fiscal obligations next year, pivotal to its ongoing critical relationship with the IMF.

Currency controls, which have set limits on foreign exchange trades, have fueled growing demand for green in the untested parallel market, as well as channels using bond buying and selling to convert pesos into dollars.

Currency controls have helped stem a sharp decline in the central bank’s reserves, which are at their lowest level since last year, raising concerns about Argentina’s ability to service its dollar debts.

Even as global central banks cut rates to spur growth, Argentina has been forced to raise its valuation level above 80% since the August crash to help keep investments in pesos and help lower inflation that accelerated back in August./investing

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