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As peso swoons, Argentina imposes capital controls

August 23, 2019 — In this Q&A, the Eaton Vance floating-rate loan team offers its perspective on today’s loan market.

By: Craig P. Russ; Andrew Sveen, CFA; Ralph Hinckley, CFA; Christopher Remington

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By Emerging Markets Debt TeamEaton Vance Management

Boston - The capital markets are having their say on the landslide defeat of Argentina President Mauricio Macri by Alberto Fernandez in last month's primary presidential election, and the message is not "thumbs up."

Following the election on August 11, Argentina's stock, bond and currency markets have all plunged, with the peso hitting record lows in August. Investors fear a return to the populist policies of former President Cristina Fernandez de Kirchner, who tapped Fernandez (no relation), a relative unknown, to run as president, while she ran as vice president.

Yesterday, Argentina's government imposed capital controls to help prevent depletion of foreign currency reserves, maintain currency stability and hopefully reduce market volatility. All companies must request permission from the central bank to sell pesos and buy foreign currency to make transfers abroad. Most of the country's debt is foreign-denominated, which underscores the need to preserve its foreign currency reserves.

The pressure to dump pesos prompted the start of an offshore market known as a "blue chip swap" to circumvent the capital controls. The swap allows investors to sell local peso positions at a discount to the official rate. The discount currently stands at 10%.

The capital controls were imposed on Sunday in the wake of Macri's decision to extend the maturity of short-term debt (both peso- and dollar-denominated) issued under local law. (The move did not include debt issued under foreign law.)

The Macri administration is also looking to restructure its debt with the International Monetary Fund (IMF) by extending its maturity. (The IMF gave Argentina a $57 billion bailout in 2018). Last Thursday, Standard & Poor's Corp. downgraded Argentina's debt to "selective default."

Given that capital controls were inevitable, it's apparent to us that they should have been implemented before the debt maturity extensions were announced. The emerging markets debt team will have a member in Argentina next week to analyze this very fluid situation.

Bottom line: Macri's efforts to rebuild the economy's foundation entailed significant hardships, for which he has paid the price. Rattled markets may just be a hint of the price Argentina will pay going forward.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.