Argentina's Peso Under Pressure: Government Intervention Amid Election Uncertainty

Argentina Intervenes to Support Peso Amid Confidence Crisis and Election Worries

The government of Argentine President Javier Milei is planning to intervene to support the country's currency, the Peso, in a surprising move that reflects growing concerns about economic stability and fragile investor confidence. This decision comes amid a political scandal casting a shadow on the government's reputation and the potential for a setback in the legislative elections scheduled for next month. This intervention marks a notable shift in the policy of Milei's government, which has long advocated for a free market economy and allowing the Peso to float within defined ranges. The new measure aims to curb the intensive selling operations seen in Argentine financial markets.

Previous Measures Failed to Stop the Decline

Despite a series of measures taken by the government to contain the Peso's decline, including imposing liquidity restrictions on banks and enticing investors to renew expiring government debt maturities with high interest rates of up to 76%, these measures have failed to alleviate pressure on the local currency. Even after the announcement of intervention plans, the Peso continued to fall during Tuesday's trading. Government bond prices also declined, with the price of Argentine bonds maturing in 2035 falling by about 2 cents per dollar, reaching 61 cents, its lowest level since April of this year.

Political Scandal Increases Pressure

The decline in Argentine asset prices reflects investors' growing concerns about Milei's ability to move forward with implementing ambitious economic reforms. These concerns have been exacerbated by reports that Milei's sister was involved in a bribery scandal. This scandal comes at a critical time, with important local elections taking place in the province of Buenos Aires on Sunday, which are expected to affect Milei's popularity.

Elections: A Referendum on Milei's Performance

Walter Stoeppelwerth, Chief Investment Officer at Grit Capital Group, described the current situation as reflecting "fragile investor confidence." He added that "most investors consider this election cycle as a 'general referendum' on President Milei's performance in the first two years of his term."

Sharp Turnaround After Promises of Reform

These developments represent a sharp turnaround for Milei, who took office in December 2023 amid global welcome for his ambitious program to cut spending and implement radical reforms aimed at reviving the Argentine economy, which has been suffering from a chronic crisis. These measures initially led to optimism in the market, leading to higher bond and stock prices.

Parliamentary Opposition and Public Discontent

However, the government is currently facing multiple challenges, including growing opposition in Congress and public discontent due to reports related to corruption. Although a judge on Monday prevented journalists from publishing offensive audio recordings, this did not prevent damage to Milei's popularity before the crucial elections.

Fears of an Electoral Setback

The local elections, which are considered a "rehearsal" for the legislative elections, increase fears about the possibility of Milei suffering a setback. In the elections in the province of Corrientes last Sunday, the candidate supported by the Milei government received only fourth place.

Buenos Aires: A Crucial Indicator

The focus is currently on the upcoming elections in the province of Buenos Aires, which is inhabited by about 40% of the Argentine population and is traditionally a stronghold of the opposition Peronist movement. Investors see these elections as a crucial indicator of the national elections to be held on October 26, in which the majority of congressional seats will be replaced.

Surprise Intervention in the Currency Market

In a surprise move, Argentine Finance Minister Pablo Quirno announced on Tuesday via the X platform that the ministry would intervene in the currency market "to facilitate liquidity and the normal operation of the market." However, this announcement did not succeed in stopping the Peso's decline, which fell by 1.6% on the same day.

Concerns About Foreign Reserves

This decision increases investors' concerns about Argentina's ability to increase its international reserves before the due date of dollar-denominated bonds next January. Data from the Argentine Central Bank indicates that the Ministry of Finance currently has $1.7 billion of foreign deposits available to support the currency market, which is about $300 million less than it was on August 11.

Temporary Intervention Before Elections?

The market expects the government's intervention to be a short-term measure aimed at stabilizing financial markets before the elections. Pedro Siaba Serrate, Research and Strategy Director at PPI Argentina, believes that "today's move is a new chapter in the strategy pursued by the government, which previously included raising reserve requirements and intervening in the foreign currency futures market to control the exchange rate." He added that "the goal of this measure is clearly temporary and will continue until the end of the midterm elections."