Argentina peso slumps as markets welcome Milei’s ‘tough pill’

By Libby George and Jorge Otaola

LONDON/BUENOS AIRES (Reuters) -Argentina’s peso dropped more than 50% to 801 to the dollar on Wednesday as markets cautiously welcomed the first details of President Javier Milei’s plans to shock Argentina’s beleaguered economy back on track.

The libertarian president’s administration swept to office with promises of drastic economic changes to tackle negative reserves, inflation above 100% and years of economic stagnation.

The rapid devaluation follows a raft of changes unveiled late on Tuesday by Economy Minister Luis Caputo, including a more than 50% cut to the official peso rate, slashed energy subsidies and cancelled public works tenders.

“The news is positive,” said Argentina expert Bruno Gennari at KNG Securities. “It is a massive fiscal effort, with 3 ppts of GDP of spending cuts and 2.2% of additional revenues.”

International sovereign dollar bonds gained more than 2 cents to trade between 35.7-41.25 cents on the dollar, many at their highest level since 2021. U.S.-listed shares of Argentinian state oil company YPF rose around 1% in premarket trading.

“Non-deliverable” FX forwards moved sharply, showing bets that the peso’s value would continue to dive. One-year forwards hit a level of 1,687.

“The dollar at 800 pesos is the highest since the exit of convertibility” when the peso was one-to-one with the dollar in the 1990s, said analyst Salvador Vitelli, noting that the devaluation “is a little more than what the market expected”.

The peso also lost ground on crypto exchanges, a proxy for the black market. The price of one tether – a cryptocurrency pegged to the U.S. dollar – was around 1,129.40 Argentine pesos at 1330 GMT, according to the crypto exchange Binance, down from a high of 1,175.90.

The IMF, which had previously hardened its view on the state of its $44 billion program with Argentina, also welcomed the “bold” changes that it said could help stabilize the economy and spur growth.

Jimena Blanco, chief analyst with Verisk Maplecroft, said the government was trying to temper an otherwise-guaranteed economic crash landing.

“He promised a very tough pill to swallow and he’s delivering that pill,” she said. “The question is how long will popular patience last in terms of waiting for the economic situation to change.”

In a note, Barclays bank said the “governability” of the reforms would be the key challenge, as they could sharply accelerate inflation and spark a recession.

Argentina has artificially controlled the peso since 2019, creating a wide gap between the official exchange rate, which was at 366 per dollar before Caputo’s announcement that it would move to 800, with plans for a monthly 2% devaluation. The parallel rates were just above 1,000 per dollar earlier this week.

On Wednesday, the central bank said it would hold interest rates at 133% and put the peso on a 2% monthly crawling peg devaluation path.

Caputo also unveiled a 2.9% of GDP cut to government spending, with nearly 1 percentage point of it coming from cuts to energy and transport subsidies, and outlined some new taxes.

“This government has not been left with a patient with a toothache. We have found a patient in intensive care on the verge of dying,” Presidential spokesman Manuel Adorni told a press conference on Wednesday.

“We are going to do everything we can not only to bring down the fever, but to save him from the disease that is killing him.”

(Reporting By Libby George in London, and Jorge Otaola and Walter Bianchi in Buenos Aires, Additional reporting by Bansari Mayur Kamdar in Bangalore and Rodrigo Campos in New York; Editing by Nick Macfie, Kirsten Donovan)