Sergio Massa led the debt front in pesos: the reaction of the markets and the challenges ahead

As Sergio Massa himself put it, the peso debt swap which officially kicks off next Thursday and ends Monday aims to “dispel the ghosts of a new re-profiling”. A new default on local currency bonds, like the one that occurred in 2019, would have been catastrophic for the financial system and would surely have shaken the confidence of savers in a dangerous way.

Beyond the criticisms of the opposition, both the economic team and the financial system agreed that “something had to be done” before facing the wall of deadlines that were accumulating before June, that is say just before the STEP, which will take place in the second week. of August.

The markets reacted favorably and it was to be expected: the danger involved in the accumulation of several million dollars of debt in pesos before the PASO was eliminated or significantly reduced. Exchange rates traded lower. The free dollar fell nearly 1% to $372 and financial dollars also eased.

Precisely one of the greatest dangers lies in the fact that the holders of securities in local currency seek to become dollarized in the months preceding the elections. To reduce that risk, the best (and perhaps only) option available to Massa was to make a swap that significantly lengthens the durations. This is shown by the transaction announced yesterday, with securities maturing in stages: 30% in April 2024, 40% in October 2024 and 30% in February 2025.

As expected, peso stocks rose across the curve. There are even investors who bought the shortest to enter the stock market and remain invested in the medium term in a bond that adjusts to inflation or that directly offers a hedge in the event of a jump in devaluation.

But in addition, dollarized bonds also climbed 1.8% on average, causing country risk to fall 44 points to 2,047 units. This means the news generated favorable reading among investors, who saw the accumulation of peso debt as a high-risk issue in the short term. Now, this continues to be a dicey issue, but it clearly happened for later.

Although the peso front now seems more important, the one that is really pressing for the government is tied to the dollar market. There will be played the real battle of this 2023 and this is what already complicates the economic and political panorama.

The latest estimates have added even more drama. According to CREA’s estimate, the total losses that the drought could generate would reach 20,000 million dollars, a dramatic figure for a country like Argentina, which continues to be heavily dependent on its agro-export sector.

The decline in foreign exchange earnings is already being felt in the drop in imports and its negative impact on economic activity. All the indicators already show that the economy has entered a recession, from which it will be very difficult to emerge in the months to come. New estimates from local research firms indicate that GDP could end the year with a drop of 1.5%.

The collection also suffered. In February, we noted the decline in receipts from exit rights, which increased receipts by 82%, or nearly 20 points less than inflation.

But the worst remains: the impact of the fall in the dollar on the foreign exchange balance. The drop in gross reserves, as estimated by Delphos Investment, could reach $10 billion by the end of 2023. For this reason, the economic team is finalizing in Washington what new reserve targets will have to be met. with the IMF. The agency has agreed to relax them, given the negative effect that this historic drought will have on Argentine exports.

This is the basic fight that Massa will have to deliver in the months to come. And for that there is no negotiation with the banks or possible exchanges. The impact on activity and the level of reserves is already a fact. All that remains is to minimize the negative effects and be satisfied with maintaining a certain stability of the exchange rate in the months to come, which is already asking enough.

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