Argentina prepares for Milei to start shock therapy

By Marc Jones

LONDON (Reuters) -Argentina’s financial markets on Monday were waiting for new President Javier Milei to launch into his promised economic shock therapy with a huge devaluation of the peso.

The radical economist took office on Sunday with a warning in his inaugural speech that he had no alternative to a sharp, painful fiscal shock to fix the country’s “titanic” challenges.

Milei has promised deep cuts to public spending but his task looks daunting with hyperinflation and recession now looming and the government’s reserves thoroughly depleted.

The 53-year-old’s speech on Sunday was light on detail, but he reiterated there would be a fiscal adjustment equivalent to 5% of GDP through cuts that would fall on “the state and not the private sector”.

Investors are now waiting for the plan to be fleshed out and to see how quickly he moves. A government spokesman said key measures would be laid out on Tuesday by new Economy Minister Luis Caputo.

Argentina’s international dollar-denominated bonds, which have surged some 25% since Milei won the presidency last month, looked to be drifting lower but focus was largely on the peso and when and how large its widely-expected devaluation will be.

The maiden speech “yesterday was for show but now he (Milei) needs to get down to the hard graft of governing”, BlueBay Asset Management’s Graham Stock said.

“There will almost certainly be a new official exchange rate,” he said, adding it was expected to move to around 650 to the dollar from around 360 now.

One way locals and internationals were able to trade the peso over the weekend was in the 24-hour cryptocurrency markets, albeit in tiny volumes compared to the traditional FX ones.

The peso was last at 42,025 per bitcoin, according to crypto exchange Binance’s website, although that was off a low of 44,862 seen on Sunday.

– another cryptocurrency pegged to the U.S. dollar – was trading at 1,019.7 pesos compared to around 980 after Milei’s election win three weeks ago.

In his speech, Milei had highlighted the need to address his country’s ticking “debt bomb”.

Serial defaulter Argentina owes over $4 billion to the International Monetary Fund and to private sector creditors by the end of January and $90 billion and $25 billion in local and foreign currency debt payments respectively for 2024 as a whole, JPMorgan calculates.

U.S. and European-listed shares, known as “depository receipts” were mostly higher, with state oil company YPF up 2.3% in U.S. premarket trading and up 1.2% in Europe

“The problem is that most people who voted for Milei didn’t vote for him because of the economic transformation, but because they hated the other guys,” said Viktor Szabo, an emerging market portfolio manager at Abrdn.

“You can gain time from the market if you make the right noises but you have a population that over the last 50 years has gotten used to Peronism, so it will be hard to explain to them that there is hardship to come.”