Argentina calls on central banks to purchase its debt

Bloomberg

Sun, Sep 09, 2018 - Page 16

Argentina, reeling from its worst currency crisis in 17 years, is proposing that its counterparts in the developed world ditch the rule book and buy the sovereign debt of emerging markets as part of their reserves.

Central Bank of Argentina President Luis Caputo called on central banks to invest as much as 2 percent of their reserves in countries with loan packages from the IMF.

Caputo on Friday told finance executives in Mendoza, Argentina, that he planned to pitch the idea at a meeting of central bank heads in Basel, Switzerland, this weekend.

He said that he has discussed the plan with European Central Bank President Mario Draghi and Bank for International Settlements General Manager Agustin Carstens.

“It’s a concrete proposal and they are going to give me time to explain it all,” Caputo said. “Developed nations should be able to have the choice to buy even a small part, perhaps 2 percent of reserves, of debt from emerging markets that have an IMF program.”

The idea could prove a tough sell after this year’s rout in emerging markets, fueled by a currency crisis in Argentina and Turkey that helped send bond spreads over US Treasuries close to the highest since 2016.

Investors are starting to speak of contagion as South Africa falls into recession, bringing the rand down with it, and Indonesia’s flirts with a milestone in currency weakness not seen since the 1997-1998 Asian financial crisis.

Argentina is in talks to speed up disbursement of money from a record US$50 billion credit line with the IMF.

The peso’s decline worsened amid concern about the government’s ability to finance itself during the second recession in three years.

Caputo last week raised the key interest rate to 60 percent to curb rampant inflation.

The US Federal Reserve does not hold any foreign debt on its balance sheets, making Caputo’s proposal a novel concept for major central banks.

The ECB declined to comment.

More than a dozen countries are in programs with the IMF, its Web site said.

“I can’t really see this happening,” Aberdeen Asset Management head of emerging market sovereign debt Edwin Gutierrez said.

“In my experience in running money for central banks and sovereign wealth funds, they usually have fairly high ratings thresholds. They do buy some EM [emerging markets] bonds, but I wouldn’t count on them being major buyers of bonds from lower rated emerging markets like Argentina,” Gutierrez said.

“There’s more than one nation that would like to do more for us and apply some of the policies they applied in their own crises,” Caputo said.