Argentina shows Turkey how to stem a currency rout

The Argentine peso has not fallen as far as the Turkish lira because of differences in the actions taken by President Recep Tayyip Erdogan (L) and President Mauricio Macri.

One curious beneficiary of the Turkish lira’s parlous state is the Argentine peso. Not because investors are switching investments from Ankara to Buenos Aires; rather, the lira’s demise is helping to change perceptions about the peso. Argentina’s currency has ceded the harsh emerging market spotlight to the lira. In the past 10 trading days, the peso has stabilized, gaining 3 percent, while the lira has continued to plumb new depths against the US dollar. Investors assessing whether lira selling is overdone should compare the reaction of policymakers and governments in Argentina and Turkey.

The Argentine central bank sought to tackle the peso’s decline via forex intervention and raising rates to 40 percent. The Macri government is also in talks with the International Monetary Fund over the terms of financial support. Meanwhile, bond fund manager Franklin Templeton offered its backing to Argentina by buying up $2.25bn in government bonds.

The lira’s freefall on Wednesday reflected the lack of a response. The Turkish central bank has for weeks been seemingly paralyzed by President Recep Tayyip Erdogan’s steadfast opposition to higher interest rates, and the limited amount of reserves at its disposal to prop up the currency.

“The different responses from Argentina and Turkey to a budding currency crisis couldn’t be any starker,” says Marc Chandler at Brown Brothers Harriman.

Finally, the Turkish central bank raised rates late on Wednesday, arresting the currency’s decline. But it is a belated response. The lira is in for further turbulence. As the president launches his election campaign on Thursday, the market is likely to test the willingness of the central bank to go further. Argentina is far from being in the clear.

There is the memory of policy mistakes, and as Goldman Sachs says the past month has left a “financial scar” that will make investors demand a higher risk premium than previously sought to return to the Argentine market. But there is an underlying belief among investors that Argentina can rescue a bad situation. “We believe the investment case for Argentine sovereign debt still stands,” says Neuberger Berman, an investment managing group, confident that the government can make progress on reform. That is certainly a long way from how investors feel about Turkey.

Read full article at Financial Times

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