Argentine Peso Strengthens After US Swap Deal

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00:00They have half a business day, right? So it doesn't look like, I don't think it's necessary

00:04for them to put the package ahead of it, actually. I think all it's necessary is that you have a plan

00:08and you execute and you're supporting Argentina. I think it's pretty, if you'd have asked me a month

00:13ago whether or not the Treasury of the United States would be talking about a $40 billion package

00:19to Argentina, I'd have said no way. It's almost unprecedented. We've seen the U.S. support in

00:24Mexico during the tequila crisis in 1994. Back then, liquidity came with strings attached in

00:29the form of oil export guarantees. Now, I have a $20 billion swap line with no strings attached

00:34and we're talking about a swap, actually a credit line to buy back bonds on the secondary market.

00:39Argentina could save a ton of money because bonds are trading below par. And by the way,

00:43the toughest part of the job, Javier Millet has already done. Around one, there has been two years

00:48that he's done the most aggressive fiscal consolidation of any G20 countries that I've ever seen

00:52in 25 years of investing. So I think that people are making, you know, this is Argentina, Argentinian

00:58elections. There has to be some drama. But people are making a bit of much bigger of a drama than

01:04it should have been. Well, I guess there's also this question. Even with this support, there are

01:09structural issues in Argentina, whether it be liquidity, inflation, debt. So does this actually

01:14even fix their problems? Well, they fixed the debt problem already because they are running now a primary

01:19and an overall surplus on the budget. So if you actually look in debt sustainability terms, which is all that

01:24investors should care, that that GDP is going to be declining within the next five years, given

01:28the fiscal adjustment that has been done over the last two years and what is still going to be done

01:33by the next two years of the Millet administration, he will most likely remain in power for the next two

01:39years. And what Argentina has is a liquidity problem related to speculation against the Argentinian

01:45peso. Investors and locals didn't like the bend. They didn't like the currency regime that was designed

01:51to bring inflation down. There is some merit to this criticism. But ultimately, it's a confidence

01:57issue. And that's why the $20 billion swap line is a game changer, because it's the U.S. Treasury.

02:03Before, you were speculating against the government and the Central Bank of Argentina, which a lot of

02:08locals and internationals have been done, have done successfully for 30 years. Now you're speculating

02:12as well against the U.S. Treasury. And I think that's quite a gamble. And to that point, when you have seen

02:18announcements of the U.S. support, there have been moments where the peso has fallen, that the

02:22reaction hasn't been straightforward. So you're saying now that you have this $20 billion swap

02:26line, you feel comfortable in going long the peso, that that is a game changer for how you actually

02:32invest in Argentina. I think you have to wait the result of the elections to see if they're going

02:37to change the effects regime, right? The peso really depends on the total return. We're current

02:42the currency traders. I'm not a currency trader myself, but I work with a bunch of them and they're

02:47really keen to see what's going to happen next week, right? Because if the currency is going to

02:50devalue by 5%, 10%, 15%, then, well, that can hurt them a little bit in the beginning. And they

02:55want to see what's going to happen post-elections. Will they change the currency regime? But I think

02:59whatever happens, the currency is very likely to find stability after the election, after a revamp or not

03:06of the currency regime comes through, because this $20 billion is a lot of the monetary basis of

03:11Argentina. We're talking about closer to close to 20% of all deposits and currency in circulation,

03:17the ballpark level. So that's, again, and they had reserves before that because the IMF gave them

03:23a very large package. So we're talking about gross reserves that could actually cover 40 to 50% of

03:28the monetary basis. So that's very large. And I would imagine that a speculation against the peso,

03:35given what's happening within the last couple of days, have been to a very large degree as well.

03:39So I wouldn't be surprised at all if the peso strengthens after the election.

03:43Gustavo, you started out this conversation by saying this is unprecedented, this amount of

03:47support from the U.S. It's abundantly clear what Millet gets out of this. What do you make of why

03:53the Trump administration is offering this unprecedented amount to help prop up Argentina?

03:58I think your colleague alluded to, right, the ideology that the Trump administration has. What

04:04Trump is trying to achieve is to get the private sector going again. And GDP growth accelerating

04:09here would allow the U.S. to get out of its twin deficits massive hole. That if it would be an

04:13emerging market economy, it would be in a very, very deep problem. Javier Mele has the same idea.

04:18He believes in economic freedom. So he wants to get the government out of the way. He wants to reduce

04:23the size of the debt. He wants to reduce the size of the deficit permanently so that actually the

04:27private sector can come and thrive and flourish. And actually there's a lot of signs that you have

04:31a large pipeline of FDI that is actually a lot of that coming from America. And I think it's important

04:37from a geopolitical perspective that Latin America becomes a successful economic model. Because if

04:44you think about the immigration problem that the U.S. has, most of that is related to how poorly managed

04:50Latin America has been on average within the last 15 to 20 years. That doesn't create economic

04:55opportunities for local population. And this local population is trying to find something a better

05:00alternative. People make a big fuss about the soybeans. The soybeans, Americans haven't been exporting

05:06soybeans to China for different reasons. Because of the trade war. China is using the leverage that

05:10they have. The fact that the U.S. is actually supporting the peso didn't change the trade in the soybeans

05:16at all. Right. So I think politically makes a lot of sense. For historically, the U.S. has had a policy

05:23of having a lot of stick against Latin American countries. You need more carrots. You need to

05:28incentivize these countries to deliver higher GDP growth. And I think that's what they're supporting,

05:32a regime that is actually already doing that by itself.

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