August 7, 2014

The black-market peso—the so-called “blue dollar”—depreciated notably in recent weeks amid negotiations between the government and the holdouts to settle a deal over USD 1.3 billion in defaulted bonds. On 7 August, the blue dollar traded at 12.78 ARS per USD, which was 6.7% weaker than the same day last month. On an annual basis, however, the blue dollar weakened 44.8%.



The official peso retreated only slightly, weakening 1.6% month-on-month to 8.26 ARS per USD. On a year-on-year basis, the peso dropped 49.5%. The sharp annual decline mostly reflects the Central Bank’s decision to scale back foreign-exchange intervention early this year in order to preserve dwindling international reserves. Foreign exchange reserves are of vital importance to Argentina; the country relies on the reserves to pay for imports and to honor its debt obligations.



Analysts categorize Argentina’s default as a very unique event and believe that the government will try to maintain a stable peso. As Joyce Chang, Global Head of Research at JP Morgan, says:



“We view Argentina’s current payment problems as idiosyncratic and do not believe that the current legal issues are indicative of a lack of capacity or willingness to pay that normally drives sovereign defaults. Argentina’s limited financial linkages and limited leverage, alongside investor positioning, downplay risk of financial or market contagion to other economies or credits. […] The policy response will be biased to displaying a stable official peso—to support the government’s narrative that debt problems are “technical” and not meaningful.”

LatinFocus Consensus Forecast panelists expect a sizeable devaluation of the official exchange rate in the years to come. They see the official exchange rate ending this year at 9.43 ARS per USD. Next year, the panel sees the peso depreciating even further than it already has, to 12.19 ARS per USD. LatinFocus Consensus Forecast panelists project a non-official exchange rate of 12.73 ARS per USD by the end of this year. In 2015, the panel sees the blue dollar depreciating to 15.13 ARS per USD.