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No Talk In The Dollar Shadows

Summary:
The company isn’t bankrupt, it just doesn’t have the right currency in its reach to repay debts coming due. YPF is Argentina’s (former) gold mine, in this case the black gold of energy exploitation. State-owned, the business has obviously close ties to the ruling powers-that-be and a privileged place to go along with them. Its formal name, Yacimientos Petrolíferos Fiscales, literally translates as “fiscal oilfields.”But no matter the primo spot in the Argentinian hierarchy, no government can deliver the dollars they don’t have – and cannot conceivably obtain. It really is that simple at times like these, confusion instead created by the disingenuous interpretations of what particularly the US central bank actually does (moral suasion that seems a lot less moral these days).According to

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The company isn’t bankrupt, it just doesn’t have the right currency in its reach to repay debts coming due. YPF is Argentina’s (former) gold mine, in this case the black gold of energy exploitation. State-owned, the business has obviously close ties to the ruling powers-that-be and a privileged place to go along with them. Its formal name, Yacimientos Petrolíferos Fiscales, literally translates as “fiscal oilfields.”

But no matter the primo spot in the Argentinian hierarchy, no government can deliver the dollars they don’t have – and cannot conceivably obtain. It really is that simple at times like these, confusion instead created by the disingenuous interpretations of what particularly the US central bank actually does (moral suasion that seems a lot less moral these days).

According to the IMF, YPF’s government reported to this particularly noteworthy supra-national organization that the country, through its own central bank, Banco Central de la República Argentin (BCRA), holds less than $39 billion in total reserves (as of November 2020). That’s not nearly enough should YPF as well as Argentina Telecom repay Eurobonds (bonds sold in offshore markets which raised US$ funds) expiring this year and next.

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This is not normally an issue during normal times because an energy business is typically one which can easily obtain a relatively efficient and sustained flow of US$ liabilities (via offshore banks, the eurodollar system). If necessary, the government can and often does raise dollars, too, and in Argentina’s case it spent much of 2016, all of 2017, and then the first couple months of 2018 doing just that.

The idea is to increase the level of national reserves such that if the eurodollar market turns from best friend to biggest foe, the government and central bank might be able to cover up and smooth out the rough patch.

Argentine officials knew they were toast, however, right from the beginning of Euro$ #4. Just look at the currency’s trading history from that point onward:

No Talk In The Dollar Shadows

The Macri government was already negotiating with the IMF for a dollar-based bailout just two weeks into the peso’s initial descent. What that tells us is that eurodollar conditions, the shadow stuff, goes on often unnoticed even by the currency’s exchange value. In other words, officials in-country knew they were in dollar trouble before it really showed up in the peso.

You could see it working backward underneath that whole time, in the shadows, even as inflation certainty the rest of the world reached its hysterical peak. I wrote in February 2018:

No. Argentina is, in fact, a pretty good if more extreme example of what’s been taking place over the past few months. Lost in this current euphoria about inflation and “globally synchronized growth” has been several troubling developments in money and global “dollar” liquidity; an escalation as I’ve called it several times since September [2017].

There are two much broader implications, therefore, contained just within the single chart above. First, the peso wasn’t an outlier in April 2018; far from it. Rather, the reason was problems building up across the entire eurodollar system (Euro$ #4), which had meant Argentina’s funding disruption wasn’t an Argentinian funding disruption at all. It was a global dollar shortage which was more easily clarified in how it more visibly impacted the system’s weaker pieces like the peso.

Second, the IMF and official “rescue.” What’s most glaring about the chart above, or should be, is that from the moment Macri contacted Christine Lagarde’s folks for bailout talks what has transpired has been the exact opposite of a rescue. The biggest action in IMF history has become its biggest blunder, an ongoing fiasco that very negatively impacts real lives.

They really have no idea what they are doing when it comes to dollars and sense.

To try to stave off oblivion in 2020, with oil prices even further depressed (recent rebound included) along with economic activity, BCRA delivered even more capital tightening back in September last year. Any “entities”, including YPF, with “hard currency” external debt (US$) expiring at any time between October 15, 2020 and March 31, 2021 has to submit a plan, and receive permission, which at the very least requires 40% of the principal to be repaid in the “official exchange market” of Argentina.

The other 60% must be restructured for at least another two years using some kind of debt swap.

It’s actually the 40% which is creating more recent bother, and not just for YPF. The official exchange market isn’t anywhere close to the actual market exchange peso-for-dollars because there aren’t any dollars available in the official market. One key reason is that even with capital controls, dollar reserves continue to dwindle officially; unofficially, who has any dollars left?

YPF has offered to restructure another $6.25 billion just this month but has run into trouble finding any takers for the “official” currency portion. Rock has met hard place.

And what this really means, big picture, is that Argentina is admitting that there is really no way for it and any company associated with the country to raise US$ funding without yet another IMF or similar “saving.” Talks, it has been said, are ongoing between the two because…

What’s being said about conditions generally to begin 2021 is that the dollar is closer to crashing than anything resembling a continuing dollar shortage. Its exchange value down, down big according to most commentary, due to an overactive Jay Powell and his Federal Reserve digitally flooding the whole globe with bank reserves. A deluge that’s reported to be (far) more likely to overdo it than come up short.

Thus, Argentina sticks out for all the wrong reasons. Again. Typically, its plight is merely dismissed as the usual basket case reverting to type. Their problems are their own making, nothing more than idiosyncratic factors having nothing to do with the rest of the world US central bankers have (allegedly) brilliantly saved. 

Just like they said when the crisis first erupted back in early 2018.

Unexpectedly, of course. And “they” get their interpretations from central bankers – like Christine Lagarde, given the short trip failing upward to now top the European Central Bank – who always and everywhere claim any kind of monetary shortage, even the one staring you in the face, is impossible.

Moral suasion, indeed.

No Talk In The Dollar Shadows

It is clear, though, that it is the eurodollar what drives growth here (and around the rest of the EM world); that when eurodollars globally had been plentiful and truly abundant via the global bank (not central bank) channels, that’s exactly when Argentina found a sustained measure of economic success. Dollars in, economy up. No dollars easily available, especially since 2011, one problem after another.

Dollar problems, since 2011 especially, these haven’t been limited to just Argentina, have they?

Dazzled by DXY and its euro component unwinding unfounded Brexit fears has given pace to broad misperception well beyond these specific locales of South America. The dollar isn’t acting like that – at all. No crash anywhere on the horizon. On the contrary, it remains elsewhere more like Argentina than European euro.

That’s not to say the dollar is rising again, broadly speaking, it’s not; that’s only where the peso is the current outlier.

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But why hasn’t the dollar gone far lower against the rest of the planet given this presumed flood of dollars? And its stubbornness is most evident right in the EM currency crosses that represent these most vulnerable parts. The reason is the eurodollar system is more dry than overflowing, even now, certainly of what still hides in the shadows behind stubborn exchange values.

And it’s not just non-European dollar exchange rates where the hints of shadow uncertainty can be witnessed. Just look at the Treasury market (or German, if you like):


No Talk In The Dollar Shadows

As my podcast co-host Emil Kalinowski quite rightly pointed out recently, the UST curve is hardly anything like the inflationary warning sign it’s being made out to be. On the contrary, like the persistent dollar exchange value, why hasn’t the yield curve moved a whole lot more than what little it has?

In fact, the curve today is significantly shrunk underneath where it had been one year ago – back when the growing specter of global deflation and money shortage was rapidly rising in probability. The yield curve today lingers yet underneath the lowest point (September 2019) of the so-called recession scare of the prior summer (which proved to be a bit more than a scare, even before COVID).

And this with a pandemic vaccine rolled out, and the Treasury Department’s TGA surely to be pilfered down to zero at some point over the coming months if not weeks.

Compared to the top of Inflation Hysteria #1, when Argentina’s peso was already undermining that story, today is no comparison whatsoever.

But Argentina continues to undercut the dollar crash, dollar flood, inflationary story anyway. It may seem like a global dollar shortage is hard to see awash as we all are in reflationary certainty and excessive monetary hysteria. That, like early 2018, is all talk.

Jeffrey P. Snider
As Head of Global Investment Research for Alhambra Investment Partners, Jeff spearheads the investment research efforts while providing close contact to Alhambra’s client base. His company is a global investment adviser, hence potential Swiss clients should not hesitate to contact AIP

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