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Similar Moves, Different Stories

14 August 2018 by jbchevrel

Argentina and Turkey have been the two sovereign CDS under the limelight, over the past few sessions. Yesterday wider (AR +60 TR +70), today tighter (AR -60 TR -80), Argentina and Turkey have features in common: current account and budget deficits, fast inflation, non-autonomous central banks, vulnerability to $ strength. But on the monetary side of the equation, the BCRA has taken ample measures to stem the crisis, contrary to the CBRT. Yesterday, the BCRA has hiked the 7D Leliq rate from 40% to 45% (adding that it will keep it there, at least until OCT) and sold c$500M in the FX market to keep ARS sub 30 per dollar. To stem ARS volatility, the BCRA also said that it will phase out c$33B ST notes by DEC and will make $ auctions harder to anticipate. Oppositely, in Turkey, Erdogan’s control over the CBRT has become absolute since the June vote. As part of his willingness to islamise the Turkish society, Erdogan said many times he is against hikes (‘evil’) by the CBRT. However, it is difficult to see how Turkey can attract investments with real rates close to zero, potentially leaning towards negative if inflation soars (especially after the recent rapid TRY depreciation).