On Feb 12 two of Argentina’s largest banks, BBVA Banco Frances S.A. (BFR) and Grupo Financiero Galicia S.A. ($GGAL) posted sizable gains without a fundamental reason. Both banks’ share price has been incredibly volatile over the last quarter. It’s the kind of action common in economies without a strong central authority. And it belies an oft-overlooked aspect of one the larger economies in South America: the country does not just take a slightly laissez-faire approach to finance, but it’s not entirely clear who’s running things.
And as a result, there’s no telling where its financial institutions will go.
The day before the bank’s spike, the economic minister of neighboring Uruguay — whose economy is closely tied to Argentina — claimed that “it is not very clear who is in charge of” Argentina’s finances. The country stood pat while their currency, the peso, devalued 19 percent as inflation rose, the country is borrowing at an unsustainable rate, and growing five-year credit-default swaps threaten to explode the economy in the very near future.
Argentine official are doing their best to put a positive spin on an economy that makes China look transparent and stable. In a letter to the Washington Post, the US’ Argentine ambassador cited the fact that Argentina possesses annualized GDP growth of 7.1 percent, ongoing debt restructuring, and the creation of more than 5 million jobs.
However, despite the ambassador’s party line, the country is still lagging behind its neighbors in growth, and even for an emerging market their economy is highly turbulent. In short, they are staring down a major crash. While Uruguay portends that Argentina has nobody behind the wheel to keep this from happening, they sort of do, just someone who likes to pass the buck.
The driver is ostensibly Argentina’s economy minister Axel Kicillof, a confrontational former professor and close ally of President Cristina Fernández de Kirchner. Kicillof tends to stand behind his populist ideological economic policies regardless of their efficacy. He has has repeatedly defended the nationalization of the country’s oil and gas industry and devaluing of the currency, moves that have been widely criticized internationally. He is also prone to blaming things like social media for resulting economic upheaval, for instance warnings that social media-fueled “disinformation” could destabilize Argentina’s economy, as opposed to poor monetary policy.
An economy run by social ideologues apparently unequipped to deal with the crisis has made foreign creditors rich. But those creditors are playing a risky game, as the second-largest economy in South America stares down its seventh default in its 198-year history.
As Argentina’s economy faces uncertainty two of its largest five banks have experienced exceedingly high price volatility. Banco Frances rose a whopping 11.59 percent to hit $6.45 a share. The bank had previously shed over 20 percent of its share price since the beginning of the year.
Galicia rose 6.02 percent to hit $8.81 a share. Galicia as well bled value since the beginning of the year, losing almost a third of its value.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer