Lenders required to uphold a promise by Argentina's administration to convert dollar debts under USD100,000 into pesos will be left holding the foreign exchange risk that the currency will devalue further with no way to hedge it, according to foreign exchange professionals. "How can they hedge the risk. They're going to be left holding the bag. No one would want to be on the other side of that trade with a 30% devaluation in the country's currency," said George Handjinicolaou, former head of global emerging markets at Merrill Lynch. The new official peso rate is at ARS1.40 to the U.S. dollar. "The banks have no choice but to eat the risk and hope for a government bail out. There isn't a counterparty alive willing to be on the other side of a trade like that," said one foreign exchange options trader in New York.
Calls to Daniel Marx, Argentina's deputy finance minister, and Julio Dreizzen, undersecretary of finance, were not returned. Rafael De La Fuente, chief economist for Latin America atBNP Paribas in New York, said local lenders stand to lose USD3-8 billion by backing the conversion of the debt. "This is clearly a big chunk of money. This could put them in near bankruptcy," he said.
