A greengrocer counts Argentine peso bills at a local market,as Argentina is due to release consumer inflation data for April, in Buenos Aires, Argentina May 11, 2024. REUTERS/Irina Dambrauskas/File Photo

By Jorge Otaola

BUENOS AIRES (Reuters) - Argentina's peso and sovereign bonds tumbled on Thursday after the central bank executed its largest daily dollar sale in five months, as fresh legislative defeats for President Javier Milei stoked investor fears that his fiscal austerity program is in jeopardy.

Pressure mounted on the peso as institutional investors rushed to dollarize their holdings, forcing the central bank to sell $379 million to meet demand. It was the bank's biggest single-day intervention since April 11, just before currency controls were eased.

The sale followed a $53 million intervention on Wednesday, bringing the two-day total to over $430 million.

The intense pressure hammered Argentina's risk assets, with the S&P Merval stock index closing down 4.93% and sovereign bonds falling an average of 3.8%.

"Black Thursday, in every sense for the bonds. A crazy and difficult day to face such losses," said a trader.

The market turmoil sent the country's risk index, a measure of investor confidence, surging past 1,400 basis points intraday, its highest level in a year.

The central bank's heavy intervention held the official interbank exchange rate steady at 1,474.5 per dollar. On Thursday, the monetary authority began publishing the limits of its daily trading band, setting them at 1,474.83 for sales and 948.76 for purchases.

Since April, when Argentina inked a $20 billion deal with the International Monetary Fund, the exchange rate has operated within a daily floating band, and the central bank must step in when the currency hits the upper or lower limits.

However, soaring demand for the safe-haven dollar spilled into the informal "blue" market, where the peso weakened 1.32% to a historic low of 1,510 per greenback, according to traders.

According to brokerage firm Cohen, the market is "testing the ceiling" of the band ahead of midterm elections scheduled for October 26.

The central bank's own projections show the top end of the band reaching 1,494.04 pesos per dollar by October 27, the day after the elections, and further devaluing to 1,526.6 by year-end.

Futures contracts are pricing it far weaker, at 1,630 per dollar.

INTERNATIONAL RESERVES ARE STRAINED

Milei's spokesman Manuel Adorni on Thursday sought to downplay the central bank intervention.

"The economic program, which includes fiscal, monetary and exchange-rate policies, is consistent, and the fundamentals are correct," Adorni stated at a press conference.

"The system is designed to avoid any problems when operating within the established currency band."

Analysts, however, warned that continued intervention by the central bank would deplete the country's international reserves, currently at a provisional $39.4 billion. This renews concerns about Argentina's ability to meet its upcoming debt obligations.

Financial firm Rava Bursatil noted, citing consultancy 1816, that external debt payments through 2027 total $34 billion, and that Argentina needs an additional $27 billion in reserves to meet those payments without its net reserves turning negative.

MARKETS HAVE ELECTION ANXIETY

Argentines in just over a month will vote to replace chunks of both chambers of Congress, which is currently controlled by Milei's opposition.

The upcoming election has created anxiety in markets, as a recent defeat for the ruling party in a local election in the influential province of Buenos Aires triggered a rush to buy dollars, a collapse in asset prices, and a spike in the country risk.

Recent legislative defeats for Milei's administration in Congress have also raised doubts about the government's ability to maintain its planned fiscal surplus.

As thousands of Argentines filled the streets of downtown Buenos Aires on Wednesday to demand increased funding for universities and pediatric care, Congress approved two bills to increase budgets for health and education - sectors subject to Milei's sharp spending cuts.

(Reporting by Jorge Otaola; Writing by Brendan O'Boyle and Kylie Madry; Editing by Aida Pelaez-Fernandez, Gabriel Araujo and Leslie Adler)