Soros Could Come Under Fire For Argentine Peso Comments

Soros' comments on the peso Friday brought back memories of the pound in '92.
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After making negative remarks about the Argentine peso at a Chicago conference Friday, powerful hedge fund investor George Soros could be pressed on whether he used his speech to "talk up his trading book."

Not for the first time, Soros will probably be asked whether funds belonging to his New York-based company,

Soros Fund Management

, had, prior to his remarks, placed trades designed to profit from drops in the prices of Argentine financial assets. Argentine bonds and stocks have fallen sharply this week due to doubts about the viability of the country's

dollar peg.

"The Argentine peso being tied to the dollar makes it probably an overvalued currency which they have to pay for with a recession," the

Reuters

news service quoted Soros as saying at the conference organized by the

Federal Reserve Bank of Chicago

.

The country's benchmark equity index was off a nasty 4.3% Friday. The price of the country's heavily-traded

Brady Discount bond

has dropped some 6% this week.

Such declines would give good profits to anyone who has sold Argentine assets short. Selling short involves borrowing a security and then selling it in the hope of buying it back at a lower price. Such trades can also be simulated with derivatives.

Soros used this strategy most famously when he built up short positions against the British pound and helped force it out of the European

Exchange Rate Mechanism

in 1992. And Malaysian prime minister

Mahathir Mohamad

implied in 1997 that Soros and other currency traders were responsible for the steep decline that year in the ringgit. Soros Fund Management claimed later that it had actually bought the Malaysian currency during 1997.

While short activity has been building up against Argentine assets this week, there is no indication that Soros has been part of it. Soros Fund Management did not immediately respond to a request for comment on any positions involving Argentine assets.

And before jumping to any big conclusions, would-be conspiracy theorists may want to consider that Soros would almost certainly suffer significant losses if Argentina were to ditch its currency board -- the mechanism that fixes the peso at an exchange rate of one dollar -- and devalue.

That's because he has a 20%-30% stake, worth $140 million-$210 million, in a sizable Argentine real estate company called

Inversiones Representaciones

(IRS) - Get Report

, or Irsa. Irsa's stock was flat Friday. He's had a position in Irsa for over six years.

"Irsa would not be a haven if Argentina got rid of its currency board," says Sobani Warner, Latin construction analyst at

Bear Stearns

.

Warner says that although Irsa's properties generally have high occupancy rates, the much higher interest rates that would probably exist in a post-currency board Argentina would hamper the company's growth prospects.

Not only would demand fall during a recession that would likely be deep, but Irsa's borrowing costs would also soar. "The currency board has allowed Argentine companies to borrow relatively cheaply."

And Irsa's debt is not small. The total is $215 million, with some $110 million of that being short-term.

However, if Soros' funds have been shorting other Argentine assets, it would be fair to assume that they expect to make profits that well exceed potential losses on Irsa.