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BUENOS AIRES, Oct 3 (Reuters) - Argentina has defaulted on its debt, the economy is stagnant, inflation is soaring and its market-friendly central bank chief has just been forced out. But its stock market is up over 100 percent this year, making it one of the world's top performers.
Investors are not buying up shares because they trust the country's economy or government policies but instead as a way of getting scarce dollars to hedge against the tumbling peso currency.
Even in dollar terms at the black market rate, the stock market's benchmark Merval index has gained 38 percent.
And the government is furious.
President Christina Fernandez this week publicly blasted the trading as unpatriotic, accusing those involved in it of trying to pull down her government and ordered an investigation into banks that use the stock market to get into dollars.
"This is pure speculation aimed at capturing exorbitant profits by supporting the dollar, because many of them have dollar positions overseas," Fernandez said in a televised address on Tuesday. "I'm asking that the regulatory agencies apply the norms needed to protect all Argentines."
She criticized the central bank for failing in its remit as regulator, even accusing it of helping commercial lenders and exporters to break currency laws.
The following day, central bank chief Juan Carlos Fabrega quit and was replaced with Alejandro Vanoli, a Fernandez loyalist expected to back her efforts to impose stronger state control over the economy.
The stock market trading strategy works like this: Argentine investors use pesos to buy stocks in the local market, especially those that are cross-listed in the United States.
It means the stock can be converted into American Depositary Receipts (ADRs) and sold in the United States for dollars.
The exchange is conducted at the "blue chip swap rate" , which is a touch stronger than the black market rate but much weaker than the official rate.
Insurance companies, banks and big businesses use the bourse in this way to get into dollars while individuals seek coveted dollars in illegal yet tolerated "cuevas", or "caves", which operate as exchange houses.
"The stock market always anticipates and gains on the devaluation of the peso and inflation," said Ezequiel Asensio, and analyst with Balanz Capital in Buenos Aires.
Contributing to the rise in the Argentine market this year were big companies such as banking conglomerate Grupo Financiero Galicia, up 93 percent; YPF, up 65 percent; and steel tube maker Tenaris, up 58 percent.
The most explosive gains came from smaller companies such as BBVA Banco Frances, up a whopping 160 percent.
Argentina's economy is stagnating due to inflation and heavy-handed trade and currency controls as well as the government's latest debt default in July.
Central bank reserves are down 8.7 percent this year to $27.9 billion, or about 4-1/2 months of import cover.
The official exchange rate has weakened about 22 percent this year to 8.4425 against the dollar while the unofficial, or black market, rate has weakened 34 percent this year to 15.15 per dollar.
Of the stock market's total rise, about 70 percent was explained by the exchange rate effect, said Alejo Costa, chief strategist at local investment bank Puente.
He said 30 percent of the rise was down to investors taking a longer-term view on fundamentals, including optimism that policies will change after next year's presidential election and over Argentina's potential as a shale oil and gas producer.
Energy investors have their eyes on the huge Vaca Muerta shale formation in Patagonia and the top three potential candidates ahead of the October 2015 presidential election are all considered more market friendly than Fernandez.
"A new group of investors entered Argentina's assets in the last few months, with a risk-tolerant, medium-term horizon view, and they have not only supported prices, but also boosted them," Costa said.
Underscoring the weight of investors trading the ADRs, the Merval shed 15 percent in the first two days of October as investors digested Fernandez's comments and Fabrega's resignation, selling heavily on the Wall Street-listed stocks.
Banks were among the worst hit on Thursday, with ADRs on Banco Macro down 6.1 percent and BBVA Banco Frances down 6.8 percent.
Both extended those losses on Friday, but the Merval index was up 5.7 percent in early afternoon trade at 11,312 points.
Equities traders said it was unclear whether this week's slide was just a blip or heavier losses would follow if the government shuts down the blue-chip swap.
"The truth is nobody knows. It's unpredictable," said a local equities trader who asked not to be named because of market fears of government reprisals. "At this point it is still legal, but tomorrow they could come out with a resolution prohibiting it." (Editing by Richard Lough and Kieran Murray)