BUENOS AIRES (Reuters) – Argentine bond prices fell on Thursday and country risk soared to levels not seen since 2005 after the government announced plans to “reprofile” about $100 billion of its debt, leaving investors scrambling to assess what kind of hit they might take.
FILE PHOTO: A man shows Argentine pesos outside a bank in Buenos Aires’ financial district, Argentina August 30, 2018. REUTERS/Marcos Brindicci
The latest round of volatility to buffet the recession- and inflation-racked country began when business-friendly President Mauricio Macri suffered a harsh defeat in an Aug. 11 primary election at the hands of populist-leaning Alberto Fernandez.
Investors fear a return of the left to power in Argentina could herald another full-blown debt crisis in Latin America’s third-largest economy.
By the time Treasury Minister Hernan Lacunza said on Wednesday the government wanted to extend maturities here of short-term debt, and would negotiate new time periods for loans to be paid back to the International Monetary Fund, a debt revamp was already widely expected.
Argentine spreads over safe-haven U.S. Treasury bonds, a measure of the perceived risk of default, nonetheless shot 200 basis points higher to 2,272 on Thursday, according to JP Morgan’s Emerging Markets Bond Index Plus.
Developing markets investment house Tellimer calculates that $7 billion of short-term debt, $50 billion long-term debt and $44 billion of IMF debt may be earmarked for an overhaul.
Lacunza labeled the debt-extension operation a “reprofiling” of obligations that will affect institutional rather than individual investors.
The bond market gave the plan a collective thumbs down.
Argentina’s century bond traded at a record low of 40.222 cents on the dollar before inching up a couple of cents according to MarketAxess data. The January 2028 benchmark briefly dropped under 40 cents for the first time ever before edging up to trade at 40.3.
Lacunza said he would send a bill to Congress to approve changes to bonds governed by local law. Talks with holders were expected to start soon, but would likely be concluded by the government that wins the October general election and takes office in December.
Fernandez, whose running mate is former President Cristina Fernandez de Kirchner, is now the clear front-runner. Populist icon Kirchner is loved by millions of Argentines who remember generous welfare spending during her 2007-2015 administration.
“We remain cautious,” Citi said in a note. “While we think the short-term funding needs have been addressed, political uncertainty remains high: any proposal on global bonds could be unwound by the potential new administration.”
Over the counter government bonds weakened 2.2% and the Merval stock index sank 4.7% amid uncertainty over the government’s ability to carry out the debt reprofiling so close to the presidential election in October.
The Merval has plunged more than 45% since the primary vote.
The central bank spent $367 million of its reserves in foreign exchange market interventions on Wednesday and $223 million on Thursday in its effort to defend the local peso.
The central bank sold $78 million in reserves in its first intervention of the day on Thursday. It followed with a second auction of $106 million, a third of $34 million and a fourth of $5 million.
The peso reacted positively, recovering from steep early-day losses to close 0.35% higher at 57.9 per U.S. dollar. But the currency is down 21.7% since Macri’s primary vote debacle all but erased his chances of being re-elected in October.
The high cost of controlling the peso’s slide remained a concern for the market.
“The pre-emptive announcement from the Macri administration to voluntarily re-profile debt shows cash flow desperation after consistent foreign exchange reserve loss,” said Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities in New York.
Among key players going forward will be the IMF, which has a $57 billion standby loan deal with Argentina. Fernandez has said he wants to renegotiate the IMF pact, which has imposed unpopular austerity measures that damaged Macri’s popularity and set him up for the drubbing he took in the primary vote.
The reprofiling will first apply to short-dated debt denominated in pesos as well as dollars but issued under local law, Lacunza said. That would require approval from Congress.
Macri-allied lawmaker Eduardo Amadeo told Reuters that Congress will decide by how long the government will seek to extend maturities. “It’s something that has not been decided yet,” he said.
The Macri administration would need support from Fernandez and opposition lawmakers to get the reprofiling through the legislature.
“The opposition can make the debate in Congress quite painful for them and highlight that even the need to be debating this measure is a failure of the government’s policies,” said Buenos Aires-based Megan Cook, lead specialist for political and regulatory risk at the Cefeidas Group.
Reporting by Karin Strohecker, Marc Jones and Tom Arnold in London; Hugh Bronstein, Gabriel Burin, Walter Bianchi, Eliana Raszewski and Cassandra Garrison in Buenos Aires and Rodrigo Campos in New York; Editing by Hugh Lawson, Bernadette Baum and Tom Brown