Argentina Forecast to Default Without Debt Accord: Week Ahead
Argentina will be forced to default by 2011 unless the government reaches an accord with investors holding $20 billion of bonds kept out of the last restructuring offer, Stone Harbor Investment Partners says.
President Cristina Fernandez de Kirchner is negotiating terms of an agreement, which the government needs to regain access to international capital markets that it lost after stopping payments on $95 billion of debt in 2001. Since then, Argentina has relied on local markets and loans from Venezuela to meet financing needs, and seized about $24 billion of pension fund assets last year to compensate for falling tax revenue.
“They’ve got to get things straightened out — they need to do that now,” said Jim Craige, who manages $10 billion of emerging-market debt at Stone Harbor in New York and owns Argentine securities, including some of the defaulted bonds.
Argentine credit-default swaps also point to concern among investors. Traders demand 1.7 percentage points more to protect the country’s debt against default for two years than one, up from 1.35 points two months ago and the widest gap among major Latin American countries, according to data compiled by CMA Datavision. The one year-two year gap on Venezuelan debt — the country with the closest borrowing costs to Argentina in the region — is 0.26 percentage point.
A basis point equals 0.01 percentage point, which is equivalent to $1,000 a year on a contract protecting $10 million of debt. Credit-default swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent.
‘Not Sustainable’
Argentina’s financing requirements jumped to $10.7 billion this year from $5.9 billion in 2008, prompting Fernandez, 56, to extend local debt maturities and turn to government agencies, state-run Banco de la Nacion and the central bank for funds, according to Credit Suisse AG. Borrowing needs will decline to $8.2 billion next year before rising to $10.2 billion in 2011, Credit Suisse estimates.
Banco de la Nacion, which lent the Treasury 1 billion pesos ($261 million) in July, is authorized to provide the government as much as 7.3 billion pesos. Argentina has issued 4.2 billion pesos of debt to state agencies this year, according to the Economy Ministry.
“You cannot live forever doing this,” said Sebastian Briozzo, an analyst in Buenos Aires with Standard & Poor’s, which rates Argentine foreign debt B-, or six levels below investment grade. “At some point you will run out of local sources of financing. It’s not sustainable.”
A spokesman for the Economy Ministry didn’t return telephone calls seeking comment low fee pay day loans.
‘Muddling Through’
Cathy Elmore, who manages $500 million in emerging-market assets at Blackfriars Asset Management, said the country has proven more resilient than she expected while it’s been cut off from international markets.
“They’ve done a good job muddling through,” Elmore, who holds Argentine securities, said in a telephone interview from London. “I’m surprised they’ve been able to carry on for so long. They’ve plundered much of the resources available to them locally.”
Lawsuits from investors such as billionaire Kenneth Dart who kept their bonds out of the 2005 agreement are blocking the South American country from selling debt overseas.
Nestor Kirchner, Fernandez’s husband and predecessor, paid investors 30 cents on the dollar in 2005, the harshest government debt restructuring since World War II, according to Arturo Porzecanski, an international finance professor at American University in Washington. About 25 percent of creditors rejected the offer.
Bonds Rally
Economy Minister Amado Boudou told reporters in Buenos Aires on Sept. 21 that the government was talking with investors in search of a “definitive strategy” for the defaulted debt. The bonds trade at 38.5 cents on the dollar, up from 15 cents in June, according to London-based Exotix Ltd., a brokerage that specializes in distressed securities.
The extra yield investors demand to own Argentina’s dollar bonds instead of U.S. Treasuries narrowed to 6.47 percentage points, the smallest gap in 14 months, from 9.62 points at the end of July, according to data compiled by JPMorgan Chase & Co.
A restructuring “would change things dramatically,” said Craige. “It will give them the ability to access capital markets. There will be a normalization of the credit curve.”
Moody’s Investors Service said Oct. 8 that a restructuring may “improve the outlook” on the country’s B3 foreign debt rating, which is also six levels below investment grade.
Without such an accord, the government “would have severe trouble,” Elmore said. “There’s only so much muddling through they can do.”
Markets
Argentina’s peso gained 0.3 percent last week to 3.8288 per U.S. dollar. The Merval stock index advanced 7.1 percent to 2,169.04.