Argentine CDS spiral on “peso-fication” fear

June 8, 2012

Investors with exposure to Argentina will have been dismayed in recent weeks by the surging cost of insuring that investment — Argentine 5-year credit default swaps have risen more than 300 basis points since mid-May to the highest levels since 2009. That means one must stump up close to $1.5 million to insure $10 million worth of Argentine debt against default for a five year period, data from Markit shows.

The rise coincides with growing fears that President Cristina Fernandez Kirchner is getting ready to crack down on people’s dollar holdings. Fears of forcible de-dollarisation have sent Argentine savers scurrying to the banks to withdraw their hard currency and stash it under mattresses. That has widened the gap between the official and the “black market” exchange rate. (see the graphic below from Capital Economics)

While government officials have denied there is such a move afoot, Fernandez has not helped matters by exhorting people to “think in pesos”.  That will be hard for Argentines, most of whom have vivid memories of hyperinflation, default and devaluation. Unsurprisingly, most prefer to save in dollars. 

So how worried should holders of Argentine bonds be? Not very, say analysts (unless one holds peso securities). 

First of all, dollar debt payments due this year amount to just over $5 billion (a $2.3 billion Boden issue maturing in August and a $3 billion payout on GDP warrants in December).  But central bank reserves (which the government is free to dip into) stand at $47 billion. 

Second, fears that Argentina may try to repay maturing dollar debt in pesos at the official exchange rate, are misplaced, JP Morgan says, noting that outstanding dollar bonds that are held by foreigners and governed by domestic law, amount to only $19 billion, or 11 percent of sovereign debt. 

Argentine spreads on the EMBI Global index have nevertheless widened to the highest since 2009 and is the worst performer in the index this year, reflecting bondholders concern.  Analysts at JPM note that fear of “peso-fication” will linger:

It is likely to further depress bond prices as financial investors will extrapolate the risk of pesofication to their securities.

Michael Henderson, an economist at Capital Economics is pessimistic on Argentina. He predicts a currency crisis in coming years as growth slows and the trade surplus vanishes, piling more pressure on the peso and forcing the government into more draconian capital controls. In the short-term however, he sees risks as relatively muted:

The idea that they will change people’s perceptions about the peso is a big stretch. But the CDS move is more down to political risk and I wouldn’t read it as an indication of their inclination to repay debt. It’s not a crippling debt burden. 

One comment

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Ms Rao,

Thank you for a fine article. I have read that the default Argentina used some years ago still causes international currency problems for the country. Is that true? I assume that it is, and yet there appears to be acceptance of this in populatioon. Is there no free market voice, such as the libertarians or “chicago school”/supply side economists that you find in America?no s

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