Global Investing

Chaco signals warning for Argentina debt

A raft of Argentine provinces and municipalities suffered credit rating downgrades this week after one of their number, Chaco, in the north of the country, ran out of hard currency on the eve of a bond payment. Instead it paid creditors $260,000 in pesos. Now Chaco wants creditors to swap $30 million in dollar debt for peso bonds because it still cannot get its hands on any hard currency.

The episode is a frightening reminder of Argentina’s $100 billion debt default 10 years ago and unsurprisingly has triggered a surge in bond yields and credit default swaps (CDS). But broader questions also arise from it.

First, will debt “pesification” by some Argentine municipalities snowball to affect international bonds as well? And second, is municipal debt likely to become a problem for other emerging markets in coming months?

In Argentina, where the central bank is zealously guarding its sparse hard currency reserves, it does look likely that more provinces will follow Chaco’s example and pay creditors in pesos. But many of these municipal bonds, including Chaco’s, are governed by local law and are mostly held by Argentines. Analysts at Barclays say it is unlikely Buenos Aires will “pesify” debt issued under international law, i.e. force creditors to take payment in pesos. That’s because changing payment terms of international law paper could constitute full-fledged rather than technical default (as in Chaco’s case) and can also trigger cross default clauses. Barclays tells clients:

We believe that local law dollar debt of provincial governments and corporations will be mostly paid in pesos, as per July regulatory changes that ban exchange rate purchases without a “predetermined purpose”. But we do not expect changes in external provincial or corporate debt. Federal government local and external debt will remain honored in dollars, in our view.

Election test for Venezuela bond fans

Investors who have been buying up Venezuelan bonds in hopes of an opposition victory in this weekend’s presidential election will be heartened by the results of a poll from Consultores 21 which shows Henrique Capriles having the edge on incumbent Hugo Chavez.  The survey shows the pro-market Capriles with 51.8 percent support among likely voters, an increase of 5.6 percentage points since a mid-September poll.

Venezuelan bonds have rallied hard ever since it became evident a few months back that Chavez, a socialist seeking a new six-year term, would face the toughest election battle of his 14-year rule. Year-to-date returns on Venezuelan debt are over 20 percent, or double the gains on the underlying bond index, JP Morgan’s EMBI Global. And the rally has taken yields on Venezuela’s most-traded 2027 dollar bond to around 10.5 percent, a drop of 250 basis points since the start of the year.

But Barclays analysts are advising clients to load up further by picking up long-tenor 2031 sovereign bonds or 2035 bonds issued by state oil firm PDVSA: