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Argentine peso gets knocked lower, country risk soars as government eyes debt 'reprofiling'

Economy Aug 29, 2019 10:50AM ET
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By Hugh Bronstein and Walter Bianchi

BUENOS AIRES (Reuters) - Argentina's peso slumped on Thursday and its 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 face.

The recession- and inflation-racked country's latest woes began when business-friendly President Mauricio Macri suffered an unexpectedly harsh defeat in an Aug. 11 primary election at the hands of populist-leaning Peronist Alberto Fernandez.

That unnerved investors, who feared that the return of the left to power could herald another debt restructuring in Latin America's third-largest economy.

By the time Treasury Minister Hernan Lacunza said on Wednesday the government wanted to extend the maturities of short-term local debt instruments and would negotiate with holders of its sovereign bonds and with the International Monetary Fund, a debt revamp was already widely expected.

The peso nonetheless fell 2.6% to 59.65 per U.S. dollar, having lost 24% of its value since Macri's primary vote debacle all but erased his chances of being re-elected in October.

Argentine spreads over safe-haven U.S. Treasury bonds, which measures perceived risk of default, rose 177 basis points higher to 2,249 on Thursday on JP Morgan's Emerging Markets Bond Index Plus.

The Merval (MERV) stock index sank 4% at the open 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.

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 labelled the operation a "reprofiling" of obligations that will affect institutional rather than individual investors.

He 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 is now the clear front-runner.

"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."


The central bank spent $367 million of its reserves in foreign exchange market interventions on Wednesday alone, part of its effort to defend the beleaguered local peso.

"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.

"It now looks like a disorderly phase of a debt restructuring with a piecemeal strategy of seeking debt relief without a comprehensive debt repayment plan," Morden said in a note, adding, "capital controls could quickly follow as this official recognition of cash flow stress will only trigger further dollar demand and capital flight."

Key players going forward will be the IMF, which has a $57 billion standby loan deal with Argentina and Fernandez, who is now the front-runner to become president at the end of the year.

Fernandez has said he wants to renegotiate the IMF pact, which calls for unpopular austerity measures that had damaged Macri's popularity and set him up for the drubbing he took in the primary vote.

A crunch point could be Sept. 15, when the next IMF loan tranche - about $5.4 billion - is due to be disbursed.

"The re-profiling was already in the prices," said Alberto Bernal, chief emerging markets strategist at XP Investments in New York.

"I expect the IMF to be supportive of the decision, not least because the IMF is already fully involved here," he added. "As far as I understand this transaction does not trigger CDS (credit default swaps), but will force rating agencies to declare that Argentina is now once again in Selective Default."

Selective default is when a country fails to make payments on one debt obligation but makes good on others.


A major question is how Fernandez will react to the reprofiling plan, considering he may become president in December. He had not made any public comments as of Thursday.

"Having been of the idea that Argentina faces not only liquidity but also solvency issues, we doubt maturity extensions would effectively solve Argentina's problems," Deutsche Bank (DE:DBKGn) said in a note.

"In our view, risk/reward remains skewed to the downside, considering the confusions and uncertainties surrounding these announcements, including (but not limited to) how Fernandez will react," the note said.

Restructurings are a traumatic subject for voters who remember the country's 2001/2002 default, which punctuated an economic meltdown that tossed millions of middle-class Argentines into poverty. Subsequent mini-defaults kept the country locked out of global capital markets for years.

Macri prided himself on getting the country out of default early in his administration and promised to reintegrate Argentina with the global markets. But Macri overestimated his ability to attract the foreign direct investment needed to provide Argentina with sustained economic growth.

Weakness in the peso has meanwhile eaten away at the government's ability to repay its dollar-denominated obligations.

The reprofiling will first apply to short-dated debt denominated in pesos as well as dollars but issued under local law, Lacunza said. The measure will require approval from Congress.

While markets understood the plan targets short-term domestic sovereign debt denominated in dollars or Argentine pesos, it was still unclear how international investors might be affected.

Some welcomed Argentina's efforts to tackle its debt burden.

"They haven't got the money, so some adjustment is necessary," said Abhishek Kumar, lead emerging markets portfolio manager at State Street (NYSE:STT) Global Advisors.

"The measures they take are still unknown, but anything is good because it realigns to the reality."

Argentine peso gets knocked lower, country risk soars as government eyes debt 'reprofiling'

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