Argentina’s Dire Month: From Dry Run Election to Quasi Default

(Bloomberg) -- Even by Argentina standards, August was a particularly dire month.

Markets have tumbled almost without stop after opposition leader Alberto Fernandez routed President Mauricio Macri, a market favorite, in an Aug. 11 primary vote, seen as a dry run for the Oct. 27 election. The peso is down more than 23%, by far the worst in emerging markets, and bonds have yet to find a floor, with notes due 2021 down more than 50% this month and yields of 75%.

The crisis came to a head Wednesday when the administration announced it would postpone $7 billion of payments on short-term local notes held by institutional investors this year and seek the “voluntary reprofiling” of $50 billion of longer-term debt. It will also start talks to delay payments on $44 billion it has received from the IMF.

The announcement prompted S&P Global Ratings and Fitch Ratings to declare the nation in default, citing the delayed payments on local notes. S&P set the grade at CCC- on Friday as the new rules for the short-term debt came into effect.

Opposition presidential candidate Alberto Fernandez told Dow Jones today that the country was in a virtual default and that he was unwilling to support the government’s debt plan. By contrast, he would look to boost consumption and wouldn’t ask permission from the IMF to do it.

Bonds extended their declines, though drops were more muted than previous daysas investors are already pricing in an over 90% chance of default in the next five years. The century bond sold just two years ago fell below 40 cents on the dollar for the first time, while the peso dropped 2.2%.

“On the bright side, some welcome efforts to lower the country’s liquidity constraints,” said Sebastian Barbe, the Paris-based head of emerging-market strategy at Credit Agricole. “However, on the dark side, some other investors mention that this would be only a temporary and partial fix, and that, given Argentina’s challenged solvency, the risk could be another default in the future. We remain very cautious on Argentina and the peso.”

The upset in the primary election had already led two of the three biggest ratings companies to downgrade Argentina. On Aug. 16 Fitch cut the country’s long-term issuer rating by three notches to CCC from B, while S&P lowered the country’s sovereign rating to B- from B and slapped a negative outlook on it.

IMF officials who were visiting Argentina at the time of the announcement said they are analyzing the measures.

‘Safeguard Reserves’

“Staff understands that the authorities have taken these important steps to address liquidity needs and safeguard reserves,” the lender said in a statement.

The fund was expected to disburse another $5.3 billion in the next few months from a record $56 billion agreement, though that’s far from certain given the current crisis.

Without the loan disbursement and cut off from global money markets, the country was facing a serious financing challenge. Morgan Stanley estimated Argentina needed $12.9 billion for repayments on dollar-denominated Treasury bills and bonds in the last four months of the year. Many of those payments have now been pushed back to next year.

Meanwhile, the country’s dollar buffers are draining away. Foreign exchange reserves fell to $56 billion Thursday, and Capital Economics estimates that net reserves -- which exclude deposits at commercial banks -- were already at $19 billion earlier in the week, down from $30 billion in mid-April. That only covered a quarter of Argentina’s gross external financing needs of $100 billion, which includes debt maturing over the next year plus the current account deficit.

(A previous version of this story corrected rating in the fourth paragraph to CCC- from CCC)

--With assistance from Robert Brand.

To contact the reporter on this story: Julia Leite in Sao Paulo at jleite3@bloomberg.net

To contact the editors responsible for this story: Daniel Cancel at dcancel@bloomberg.net, Philip Sanders, Walter Brandimarte

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