Argentina is giving some of its largest bondholders the chance to trim their holdings in one of the world’s worst-performing currencies, offering to swap their local peso securities for dollar-denominated assets.
Monday’s offer is the first of two planned US$750-million bond exchanges, which the government says were designed for foreigners who want to get rid of peso holdings. Franklin Templeton Investments and Pacific Asset Management Co, the largest owners of the peso bonds eligible for Monday’s exchange, declined to comment about their intentions.
While in most countries investors seeking to get out of local debt would just sell the notes and transfer their money abroad, Argentina’s capital controls prevent money from leaving the country under all but a few circumstances. Buying local, dollar-denominated notes may be the next best option for investors who want to convert their peso assets or eventually pull their money from the country entirely.
The swap is likely to appeal to investors wary of the outlook for further weakening of Argentina’s peso, which has plummeted 24 percent this year and 52 percent since the end of 2018. Traders are bracing for a sudden devaluation that analysts say the government may be forced into if it can’t stabilise international reserves.
The Economy Ministry said in June it would offer ways for international holders of its local debt to dollarise, as speculation tied to the peso was “creating conditions of financial and macroeconomic instability.” The country’s official exchange rate is kept artificially strong by capital controls, while the parallel rate used to skirt the rules recently reached its weakest relative to the official rate in 30 years.
Monday’s swap will allow holders of Treasury notes and inflation-linked Lecer and Boncer bonds due within the next six months to exchange them for dollar bonds due in 2030 and 2035. The exchange will probably take place near the weaker parallel rate, a measure known as the blue-chip swap, according to Alejo Costa, the chief Argentina strategist at BTG Pactual in Buenos Aires.
Owners of the new bonds may decide to hold onto them if they see the potential for gains in Argentina, but another option will be selling them overseas for dollars, allowing the funds to reduce their exposure to the South American country as it suffers through its worst economic contraction on record.
Franklin Templeton and Pimco were the largest reported foreign holders of inflation-linked Boncer bonds eligible for Monday’s swap, according to data compiled by Bloomberg based on filings from September 30 and June 30.
To be sure, the planned swaps wouldn’t be enough to allow foreign investors to dollarise all their holdings. Analysts say it’s difficult to estimate just how much of Argentina’s local debt is owned by overseas funds, but the total amount could be between US$4 billion and US$6 billion, according to estimates by Costa.
Investors including Franklin Templeton and Pimco rushed to lend to Argentina in 2016 when former president Mauricio Macri promised reforms that would lure overseas investment, a pledge that largely went unfulfilled. Franklin Templeton then expanded its Argentina bet in 2018, buying S$2.3 billion in peso-denominated securities.
But a tumbling peso and the government’s local debt default in April have translated into big losses for the US-based funds. Since the end of 2018, local-currency Argentine debt has lost close to 60 percent in dollar terms, by far the worst performance among 20 countries ranked by the Bloomberg Barclays Emerging Markets Local Currency Government Index.
Despite winning US$38 billion in debt relief from its international creditors, Argentina has struggled to conjure economic growth and was particularly hard hit this year by the pandemic. Gross domestic product is set to contract about 12 percent and international reserves have fallen to a four-year low.
by Scott Squires, Bloomberg