From almost the moment Argentina restructured US$65 billion of debt three years ago, investors have been betting the next default was around the corner. This week, they got a better idea of who their negotiating partner will be when it comes, and they’re not at all encouraged.
As traders take stock ahead of what they expect will end up becoming the country’s fourth debt workout in two decades, overseas bonds have slumped to a two-month low. The tumble follows a shock primary result Sunday that showed voters favouring a mop-topped libertarian economist with radical proposals to dollarise the economy and lead Argentina out of its perennial economic crisis.
Javier Milei, the outsider congressman who won a third of the primary vote ahead of October’s presidential election, is a firebrand often compared with Donald Trump or Brazil’s Jair Bolsonaro. While he’s said very little about Argentina’s debt problem or the country’s relationship with creditors, investors are fretting about the implications of negotiating with a little-known populist when the all-but-inevitable restructuring comes.
“He’s an outsider and voters are frustrated,” said Jared Lou, a portfolio manager at William Blair “If he does eventually become president, it’s not clear which policy proposals he will be able to implement, given he’s likely to face significant opposition in congress.”
The Sunday vote sparked a sell-off in the nation’s overseas bonds, sending some securities dipping back below 30 cents on the dollar. The government also devalued the peso the same day, a step analysts had been urging for a long time but still came with unexpected timing.
Argentina’s sovereign bonds due 2030 extended losses on Wednesday, dropping 0.3 cent to 31.3 cents on the dollar.
Meanwhile, Wall Street is reexamining its assumptions about what the next restructuring will look like as shops from Credit Suisse to Wells Fargo predict Milei as the favourite to take over the presidency in December.
“Based on the country’s long history of defaults and debt restructurings, we do not find Argentine sovereign bonds suitable for a hold-to-maturity investment strategy, but only for trade-oriented investors with a high risk-appetite,” said Alejo Czerwonko, the chief investment officer for emerging markets in the Americas at UBS AG in New York. “We also caution against sizeable allocations in investment portfolios.”
As Czerwonko’s note signalled, the debt woes shouldn’t come as any surprise for longtime investors in Argentina, who have been bracing for the country’s 10th default from the moment it exited it’s ninth. After money managers got around 55 cents on the dollar in the last restructuring, the securities sank almost immediately to less than 40 cents, a sign investors fully expected the serial defaulter to fall back into old habits.
Investors are so sure Argentina is headed for another default because it’s been unable to build up its international reserves ahead of a wall of payments on the bonds starting next year. Central Bank reserves have dipped to a 17-year low as the economy heads toward its sixth recession in a decade.
Now, Wall Street is trying to determine just how much it can expect in the next restructuring. Czerwonko’s base case is that investors get an average 40 cents on the dollar for their bonds at an exit yield of around 15 percent, without a major haircut on the principal of the securities.
Argentina — which has paid near zero interest since 2020 — has US$2.6 billion in payments due next year and US$5.6 billion in 2025, according to Morgan Stanley analyst Simon Waever. He thinks bonds could be worth around 43 cents on the dollar if the next administration pushes out payments another four years on average.
In the best, albeit unlikely, case that Argentina avoids a default altogether, he sees the notes surging to around 50 percent of face value.
The primaries “did not bring the clarity the market was hoping for, even if a path to the bull case remains,” Waever wrote. He recommends Argentina’s cheaper bonds maturing in 2046.
Race to the right
Benchmark bonds due in 2030 had climbed as high as 36 cents on the dollar in the run-up to the vote, from as low as 24 cents in mid-April. The rally was fed by speculation the nation’s politics would swing right in the next election as voters moved to oust President Alberto Fernández’s administration, which has overseen the worsening crisis.
But the mainstream Juntos por el Cambi coalition got just 28 percent of ballots, compared with the ruling party’s 27 percent support, leaving Milei the clear front-runner ahead of the presidential vote. His closest competitor may be Patricia Bullrich — a hardline former security minister from the market-friendly opposition coalition.
Even incumbent Economy Minister Sergio Massa, whose coalition lagged on Sunday night, is seen tacking right if his party were to remain in power.
“The election trade predicated on the ‘change’ of the political landscape remains in play,” according to Citigroup strategists Dirk Willer and Donato Guarino, who recommend selling Argentina’s 2030 bonds and buying cheaper notes maturing in 2035.
To be sure, the results are far from certain, with each of the country’s three main political camps with similar levels of support. Participation in the primaries was only around 70 percent, and it’s unclear if voters whose candidates were knocked out Sunday will remain with their coalition, or migrate to another candidate in October’s first round vote.
It’s also likely the presidential vote will go to a run-off in November, which happens if the top candidate doesn’t receive 45 percent of valid votes in the first round, or fails to clinch 40 percent of them while holding onto a 10 percentage-point lead over the runner-up.
All the twists and turns ahead mean that Argentina’s bonds are likely to slump over the next few months, according to Diego Ferro, founder of M2M Capital in New York.
“I doubt we’ve seen the lows before the election,” he said. “Once a candidate gets elected, any of them will try to be more market friendly, but that doesn’t mean the challenges won’t still exist.”
by Scott Squires, Bloomberg