Even by the standards of Argentina’s debt crisis and default of 2020, the nation’s sovereign bonds are now trading at unprecedented lows.
Benchmark notes due 2030 have slumped almost four cents on the dollar to 20 cents since Silvina Batakis was named as economy minister on July 3, threatening a lurch to the left in a government battling economic turmoil. Prior to the restructuring of debt two years ago, the bonds, which had higher coupons than today’s ones, never fell below 23 cents.
It’s a sign of just how bad things are that even the notes due 2046 were recently trading below 20 cents, though the government confirmed last week that it will make a coupon payment of almost US$700 million due on July 9. While that would have given investors a quick 5.5 percent return on the bonds in a few days, it wasn’t enough to peak their interest.
“The market is already pricing in a catastrophe, or something near that,” said Joaquín Almeyra, a fixed income trader at Bulltick LLC in Miami. “Nobody can predict what will happen in six months, and there’s no way you can make an investment in that context.”
Argentina’s current debt woes are happening even as the government pays next to nothing on its sovereign bonds. Two years ago, the debt had coupons as high as eight percent, with those notes sinking as low as 23 cents on the dollar before a restructuring deal gave creditors about 53 cents. Today’s securities carry coupons that step-up from as low as 0.5 percent and have no principal due until 2024.
Last week’s pessimism stems from uncertainty over how Batakis, a little-known bureaucrat with ties to the government’s leftist faction led by Vice-President Cristina Fernández de Kirchner, will run the economy.
For now, Batakis is signaling she’ll continue on the path laid out by her predecessor, saying in a TV interview on July 6 the government wouldn’t devalue the official exchange rate, that it wouldn’t increase export taxes further, and that its fiscal deficit target of 2.5 percent of gross domestic product for this year will remain in place.
But in an economy beset by a litany of problems including 60 percent inflation, a slumping parallel exchange rate and falling demand for local debt rollovers, there is little confidence the country will meet targets laid out in a US$44-billion lending programme with the International Monetary Fund. And that is the only thing keeping Argentina’s foreign currency reserves afloat and with it, dollar debt payments.
“The government may use devaluation of the official exchange rate only as a last resort,” said Javier Casabal, a fixed income strategist at Adcap, a local brokerage. “But keep in mind that one of the principal problems with the deficit is energy subsidies, which would go up with a devaluation, aggravating the problem.”
Batakis said on Thursday that Argentina will “move ahead quickly with reducing subsidies,” according to a summary of her remarks to local media outlets sent by a spokeswoman.
Efforts by her predecessor, Martín Guzmán, to raise energy prices were met with opposition by left-leaning lawmakers in Argentina’s Energy Ministry, and his inability to make progress on the issue was a major reason for his resignation, according to a report by Portfolio Personal Inversiones.
A spokeswoman for Batakis didn’t reply to requests for further comments.
Keeping the status quo won’t serve to rebuild investor confidence in the crisis-prone nation. There are prospects for regime change in the October 2023 elections, but investors are wary of jumping back into Argentina, especially when other countries with lower default risk offer similar returns.
“The problem is the elections are quite far away, and while the opposition has a really good chance of coming back, we still could face more deterioration,” said Nathalie Marshik, managing director for fixed income at Stifel Nicolaus & Co in New York. “Batakis won’t rock the boat, but the boat may just capsize by itself.”
by Scott Squires, Bloomberg