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Default Risk Tumbles Most in World on Fernandez Economy: Argentina Credit

Argentina’s bond risk is falling the fastest of any country as South America’s second-biggest economy heads toward its largest expansion since 1992, increasing the government’s ability to pay its debt.

The cost of protecting Argentine debt against non-payment for five years with credit-default swaps plunged 274 basis points, or 2.74 percentage points, to 854 from June 3 through last week, the biggest decline worldwide for the past three months, according to CMA DataVision.

Argentina’s credit-default swaps became cheaper as an economic expansion that President Cristina Fernandez de Kirchner said last month quickened to a 9 percent annual rate increased tax revenue. They may tumble as much as 200 basis points more by the end of the year, said Nick Chamie, global head of emerging- markets research in Toronto at RBC Capital Markets, a unit of Canada’s biggest bank.

“All in all, it’s good news for Argentina with regards to economic prospects and overall risk premiums,” Chamie said.

The nation’s swaps dropped from 1,379 basis points in May as prices for soybeans and wheat exports rose and car shipments to neighboring Brazil soared. Fernandez, 57, closed an offer on June 22 to restructure $12.9 billion of debt held out of a 2005 settlement, paving the way for Argentina to tap international bond markets for the first since its record default on $95 billion of debt in 2001.

The central bank forecasts Argentina’s gross domestic product will grow as much as 9.5 percent in 2010, the most since 1992. Argentina’s tax revenue rose 37 percent in August from a year earlier to 34.6 billion pesos ($8.8 billion), the country’s tax agency reported last week.

GDP Growth

Gross domestic product rose 6.8 percent in the first quarter of this year, according to the National Statistics Institute, and growth will continue in coming months, Goldman Sachs Group Inc. economist Alberto Ramos wrote in a Sept. 3 report from New York.

“There is a high probability that following the steady expansion recorded during the first half of 2010 the economy will continue to expand over the next few months,” Ramos wrote.

Five-year credit-default swaps tied to Argentine debt plummeted 389 basis points since June 1. A basis point equals $1,000 annually on a contract protecting $10 million of debt. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Venezuela Default Insurance

Venezuela had the biggest decline in default insurance after Argentina during the past three months, with five-year swaps dropping 133 basis points to 1252. The cost of protecting Greek debt rose the most during the period, climbing 133 basis points to 859, nearing parity with Argentina. Greece was forced to seek an EU-led bailout in May after mounting concerns the country may default drove up borrowing costs.

The extra yield investors demand to hold Argentina’s dollar bonds instead of U.S. Treasuries fell to 686 basis points on Sept. 3 from 852 on June 8, according to JPMorgan Chase & Co.’s EMBI+ index.

The peso was little changed at 3.9443 per dollar today at 5:00 p.m. New York time. The yield on benchmark 7 percent bonds due in 2015 rose six basis points to 10.65 percent while warrants linked to economic growth gained 0.16 cents to 11.31 cents today, according to data compiled by Bloomberg.

‘Massive Outperformer’

Economic growth has helped Argentine bonds be “a massive outperformer,” said Edwin Gutierrez, who manages about $5 billion of emerging-market debt, including Argentine securities, at Aberdeen Asset Management Plc in London. The decline in costs to insure Argentina’s debt may slow should Fernandez be reelected in 2011, he said.

Fernandez’s husband and predecessor, Nestor Kirchner, offered creditors about 30 cents on the dollar in the 2005 settlement of the defaulted bonds, the harshest restructuring terms since at least World War II, according to Arturo Porzecanski, an international finance professor at American University in Washington.

Four years earlier, Argentina was mired in a three-year economic slump in late 2001 that made it harder for the country to make payments on billions in dollar-denominated debts it racked up in the 1990s, when the peso was fixed one-to-one against the U.S. dollar. The government moved to slash salaries and freeze bank accounts, spurring violent protests. Residents across Argentina took to the streets to oppose the measures, with more than two dozen people killed in protests.

Consumer Price Data

Economists and government officials including Vice President Julio Cobos have also questioned the accuracy of the nation’s consumer price index, saying officials have underreported price increases since January 2007, when Nestor Kirchner made personnel changes at the statistics agency

“Growth masks a lot of problems and that’s a very valid point on the political front as well,” Gutierrez said. “The politics, though, is actually something that could weigh on the market sometime down the line, especially the prospects of the Kirchners returning. That is bad for the markets, unequivocally bad.”

RBC’s Chamie said he expects Argentina will continue to outperform.

“Argentina will probably lead the pack” through the end of the year, Chamie said.

To contact the reporters on this story: Ben Bain in New York at bbain2@bloomberg.net; Drew Benson in Lima at abenson9@bloomberg.net.

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