Fernandez $7.5 Billion Reserve Raid Signals No Bond Sale: Argentina Credit

Argentine President Cristina Fernandez de Kirchner’s bid to use $7.5 billion in reserves to pay debt next year shows that the country may delay plans to sell international bonds for the first time since 2001.

A record 55-million ton soybean harvest and surging automobile sales to Brazil are helping South America’s second- biggest economy build up a $12 billion trade surplus and boost reserves 6.4 percent so far this year to $51.1 billion, a record level reached yesterday. Tapping reserves will allow the government to hold off on a bond offering , said Eduardo Suarez, an emerging-markets strategist at Royal Bank of Canada.

“This signals that they are willing to keep on using reserves to pay debt and wait for interest rates to fall to levels they find attractive, say 8 or 9 percent, before they decide to issue debt,” said Suarez in a telephone interview from Toronto. “They are showing patience.”

The extra yield investors demand to hold Argentine dollar bonds instead of U.S. Treasuries has fallen 224 basis points, or 2.24 percentage points, to 652 at 9:22 a.m. New York time from a high this year of 878 basis points. That’s still more than double the 274 basis point average for major emerging market economies, according to JPMorgan Chase & Co. indexes.

Photographer: Nelson Ching/Bloomberg

Argentina’s economy expanded 11.1 percent in June from a year earlier, the government reported Aug. 20, and may grow 8.9 percent this year, the fastest since 2005, according to the budget submitted yesterday. Close

Argentina’s economy expanded 11.1 percent in June from a year earlier, the government... Read More

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Photographer: Nelson Ching/Bloomberg

Argentina’s economy expanded 11.1 percent in June from a year earlier, the government reported Aug. 20, and may grow 8.9 percent this year, the fastest since 2005, according to the budget submitted yesterday.

Economy Minister Amado Boudou presented a 2011 budget yesterday that calls for spending 59 percent more in reserves next year after allocating $4.7 billion this year to debt. Boudou said the strategy is prudent in a “difficult international context.” Finance Undersecretary Adrian Cosentino also said in a Sept. 15 interview in Beijing that Argentina is in “no hurry” to return to international debt markets, citing “a healthy macro position.”

Sale Delay

The decision to use more reserves comes eight months after Fernandez fired former central bank President Martin Redrado after he refused to back her policy of tapping reserves, replacing him with Mercedes Marco del Pont, a former lawmaker from the ruling coalition.

Boudou in May delayed a $1 billion bond sale the government had planned to make during a restructuring of $12.9 billion of defaulted debt in June. Boudou said then that the country doesn’t need the money and would wait for benchmark yields to fall below 10 percent. The yield on the 2017 note rose nine basis points today to 9.99 percent, after closing below 10 percent yesterday for the first time since Aug. 23.

Standard & Poor’s raised the country’s foreign and local debt ratings on Sept. 13 one level to B, five steps below investment grade, saying Argentina’s “strong” economic expansion is helping it make debt payments.

Economic Growth

Argentina’s economy expanded 11.1 percent in June from a year earlier, the government reported Aug. 20, and may grow 8.9 percent this year, the fastest since 2005, according to the budget submitted yesterday.

Warrants linked to growth in South America’s second-biggest economy rose 0.21 cent to 11.48 cents, the highest since May 2008, according to data compiled by Bloomberg. The peso was little changed at 3.9498 per dollar.

The cost of protecting Argentine debt against non-payment for five years with credit-default swaps slid 24 basis points yesterday to 769, according to data compiled by CMA DataVision. 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 debt agreements.

Inflation Forecast

The 2011 budget forecasts that consumer prices will rise 8.9 percent from this year. Gross domestic product will expand 4.3 percent, with revenue climbing 22 percent next year to 492 billion pesos, according to the budget.

Inflows will likely be higher than that since the budget is based on official inflation, which is less than half of actual inflation that may climb as high as 30 percent next year, said Henry Stipp, who helps manage $98 billion of assets, including Argentine bonds, at Threadneedle Asset Management in London.

“This gives them some comfort,” Stipp said in a phone interview. Still, Argentina “cannot rely on this measure forever and will have to adjust their fiscal stance going forward,” he said.

Economists and politicians including Vice President Julio Cobos have questioned the government’s price reports since Fernandez’s husband and predecessor, Nestor Kirchner, began changing personnel at the national statistics institute in 2007.

The government forecasts that it will have a budget surplus of 0.13 percent of gross domestic product, up from 0.07 percent this year. The peso will fall 3.7 percent to 4.1 per dollar next year, Boudou told reporters.

Creditors

Argentina is likely using reserves because its financing gap is expected to rise next year to about $10 billion from about $6 billion this year, said Bret Rosen, a Latin America debt strategist with Standard Chartered Bank in New York.

The sale of another $1 billion worth of 2017 bonds could also set a benchmark for corporate lenders seeking to sell debt. It would demonstrate that the government has been able to avoid threats by litigating creditors holding $4.5 billion worth of defaulted bonds left outstanding from the 2001 default, he said.

“If they can sell bonds it would be more of a symbolic issuance,” Rosen said. “More to show that they can come to market and not that they badly need the money.”

To contact the reporter on this story: Drew Benson in Buenos Aires at abenson9@bloomberg.net

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