Surging Inflation Spurs Debt Concern in 2012, Swaps Show: Argentina Credit
Argentina's President Cristina Fernandez de Kirchner
Michele Tantussi/Bloomberg
Argentina's President Cristina Fernandez de Kirchner took $5.9 billion of the central bank’s record reserves this year to pay bondholders and plans to use another $7.5 billion in 2011.
Argentina's President Cristina Fernandez de Kirchner took $5.9 billion of the central bank’s record reserves this year to pay bondholders and plans to use another $7.5 billion in 2011. Photographer: Michele Tantussi/Bloomberg
The third-highest inflation rate in the world is making investors less confident in Argentina’s ability to keep up economic growth and repay debt beginning in 2012, credit default swaps show.
Five-year contracts that protect investors against a default by Argentina cost 123 basis points, or 1.23 percentage points, more than two-year swaps on Oct. 15, the biggest gap in a year, according to CMA prices. The difference in similar- maturity swaps for Venezuela, whose contracts are the most expensive among 71 countries tracked by Bloomberg, is 10.
At 11.1 percent, Argentina’s inflation rate is the highest in the world after Venezuela and Pakistan, and Goldman Sachs Group Inc. and Barclays Plc estimate the actual rate is closer to 25 percent. The central bank’s printing of pesos to weaken the currency and help maintain a growth rate, which the central bank estimates at more than 9.5 percent this year, isn’t sustainable, according to Goldman Sachs.
“There’s a huge amount of fiscal monetary stimulus, so this economy will get tired pretty soon,” said Alberto Ramos, an economist at Goldman Sachs in New York. “If you continue to over-stimulate the economy and the investment environment isn’t friendly, you’re going to generate more inflation. This model isn’t sustainable in time.”
The cost of protecting Argentine debt against non-payment for two years using credit-default swaps tumbled to 609 basis points yesterday from 1,460 on May 25, according to CMA. The country’s five-year contracts sank to 699 from 1,379 during the same period.
Foreign Reserves
Argentina’s default risk is declining after President Cristina Fernandez de Kirchner, whose term ends December 2011, restructured $12.2 billion of debt in June left over from the country’s 2001 default and as a record 55-million metric ton soybean harvest propels the fastest economic expansion since 1992, according to the central bank. Fernandez, 57, took $5.9 billion of the central bank’s record reserves this year to pay bondholders and plans to use another $7.5 billion in 2011.
The government said consumer prices rose 11.1 percent in September from a year earlier, the third-highest inflation rate of 78 countries tracked by Bloomberg behind Venezuela’s 28.5 percent and Pakistan’s 15.7 percent. Argentines expect prices to rise 30 percent over the next year, according to a monthly survey published Oct. 14 by Buenos Aires-based Torcuato Di Tella University.
Economists and politicians from Vice President Julio Cobos to former Economy Minister Roberto Lavagna began to question official inflation statistics in early 2007, when then-President Nestor Kirchner made personnel changes at the national statistics institute. Kirchner and Fernandez say government data is accurate.
‘Inflation Problem’
“The elections are next year and there is the risk the inflation problem will regain attention and will have to be addressed,” said Donato Guarino, an analyst at Barclays in New York who recommends investors sell five-year Argentine default swaps and buy the two-year contracts.
Government spending surged 40 percent in September from the year earlier, according to a report released by Economy Minister Amado Boudou on Oct. 19.
Nouriel Roubini, the New York University professor who predicted the global financial crisis, said the outlook for Argentina’s economy is “cloudy” and gross domestic product is slated to decline in 2011 as the global slowdown may lead to less exports.
The country’s “loose” fiscal and monetary policies have encouraged domestic demand and led to high inflation, Roubini said yesterday in a speech in Buenos Aires.
Default Swaps
Credit-default swaps insuring Argentine debt for five years are the second-most expensive among the 71 countries tracked by Bloomberg. The contracts 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. A basis point on a contract protecting $10 million of debt from default is equivalent to $1,000 a year.
The peso fell 0.1 percent yesterday to 3.9570 per dollar.
Warrants linked to growth in South America’s second-biggest economy after Brazil rose 0.15 cents to 12.47 cents, according to data compiled by Bloomberg.
The extra yield investors demand to hold the government’s dollar bonds instead of U.S. Treasuries narrowed 15 basis points yesterday to 590, according to JPMorgan Chase & Co.’s EMBI+ index. It’s down from 846 on July 1. Argentine debt is the highest yielding in the EMBI+ index after Venezuela and Ecuador.
‘External Reasons’
Argentina’s bond yields will continue to lure investors regardless of the outcome of the country’s presidential elections, said Alberto Bernal, head of fixed-income research at Bulltick Capital Markets, a Miami-based brokerage that focuses on Latin America.
“People who are buying the Argentina story are buying it for external reasons: it pays you a high yield and it’s a prime beneficiary of China’s and Brazil’s booming economies as well as soft commodity prices,” Bernal said.
Fernandez and Kirchner, her husband and predecessor, are eligible to run in presidential elections in October 2011. Mauricio Macri, the mayor of Buenos Aires city, said he may run for president.
“Investors are clearly splitting Argentina to before and after the elections,” said David Beker, the head of Latin America strategy at Bank of America Corp. in New York. “In the long end, the elections could be a big changer and it’s hard to have a strong opinion on what will happen in these elections.”
To contact the reporters on this story: Tal Barak Harif in New York at tbarak@bloomberg.net
To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net
Rate this Page