Argentine Bonds Post Biggest Two-Day Tumble Since October 2008

Argentine bonds posted their biggest two-day plunge in four years as JPMorgan Chase & Co., Bank of America Corp., and Barclays Plc cut their recommendations on the debt following a U.S. court decision favoring holders of defaulted securities.

The government’s bonds due 2033 sank 1.5 cents to 68.5 cents on the dollar today, pushing yields to 12.85 percent, after sinking a record 10 cents on Oct. 26, according to pricing provided by JPMorgan. The two-day tumble, the biggest since October 2008, followed a U.S. appeals court ruling that blocks Argentina from making payments on securities it restructured in 2005 and 2010 while refusing to pay holders of the bonds still in default.

Bank of America and Barclays lowered Argentine debt to underweight from marketweight today. JPMorgan moved Argentina to marketweight, six weeks after raising the nation’s bonds to overweight.

“We see a period of uncertainty ahead,” Vladimir Werning, an analyst at JPMorgan in New York, wrote in the report. “Our concerns over the risk this litigation poses to Argentine performing bondholders remains large.”

The cost to protect Argentine debt against default for five years soared 2.5 percentage points to 15.3 percent after surging 3.3 percentage points on Oct. 26, when the court published its decision. The increase was the biggest among all government debt in the world, data compiled by Bloomberg show.

Low Volume

Trading in Argentine dollars bonds was about 10 percent of normal levels today as Hurricane Sandy prompted some U.S. traders to stay at home, according to Alberto Bernal, the head of fixed-income research at Bulltick Capital Markets in Miami. The Securities Industry and Financial Markets Association recommended trading in dollar-denominated fixed-income securities end at noon in New York today and remain closed tomorrow.

“With this liquidity, no one is going to be able to do anything but watch their prices go down,” said Jane Brauer, a New York-based debt analyst at Bank of America.

Argentine securities linked to economic growth also fell 1.1 percent to 11.10 cents after tumbling 9.7 percent on Oct. 26. The benchmark Merval stock index declined 2 percent compared with a 0.2 percent decline in Brazil’s Bovespa index.

Argentina will appeal the U.S. court ruling to the Supreme Court, state news agency Telam reported Oct. 26, citing Finance Secretary Adrian Cosentino. Press officials at the Economy Ministry didn’t return telephone calls made by Bloomberg News seeking comment today.

‘Vulture Funds’

The court’s decision was a blow to President Cristina Fernandez de Kirchner, who has called defaulted bond holders “vulture funds” and vowed not to pay them even after an Argentina naval ship was detained in Ghana Oct. 2 at the request of Elliott Management Corp.’s NML Capital Fund. Elliott leads a group of holdout creditors who rejected the country’s restructuring offerings of about 30 cents on the dollar following its record $95 billion bond default in 2001.

The government hasn’t sold bonds overseas since the default as it fights the lawsuits from the holdout creditors. The restructurings were accepted by holders of about 92 percent of all defaulted debt.

Without access to global credit markets, Fernandez has counted on restrictions on dollar purchases and soybean exports to sustain central bank reserves, which she taps to pay off existing debt. Reserves fell to $45 billion at the end of last month from $48.6 billion a year earlier.

‘Dead’ Economic Model

Argentina’s gross domestic product will expand 2.8 percent this year after growth of 8.9 percent in 2011, according to the median estimate of 24 analysts, while economists estimate annual inflation is more than 20 percent. The array of challenges now facing Fernandez show that “the economic model as we knew it is dead,” according to Jose Luis Espert, an economist who runs the Espert & Asociados consulting company in Buenos Aires.

In the latest legal ruling, a three-judge panel at the U.S. Appeals Court in New York upheld orders issued by U.S. District Judge Thomas Griesa in Manhattan. The court sent the case back to Griesa to clarify how a payment formula set by the judge is intended to work and to determine how the orders apply to intermediary banks and other third parties.

Argentina may make payments on restructured sovereign debt in Europe or other countries rather than the U.S. to avoid paying holders of defaulted bonds, Buenos Aires-based newspaper Ambito Financiero reported, without saying where it got the information.

Argentina, which is rated B by Standard & Poor’s, or five levels below investment grade, claims that upholding Griesa’s rulings would undermine the debt restructurings, spark a financial crisis in the country and make it impossible for other nations to restructure their debt.

To contact the reporter on this story: Katia Porzecanski in New York at kporzecansk1@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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