Lottery Raided as $115 Billion Hole Filled: Argentina Credit

Photographer: Diego Giudice/Bloomberg

The bank will print 100 million new notes to go along with the 2.2 billion 100-peso bills in circulation. Close

The bank will print 100 million new notes to go along with the 2.2 billion 100-peso bills in circulation.

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Photographer: Diego Giudice/Bloomberg

The bank will print 100 million new notes to go along with the 2.2 billion 100-peso bills in circulation.

Argentina owes itself more money than ever as President Cristina Fernandez de Kirchner squeezes pesos out of public institutions from the pension agency to the lottery, a decade after losing its access to overseas financing.

Led by the central bank, government institutions are now the nation’s largest creditors, having lent the Treasury $115 billion as of the end of 2012, according to an Economy Ministry report published July 2. That’s equal to 58 percent of Argentina’s total debt. The proportion climbed from 53 percent in 2011 and is double the $57.5 billion that Argentina owes private creditors.

Fernandez, 60, is ratcheting up internal borrowing to avoid paying more than 14.53 percent for dollars abroad, the highest rate among emerging-market bond issuers tracked by JPMorgan Chase & Co. The debt program is adding to the world’s third-highest inflation rate as Fernandez orders the central bank to swell the money supply at a 30 percent annual pace to stuff institutions with the cash she needs to borrow.

“They swapped creditors,” Camilo Tiscornia, a former central bank economist who now runs research company C&T Asesores Economicos, said in a phone interview from Buenos Aires. “It’s unsustainable in the long term because this policy is inflationary. They’ll eventually need to cut spending or devalue.”

Record Debt

Argentina’s total debt jumped to a record in 2012 of $197.5 billion, surpassing the previous high of $191.3 billion in 2004, the year before the nation restructured debt left over from its $95 billion default in 2001.

Adrian Cosentino, the Argentine finance secretary, told reporters on July 2 that the report shows the “positive evolution of the level, composition and sustainability of our debt.”

Debt to public institutions makes up 58 percent of the total, while private-sector obligations and money owed to multilateral and bilateral lenders makes up 29 percent and 12.8 percent, respectively, according to the report. Argentina’s debt is 48 percent in U.S. dollars, 23 percent in pesos, 18 percent in inflation-linked peso bonds and 10 percent in euros.

Reserves Raid

Unable to borrow in capital markets abroad, Fernandez has drawn down about $30 billion of central bank reserves to pay foreign debt since changing the central bank charter in 2010. Reserves have tumbled 29 percent to $37.2 billion from a record $52.6 billion in 2011.

The government has sold peso and dollar-denominated notes to the central bank, state pensions fund Anses, Banco de la Nacion Argentina and even to a port operator and lottery company to finance spending in the past year. The central bank’s holdings of government debt jumped 39 percent the week ending June 15 from a year earlier to $38 billion, or 20 percent of the country’s total debt.

Argentina, which had to print pesos in Brazil in 2011 due to shortages of bills, began to print a second series of 100-peso notes with former first lady Evita Peron’s image this week, according to a central bank official. The bank will print 100 million new notes to go along with the 2.2 billion 100-peso bills in circulation.

Evita, who died in 1952, once said she would return multiplied by millions, according to Fernandez.

Peso Flood

The nation has added 24 percent more bills of the highest denomination in the past year, according to central bank data, while the number of pesos in circulation has grown 32 percent in the past year to 493.6 billion pesos ($91.4 billion).

The peso has lost 16 percent in the past 12 months to 5.3980. The pace of depreciation for the currency still outpaces estimated annual inflation of 24 percent.

Still, Argentina can devalue the peso in the future to lower internal debt levels.

The extra yield investors demand to hold Argentine government dollar bonds instead of U.S. Treasuries fell two basis points, or 0.02 percentage points, to 1,203 basis points at 12:47 p.m. in Buenos Aires, according to JPMorgan Chase & Co.

It’s typically better for a country to hold its debt internally rather than in the hands of foreign investors, according to Bianca Taylor, senior sovereign analyst at Loomis, Sayles & Company in Boston.

“When you have a period of volatility, levered investors are often forced to dump their positions,” Taylor said in an e-mail response to questions. “Areas where foreign investors hold a smaller share of the outstanding debt generally bodes well for the credit during downturns.”

‘Future Generations’

Private creditors hold $57.5 billion of Argentine debt, or 13.1 percent of GDP, according to the Economy Ministry.

Saddling the pensions system with government debt that may lose value in the future is a risky policy, said Eduardo Hecker, former head of the securities regulator between 2006 and 2009, who now runs the DEL consultancy in Buenos Aires.

“This policy raises concerns that Argentina has adopted a strategy of highly indebting future generations,” Hecker said in a telephone interview. “We may not see the full effect of this policy for another 10 to 20 years.”

To contact the reporter on this story: Pablo Gonzalez in Buenos Aires at pgonzalez49@bloomberg.net

To contact the editors responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net

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