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Fernandez Warrants Slide Signals Buy to RBS: Argentine Credit

Aug. 30 (Bloomberg) -- The biggest tumble in three months for Argentine warrants linked to economic growth is a signal to Royal Bank of Scotland Group Plc to buy the securities as the central bank steps up efforts to fuel the expansion.

The warrants, which pay holders when growth exceeds government projections, sank 0.78 cent last week, the largest weekly drop since May 21, to 9.55 cents on concern a slowing global expansion will curb demand for the country’s commodity exports, according to data compiled by Bloomberg. They rose 0.1 cent today to 9.65 cents. Siobhan Morden, a Stamford, Connecticut-based strategist at RBS, predicts the securities may climb to 11.8 cents by the first quarter of next year.

The central bank, which forecasts South America’s second-biggest economy after Brazil will grow as much as 9.5 percent in 2010, boosted the country’s money supply limit for this year to 29.4 percent last week from 19 percent. Bank President Mercedes Marco del Pont said in a statement the move will ensure monetary policy won’t be “restrictive or inhibit economic growth.”

While the measure may cause the economy to overheat, it will boost growth in the short term, according to Morden. With warrants, “your payments are based upon growth, so anything that promotes growth is going to suggest a higher payout,” she said.

Payment on the warrants is triggered when growth is above 3 percent and the inflation-adjusted value of the country’s gross domestic product surpasses a base-case scenario laid out in the contracts. Morgan Stanley this month raised its 2010 growth forecast for Argentina to 9.7 percent, which would be the fastest expansion in Latin America, from 4.6 percent. JPMorgan Chase & Co., Royal Bank of Canada and Goldman Sachs Group Inc. boosted their estimates for Argentina in the past two months.


The securities, which mature in 2035, will pay about 5.35 cents in December 2011 should the economy grow by the 9.7 percent forecast by Morgan Stanley, according to an estimate from Alberto Bernal, head of fixed-income research at Bulltick Capital Markets, a Miami-based brokerage that focuses on Latin America.

Argentina attached the warrants to bonds it gave creditors in a 2005 restructuring of $95 billion of defaulted debt. Within months, the warrants started trading separately.

The decision to lift the money supply limit suggests the government has a “benign” view of inflation, said Alberto Ramos, an economist with Goldman Sachs Group Inc. in New York. He estimates inflation is about 20 percent, almost double the 11.2 percent annual rate the government reported for July.

Economists and politicians including Vice President Julio Cobos have questioned the official data since January 2007, when Nestor Kirchner, President Cristina Fernandez de Kirchner’s predecessor and husband, began changing personnel at the national statistics institute.

Historical ‘Failure’

“Policies to cool down the economy have historically led us to failure,” Marco del Pont said in an e-mailed statement announcing the decision to raise the money supply limit.

A central bank official who asked not to be named in accordance with bank policies declined to comment further.

The extra yield investors demand to hold Argentine dollar bonds instead of U.S. Treasuries widened 60 basis points, or 0.6 percentage point, last week to 754 basis points on Aug. 27, according to JPMorgan’s EMBI+ Index.

The cost of protecting Argentine debt against non-payment for five years with credit-default swaps jumped 121 basis points to 942, 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.

‘Natural Limits’

The peso was little changed today, falling 0.01 percent to 3.9450 per dollar.

Argentina’s money supply, as measured by the M2 monetary gauge, rose 23.8 percent in July from a year earlier to 217.8 billion pesos, exceeding a target of 214.4 billion pesos, the central bank said in a monthly report released Aug. 12. Policy makers target M2 instead of using a benchmark lending rate to control inflation.

Jorge Todesca, a former deputy economy minister who now is a partner at Finsoport Consultores Economicos research company in Buenos Aires, said the increase in the money supply limit is aimed at financing the government’s spending and will accelerate inflation, which he forecasts to reach 25 percent by year-end.

“The central bank and the government are acting as if there are no natural limits to how fast an economy can expand,” Goldman’s Ramos said. “So they continue, in my view, to over-stimulate the economy, both fiscally and monetarily, but the economy has a natural speed limit. Inflation is getting entrenched in the economy.”

To contact the reporters on this story: Ben Bain in New York at; Eliana Raszewski in Buenos Aires at

To contact the editor responsible for this story: David Papadopoulos at

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