Default Risk Sinks on Paris Club, CPI Reform: Argentina Credit

Argentine bond risk is falling the most in the world this week after President Cristina Fernandez de Kirchner pledged to open talks with the Paris Club on $6.7 billion in defaulted debt and redesign the consumer price index.

The cost of protecting Argentine government debt against non-payment for five years with credit-default swaps tumbled 51 basis points, or 0.51 percentage point, in the five days through yesterday to 659, according to CMA data. The next-best performer among countries was Iceland, whose default risk sank 6.7 basis points.

Fernandez said Nov. 16 the Paris Club group of creditor nations accepted Argentina’s request to start talks to restructure the debt without International Monetary Fund oversight. The government also asked the IMF this week to help revamp the national consumer price index amid concern the data doesn’t reflect the true inflation rate.

“These are all very good steps and very clear signals about the direction in which they seem to be moving,” said Gunter Heiland, an emerging market debt portfolio manager who helps oversee more than $2.6 billion worth of assets, including an “overweight” Argentine position, at Greenwich, Connecticut- based fund Gramercy. “We find it very encouraging.”

More Credibility

The yield on benchmark inflation-linked peso bonds due in December 2033 dropped 59 basis points to 7.45 percent since the Nov. 16 announcement, according to Bloomberg prices.

Economy Minister Amado Boudou said yesterday that he plans to travel to France as soon as Dec. 9 to meet with Paris Club officials. In June, Argentina restructured $12.2 billion of debt remaining from the country’s record $95 billion default in 2001.

“Argentina has gained a lot of credibility because Argentina has demonstrated that it can restructure its debt in a credible way,” Boudou told Buenos Aires-based Radio La Red yesterday. “Moving ahead with the Paris Club will allow interest rates to continue to fall” for companies seeking to sell bonds, he told Radio Mitre, also in Buenos Aires.

Argentina’s consumer price index, which measures prices in the city of Buenos Aires and its outskirts, has been questioned by private economists and politicians, including former Economy Minister Roberto Lavagna and Vice President Julio Cobos. They say the government has underreported the rate since January 2007, when then-President Nestor Kirchner shuffled personnel at the national statistics agency, known as Indec.

Technical staff from the Washington-based IMF will arrive in Argentina in the first half of December to help draw up the new price index, Indec director Ana Maria Edwin said Nov. 23.

The IMF confirmed later that day “the request by the Argentine authorities for the IMF to provide technical assistance on the Consumer Price Index.”

IMF Review

Argentina has refused to let the IMF review its finances since 2006, when Kirchner, Fernandez’s predecessor and late husband, paid its $9.8 billion debt to the lender. Kirchner, who once labeled the IMF a “dictatorship,” died on Oct. 27, sparking an Argentine bond rally. During the week after his death, the average yield on Argentine dollar bonds tumbled 76 basis points to 8.35 percent, according to JPMorgan Chase & Co.

Argentina’s five-year credit default swaps have had the third-biggest decline this year among governments worldwide, dropping 257 basis points. Latvia is down 264 and Ukraine has plunged 689.

The Paris Club plan and a new inflation index “show a change in direction, or at least a nod toward a change from how the government had been acting,” said Marina Dal Poggetto, a partner at Estudio Bein & Asociados, a Buenos Aires research company founded by former Deputy Economy Minister Miguel Bein.

Cutting Inflation

Fixing the consumer price index will be easier than curbing inflation, she said.

“You need changes to monetary policy, fiscal policy,” Dal Poggetto said. She forecasts prices will rise 24 percent this year.

The extra yield investors demand to own Argentine government bonds instead of U.S. Treasuries fell 3 basis points, or 0.03 percentage point, to 518 at 9:29 a.m. New York time, according to JPMorgan. The so-called spread is down from 846 on July 1. Almost a decade after its financial collapse, Argentine spreads are the highest in emerging markets after Ecuador and Venezuela.

The yield on Argentine dollar bonds due in 2017 rose 6 basis points to 8.20 percent. The peso was little changed at 3.9723 per dollar.

Lower Yields

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 its debt agreements. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Argentine warrants linked to economic growth rose 0.17 cents to 13.63.

Among other credit plans, Argentina’s Compania Latinoamericana de Infraestructura y Servicios SA, or CLISA, as the company is known, seeks to sell as much as $150 million of six-year notes overseas as soon as Nov. 30, according to a person familiar with the offering, who declined to be identified because terms aren’t set. Buenos Aires city officials are in China this week seeking a $1.4 billion development bank loan for subway expansion plans, municipality Public Credit Director Abel Fernandez said Nov. 23.

The sovereign debt rally sparked by Fernandez’s most recent moves may be slow, Gramercy’s Heiland said.

“I’m not looking for any one decisive market-moving event,” Heiland said. “We’re building a foundation here for lower yields. These are all steps that add up to significant improvements.”

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