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Lowest Yields Since 2008 Signal Debt Accord: Argentina Credit

Argentina's Economy Minister Amado Boudou
Argentina's Economy Minister Amado Boudou, seen here, is scheduled to meet with Paris Club officials today in the French capital. Photographer: Andrew Harrer/Bloomberg

Dec. 13 (Bloomberg) -- Argentina’s borrowing costs are dropping to the lowest level since March 2008 as the government pledges to restructure defaulted debt with creditor nations in talks that begin today.

The extra yield investors demand to hold Argentine dollar notes rather than U.S. Treasuries fell 20 basis points last week to 507 after touching 497 on Dec. 7, the smallest difference since before JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. more than 2 1/2 years ago. The yield spread on emerging-market dollar debt overall shrank 11 basis points in the week to 230.

Argentine dollar bonds returned 34 percent this year, the most among developing nations tracked by JPMorgan, after President Cristina Fernandez de Kirchner’s swap of $12.2 billion of defaulted bonds for new securities in June. A settlement with the Paris Club group of creditors would bolster the country’s access to international credit markets, helping extend the bond rally, said Carola Sandy, a Credit Suisse Group AG economist.

“It may be difficult, but I think the government has made up its mind that it wants to reach an agreement with the Paris Club,” Sandy said in a Dec. 10 telephone interview from New York. “As we see more concrete results, it’s going to help tighten spreads even more,” she said.

Economy Minister Amado Boudou is meeting with Paris Club officials today in the French capital. Finance Secretary Hernan Lorenzino declined to comment Dec. 10 about Argentina’s goals for the meetings. The Paris Club secretariat didn’t return a call seeking comment.

Boudou’s Plan

“We have solved this with 93 percent of private creditors and now this issue remains to be resolved,” Boudou said, according to an audio recording taped in France and released by e-mail by the Buenos Aires-based Economy Ministry. “We today started technical meetings in Paris to reach an accord that would allow creditors to get their debt paid but in favorable terms that would allow Argentina to keep growth with social inclusion and reopen investment in the economy.”

While Argentine debt has rallied, the nation’s borrowing costs remain the third highest among major emerging markets after Venezuela and Ecuador, according to data compiled by JPMorgan.

Argentina owed $6.868 billion as of the end of last year to the governments of 16 nations including Canada, Germany, Italy, Japan, Spain, the U.K. and the U.S., according to the Paris Club’s website. In 1956, Argentina received the first loan the Paris-based group ever made.

Halted Payments

“As this will be a meeting between Argentina and the Paris Club Secretariat, the United States will not be a party to the discussions” said U.S. Treasury spokeswoman Natalie Wyeth. Government officials representing Canada, Germany, Italy, Japan, Spain, and the U.K. declined to comment or didn’t return requests for comment.

Argentina halted payments to the Paris Club in 2001, when it also defaulted on $95 billion of bonds. Settling Argentina’s debt with the group would allow export-import banks from member nations to renew lines of credit for projects in the South American country, according to Sandy.

U.S. and European lenders may seek to restore credit to Argentina within months of an accord since export-import credit gives priority to goods and service providers from lender nations struggling after the worst economic slowdown since the Great Depression, Sandy said.

“It helps them too,” she said.

More Loans

Foreign companies will be able to get loans from their export agencies at as low as 100 basis points, or 1 percentage point, above the London interbank offered rate, or Libor, once credit is restored, said Miguel Kiguel, a former Argentine finance undersecretary, in a Dec. 10 interview.

Five-year credit-default swaps tied to Argentine debt fell 11 basis points to 630 at 2:17 p.m. New York time. A basis point equals $1,000 annually on a contract protecting $10 million of debt. 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.

Government warrants linked to growth in South America’s second-biggest economy rose 0.14 cent to 14 cents, according to data compiled by Bloomberg.

The peso rose 0.1 percent to 3.9733 per dollar today, while Argentina’s so-called spread above U.S. Treasuries gained 2 basis points to 509.

Boudou may be overestimating his bargaining position, said Kiguel, who now runs Buenos Aires-based research company Econviews. Fernandez announced Nov. 15 that the Paris Club agreed to Argentina’s request to hold the talks without oversight from the International Monetary Fund.

Club’s Demands

“Argentina is probably too optimistic about how the talks will go,” Kiguel said. “If they don’t want the IMF involved, and it looks like they don’t, the Paris Club will demand that the payment be made within a relatively short period of maybe 18-24 months.”

Argentina’s record $52 billion in reserves, which Fernandez is using to pay debt, along with the country’s current account surplus make it unlikely that Paris Club nations will offer lenient terms, said Alberto Ramos, an economist with Goldman Sachs Group Inc. in New York.

Settlement Terms

“My gut feeling is that the Paris Club will demand something that’s not as easy as what Argentina wants,” Ramos said. “It’s very hard for Argentina to build a case for financial hardship that would justify a restructuring over a long period.”

Argentina’s yield gap above U.S. Treasuries may narrow by another 50 basis points once the country reaches an agreement on the debt, said Kevin Daly, who helps manage $6 billion, including Argentine bonds, at Aberdeen Asset Management in London.

“If they can do this it will potentially unlock foreign direct investment,” Daly said in a Dec. 10 telephone interview. “Certainly you will see some spread tightening if they are able to successfully complete the Paris Club restructuring.”

To contact the reporters on this story: Drew Benson in Buenos Aires at; Camila Russo in New York at

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

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