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Rating to Rise as Accord Cuts Borrowing Costs: Argentina Credit

Argentina's Economy Minister Amado Boudou
Economy Minister Amado Boudou met with representatives of the Paris Club last week as part of an effort to regain access to financing from official bi-lateral agencies. Photographer: Andrew Harrer/Bloomberg

Speculation Argentina may win a credit grade increase after reaching a defaulted debt accord with the Paris Club is helping cut borrowing costs by more than 50 percent against similarly rated countries.

The extra yield investors demand to own Argentine debt instead of bonds sold by the Dominican Republic, Belize, Jamaica, Ghana, Lebanon and Pakistan shrank to 154 basis points, or 1.54 percentage points, from 331 on June 30, according to JPMorgan Chase & Co. Like Argentina, the countries are rated B3 by Moody’s Investors Service or B by Standard & Poor’s.

A settlement with the Paris Club group of creditor nations, whose members include Germany, Japan and the U.S., over about $7 billion of debt would move Argentina closer to restructuring almost all of the obligations dating from its record default in 2001. President Cristina Fernandez de Kirchner’s swap of $12.2 billion of bonds earlier this year in part led S&P to boost Argentina’s rating one level in September.

“A settlement with the Paris Club would be an event that could eventually lead to a rating upgrade,” Igor Arsenin, head of Latin America strategy at Credit Suisse Group AG in New York, said in a telephone interview. “There will be continued progression with the Paris Club.”

Economy Minister Amado Boudou met with representatives of the Paris Club last week as part of an effort to regain access to financing from official bi-lateral agencies. Argentina is seeking a solution that will allow the country to maintain growth and “reopen investment in the economy,” Boudou said in Paris on Dec. 13.

Soybean Harvest

South America’s second-biggest economy grew 8.6 percent in the third quarter following a record 55-million metric ton soybean harvest, the country’s National Statistics and Census Institute said Dec. 17. Industrial output rose 12.8 percent in November from a year earlier, fueled by a 36 percent jump in auto production and 26 percent increase in vehicle exports, according to the Argentina Auto Manufacturing Association.

The central bank forecasts the economy will grow 9 percent this year, the fastest pace since 2005.

“Since September, there’s been a favorable economic environment for Argentina,” Sebastian Briozzo, a Latin America director at S&P, said in a telephone interview. “We are seeing a positive overall external environment as commodity prices continue to go up and growth continues in Brazil, the main destination for the country’s products.”

Yield Spread

The extra yield investors demand to hold Argentina’s dollar bonds instead of U.S. Treasuries narrowed 210 basis points since S&P raised the country’s rating on Sept. 13 to 488 as of 1:19 p.m. New York time, according to JPMorgan. The decline in borrowing costs is the biggest among emerging-markets after Venezuela. Moody’s last increased the country’s rating in June 2005.

“The market perception continues to be more conservative than our rating is, despite the narrowing spreads we’ve seen since the upgrade,” Briozzo said. “The view is that Argentina is a relatively weaker credit than we believe.”

Moody’s analyst Gabriel Torres didn’t return a telephone call seeking comment.

A settlement with the Paris Club would likely lead to a ratings boost for Argentina, said Alberto Bernal, head of fixed-income research at Bulltick Capital Markets, a Miami-based brokerage that focuses on Latin America.

Default Swaps

“A Paris Club agreement has always been something that would help Argentina’s private sector,” he said in a telephone interview. “The capacity to finance infrastructure investments will look much better. If you see higher levels of infrastructure investment, ratings agencies will look at Argentina and see more sustainable growth prospects.”

The peso strengthened 0.1 percent to 3.9732 per dollar today.

Warrants linked to economic growth rose 0.48 cent to 14.88 cents, according to Bloomberg data.

The cost of insuring Argentine bonds against default for five years fell 13 basis points to 618 yesterday, according to 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 comply with debt agreements.

Argentina’s record $95 billion debt default and concern the government underreports inflation have hurt the country’s credibility with investors. Fernandez says the government’s inflation data is accurate.

“Argentina has a lot of baggage,” Bernal said. “It takes a lot of convincing, time, goodwill and new messages for you to start believing, and slowly but surely people are starting to believe in Argentina.”

The yield on Argentina’s benchmark dollar bonds due in 2017 fell six basis points to 8.20 percent, according to Bloomberg data. The notes yielded 10.56 percent in September.

“The spreads will continue to fall,” Credit Suisse’s Arsenin said. “It will depend on how politics play out next year, but in the base-case scenario, the government will pursue the same policies they’ve pursued this year, and try to close the gap with the Paris Club.”

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