Gang Truce Spurs Bond Rally as El Salvador Murders Drop 70%

Gang Truce Spurs Bond Rally as El Salvador Murders Tumble 70%
Organization of American States' (OAS) Secretary-General Jose Miguel Insulza, left, visits gang leaders in a prison in San Salvador on July 12, 2012. Source: OAS via Bloomberg

A truce between El Salvadoran gangs that have made the Central American nation among the world’s most violent is fueling a rally in government debt as President Mauricio Funes seeks a permanent deal to end the bloodshed.

Yields on El Salvador’s dollar bonds have fallen to their lowest level in almost a year after two of the nation’s largest criminal groups, Barrio 18 and Mara Salvatrucha, agreed to a 100-day truce on March 9 that has since been extended. The accord has been praised by Funes and Jose Miguel Insulza, secretary-general of the Organization of American States, who visited gang leaders in prison on July 12.

El Salvador’s dollar bonds due in 2023 have tumbled 55 basis points, or 0.55 percentage point, to 6 percent after gangs promised to give up some weapons in exchange for better conditions for imprisoned leaders. Latin American debt yields fell 23 basis points to 5.74 percent over the same period, according to JPMorgan Chase & Co’s EMBIG index.

“A reversal in the violence bodes well for the economy,” said Carl Ross, managing director of investments at Oppenheimer & Co. in Atlanta. “El Salvadoran bonds are finally getting a bit of attention again.”

El Salvador’s debt has returned 6.4 percent since the truce started, compared with 2.2 percent for Costa Rican bonds and 4.9 percent for Panamanian bonds, both maturing in 2020, data compiled by Bloomberg show.

The extra yield that investors demand to hold El Salvador debt over U.S. Treasuries rose 1 basis point to 473 at 10:40 a.m. in New York, according to JPMorgan Chase & Co.’s EMBIG index.

Murder Rate

The nation of 6.1 million had the second-highest homicide rate in the world after Honduras, according to the United Nations. The UN’s 2011 Global Study on Homicide estimated there were 62 murders in El Salvador per 100,000 people, compared with 82 in Honduras and five in the U.S.

Funes outlawed the gangs, which have ties to criminal groups in the U.S., following a 2010 attack that killed 14 people when a bus was set on fire. Police were empowered to arrest anyone showing marks of gang membership, such as having a tattoo. Gang members often put tear drop-shaped tattoos near their eyes to signify time served in prison or murders avenged.

After the truce began, the average number of daily homicides dropped 70 percent, from 14 to four, Funes said in a national address on June 14.

“Gang leaders have begun to demonstrate goodwill that can contribute to a peaceful society,” Funes said. “The truce has created a different scenario that allows the government to consider a national agreement.”

‘Very Positive’

Morten Groth, who helps oversee $1.8 billion of debt at Jyske Bank A/S in Sikeborg, Denmark, said he has a neutral position on El Salvador’s debt, up from underweight in the first quarter as violence abated.

“The truce is very positive for El Salvador and is necessary for creating a better growth and reform situation for the country,” Groth said by e-mail.

Some 27,000 members of Barrio 18 and Mara Salvatrucha roam the streets of El Salvador, while another 9,000 are behind bars for extorting businesses, trafficking drugs and other crimes, the national police estimate.

El Salvador’s economy is dependent on the U.S. both for trade and remittances sent home from workers. Economic growth this year will be the slowest in Central America at 2 percent as the U.S. economy struggles to recover, the International Monetary Fund said July 16.

Legal System

Standard & Poor’s rates El Salvador BB-, three levels below investment grade and the same category as Vietnam, while Fitch has the country one step higher at BB.

Security problems and a weak legal system have stymied the level of foreign investment that other countries with similar ratings receive, said Santiago Mosquera, an analyst at Fitch.

“El Salvador has a good track record of structural reforms to promote business, but the major weakness is the rule of law,” Mosquera said in a phone interview from New York.

Negotiations to end the violence are at a difficult stage, the OAS’s Insulza said after meeting with gang leaders at a prison near the capital, San Salvador.

“The advances must be made concrete, and it must be done promptly,” Insulza said.

The truce could quickly unravel as members squabble over special deals given to leaders and life-long criminals push for more concessions, said Douglas Farah, a Senior Fellow at the International Assessment and Strategy Center in Washington.

“The gangs are thinking, holy crap, we’ve asked for something and got it,” said Farah, who interviewed El Salvadoran gang members last month. “The government is much more desperate to keep the truce.”

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