Argentine government bonds fell on concern holders of dollar-denominated debt will have to accept pesos after the central bank denied Chaco province’s request to buy the U.S. currency to make payments on local securities.
The extra yield investors demand to own Argentine government dollar bonds instead of U.S. Treasuries rose 25 basis points, or 0.25 percentage point, to 867 basis points at 4:52 p.m. in Buenos Aires, according to JPMorgan Chase & Co.’s EMBI Global index. The jump was the biggest in the index after Venezuelan debt. The cost of Argentine five-year credit-default swaps soared 65 basis points to 978 basis points.
“It brings back concerns Argentina may pesofy debt payments,” said Bret Rosen, a Latin America strategist at Standard Chartered Bank in New York. “Even if right now it’s just a small payment from Chaco, holders of government debt will think ‘the same could happen to me.’”
Chaco said in a statement today that it wasn’t able to buy the dollars needed to pay its debt due to “foreign-exchange regulations,” forcing it to make the payment in pesos.
A central bank measure approved in July doesn’t allow for issuers to buy dollars to make payments to local investors on dollar-denominated bonds sold in Argentina, said a central bank official who asked not to be identified in accordance with the bank’s policy. Issuers can buy dollars to pay international investors, he said, adding that all of Chaco’s debt is held by local investors.
Torino Says Sell
The peso payment by Chalco is fueling investors’ concerns that President Cristina Fernandez de Kirchner’s administration is becoming increasingly unpredictable, said Boris Segura, a strategist at Nomura Securities International Inc.
Jorge Piedrahita, the chief executive officer of Torino Capital LLC, recommended “exiting all positions in Argentina.”
“Who is to say that the government does not make this a precedent and extends it to other local law bonds,” Piedrahita wrote in a report.
The yield spread between Argentine government bonds due 2017 sold under domestic law and similar maturity notes protected by New York law touched a record in June when speculation mounted that was going to convert foreign-currency contracts into pesos.
Barclays Plc recommended buying Argentine government local dollar bonds as the bank’s “perception of credit risk of local law federal bonds has not changed,” according to a report e-mailed today.
In an effort to curb capital flight and increase the use of pesos in the economy, Fernandez banned most foreign exchange purchases, made insurance companies bring foreign investments into the country and forced exporters to repatriate revenue.
The peso has weakened 8.7 percent this year in the official market to 4.7113 per U.S. dollar. In the so-called blue-chip swap, which investors use to acquire dollars by buying assets locally in pesos and selling them abroad in the U.S. currency, the peso has weakened 25 percent to 6.3739 per dollar.