The alleged data rigging by Argentina that cost inflation-linked bondholders $7 billion and earned the nation a rebuke from the International Monetary Fund is now turning MetLife Inc. against its banker.
The local unit of the largest U.S. life insurer is suing JPMorgan Chase & Co. to recoup $107 million in losses on notes securitized by the lender, claiming the biggest U.S. bank by assets used government inflation data that is estimated to be less than half the actual rate to value the debt. The underlying bonds lost 9.5 percent in dollars this year, the biggest drop among inflation-linked debt in Latin America, after plunging 25 percent in 2011, according to Barclays Plc. Economists estimate inflation at 24 percent, versus the official rate of 9 percent.
The lawsuit, filed in London, is emblematic of the mistrust Argentina has sowed since it fired statisticians in 2007 and began reporting consumer prices that economists say are inaccurate. That’s shut the nation out of its own bond market and caused trading in notes tied to consumer prices to dry up. Unable to sell debt overseas since its record default in 2001, Argentina has also imposed currency controls and seized oil producer YPF SA in the past year as it faces borrowing costs that are twice the average in emerging markets.
Inflation-linked bonds have “fallen off the map,” Leonardo Chialva, a partner at Delphos Investment in Buenos Aires, said in a telephone interview. “They barely trade among a reduced, highly speculative group of investors who are not looking at the fundamentals because they depend on the highly subjective and arbitrary component that is official inflation.”
Spokesmen for JPMorgan and MetLife declined to comment about ongoing litigation. Officials at Argentina’s Economy Ministry didn’t return calls seeking comment.
Metropolitan Life Seguros de Retiro SA alleges that by using the government’s data, JPMorgan paid less interest on securities that were created by the bank and tied to the performance of underlying Argentine bonds, according to court documents filed in September and made available last week. JPMorgan put the redemption value of the notes at $177 million, a figure based on official inflation, while MetLife said their value should have been $284 million.
The Argentine unit of the New York-based insurer says a clause in the bond contract stipulates that JPMorgan was required to determine consumer prices “in good faith and in a commercially reasonable manner based in available market information,” in the event the country’s official data was deemed unreliable. Instead, New York-based JPMorgan used official inflation that one of its analysts deemed “grossly distorted,” MetLife said.
Argentine President Cristina Fernandez de Kirchner has said since taking office in December 2007 that her government’s data is accurate.
In a separate case, Argentina lost a bid to reverse U.S. court rulings on Oct. 26 that may help creditors including billionaire Paul Singer’s hedge fund Elliott Management Corp. collect $1.4 billion on defaulted debt, sparking the biggest decline in the country’s bonds in four months.
The government’s dollar-denominated notes due in 2015 fell 4.98 cents to 84.55 cents on the dollar, pushing yields to an almost three-month high 13.82 percent, after the U.S. Appeals Court in New York ruled that Argentina can’t discriminate against holders of the defaulted bonds in favor of those that own the securities it restructured following the default.
New York-based Elliot Management this month won a court order in Ghana to seize an Argentine navy frigate when it docked in the West African nation on a training mission.
The nation’s foreign-exchange restrictions, which Fernandez imposed after her re-election in October 2011, have also undermined trading in inflation-linked bonds, according to Bulltick Capital Markets.
In the unregulated market, which traders use to acquire dollars by buying assets locally in pesos and selling them abroad in U.S. currency, the peso has weakened 27 percent this year to 6.5252 pesos per dollar.
“Basically, everybody bailed on that trade,” Alberto Bernal, head of fixed-income research at Bulltick, said in a telephone interview. “Local trading is mostly arbitrage by captive buyers at this point.”
Argentina’s credit-rating outlook last month was revised to negative from stable by Moody’s Investors Service, which said misreporting inflation data has resulted in the underpayment of holders of inflation-linked bonds.
Combined with the $8.9 billion still owed to the Paris Club of creditor nations, the underpayment demonstrates a lack of willingness to pay back creditors, according to Moody’s. The country is rated B3, six levels below investment grade.
Moody’s lowered the foreign debt ratings of three Argentine banks from B2 to B3 on Oct. 26, citing the risk that debtors will be unable to access foreign currency.
South America’s second-biggest economy is on track to be the first country censured by the IMF for not sharing accurate inflation data. The IMF’s board of directors gave Argentina until Dec. 17 to respond to its concerns. After that, the board can issue a declaration of censure.
Enrique Alvarez, the New York-based head of Latin America fixed-income research at IdeaGlobal, says the threat of a downgrade and censure by IMF won’t compel the Argentine government to change its inflation data.
“Argentina is not going to fully budge,” he said in a telephone interview. “You see that in their actions. I don’t believe that they’ll make an immediate U-turn and start reporting something that would cost them.”
Last year, Fernandez fined economists for reporting independent inflation estimates, prompting opposition lawmakers to compile the reports and publish them anonymously.
In September, she questioned whether U.S. inflation was close to 2 percent and told a Georgetown University student in a televised conference that “if inflation in Argentina was 25 percent, the country would blow up.”
The extra yield, or spread, investors demand to hold Argentine government dollar bonds instead of Treasuries swelled six basis points to 993 at 12:32 p.m. in Buenos Aires, according to JPMorgan.
The cost of protecting Argentine debt against non-payment for five years with credit-default swaps surged 246 basis points to 1,533, data compiled by Bloomberg show. The swaps pay the buyer face value in exchange for the underlying securities or cash if a government or company fails to comply with debt agreements.
The peso was little changed at 4.7537 per dollar.
Edwin Gutierrez, who helps manage $9 billion of emerging-market debt at Aberdeen Asset Management Plc and owned Argentine inflation-linked bonds in the past, says MetLife may be locked in a legal battle with JPMorgan for years.
“This will be a long, drawn-out battle,” Gutierrez said in a telephone interview from London. “Good luck with that.”