Argentine dollar bonds tumbled the most in emerging markets on concern government measures from devaluation to rate increases aren’t enough to improve the country’s deteriorating debt payment capacity.
Argentine government dollar bonds due 2015 fell 3.88 cents on the dollar to 85.75 cents, driving yields up to 19.12 percent, the highest since June 2012. The extra yield investors demand to own Argentine bonds over U.S. Treasuries widened 75 basis points to 1,142 basis points, while the average spread on emerging-market bonds rose 11 basis points at 10:28 a.m. in New York, according to JPMorgan Chase & Co.’s EMBIG index.
Argentina is losing foreign currency reserves at the fastest pace in more than a decade as estimated 28 percent inflation and currency controls spur capital flight. The funds, which the country relies on to pay debt and finance energy imports, dropped to a seven-year low of $28.3 billion. The government devalued the peso 15 percent last week and raised benchmark interest rates as much as 6 percentage points. The moves, coupled with less risk appetite for emerging market assets, haven’t settled investor concerns.
“There is fear and panic about the emerging markets and the news has not been good out of Argentina with reserves dropping $250 million yesterday,” said Russell Dallen, the head trader at Caracas Capital.
In an effort to curb demand for foreign currency and prop up reserves, officials let the peso slide to 8 per dollar last week and raised rates on 98-day peso notes to 25.89 percent, the highest since November 2002.
The measures come after President Cristina Fernandez de Kirchner increased a tax on Argentines’ spending abroad and gave exporters incentives to bring in dollars, helping Argentine bonds end 2013 with a rally.
“A lot of the aggressive buying in November and December was by long-only EM and global bond managers,” said Michael Roche, an emerging-market strategist at Seaport Group LLC. “The devaluation move was a surprise and disturbed their strategy, calling for a new decision. It looks obvious now that this group is cutting their allocation.”
Fernandez also allowed the richest 20 percent of Argentines to buy a maximum of $2,000 per month. She had banned buying foreign currency for savings in July 2012.
The move to devalue the peso and ease currency controls won’t succeed in solving the country’s economic imbalances, and officials should take further action to tighten fiscal policy, Fitch Ratings said in a report yesterday.
“The government’s inability to tighten its policy stance could increase the risk of a disorderly economic adjustment and could impair Argentina’s sovereign creditworthiness further,” analyst Lucila Broide wrote in the report.