Elliott’s Argentina Deal Pessimism Is Spreading in Bond Market

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Elliott Management, mired in a decade-long legal tussle with Argentina, said last week bond investors are too optimistic the next president will end the nation’s default.

It turns out that hope has already begun to wane.

Argentina’s benchmark notes due 2033 have slumped 3.1 percent in the past month as polls show increasing support for Daniel Scioli, the candidate that investors perceive to be most aligned with President Cristina Fernandez de Kirchner. Emerging-market debt gained in the same span.

Given Scioli’s ties to Fernandez -- they belong to the same political party -- investors are beginning to scale back bets that Argentina’s new government will prioritize reaching a deal settlement with disgruntled creditors led by Elliott. Argentina’s defaulted international dollar bonds have gained 23 percent in the past year on speculation the winner of October presidential elections will resolve the dispute.

“Every day that goes by, I’m becoming more convinced that Scioli will become the next president of Argentina,” Javier Kulesz, an analyst at Nomura Holdings Inc., said Friday at a conference organized by trade group EMTA in New York. Policy changes initially will take place “mostly at the margin. I would worry quite a bit if that were to be the case.”

Scioli Gaining

Support for Scioli, the governor of Buenos Aires province, climbed 4 percentage points to 33 percent, solidifying his status as the frontrunner, according to a Management & Fit poll published April 29.

Buenos Aires Mayor Mauricio Macri, who belongs to the opposition PRO party and is most favorably viewed by investors, was backed by 29 percent, little changed from a previous survey.

The poll, which had a margin of error of 2 percentage points, also found that 56 percent of those surveyed want to see continuity of the current political and economic policies with some changes.

When asked whether there should be a quick settlement with holdout creditors in an April 10 interview with newspaper Cronista, Jorge Telerman, a spokesman and campaign manager for Scioli, said, “No, clearly not.”

Fernandez, who can’t run for a third term, has dubbed creditors led by Elliott “vultures” and defied a U.S. court order to repay them.

Elliott rejected Argentina’s efforts to renegotiate debt after its default in 2001 and instead won the right to full repayment in courts. In June, the country was banned from paying on foreign debt until it reaches a deal with the New York-based hedge fund.

Fernandez Policies

Jay Newman, a fund manager at Elliott, said Thursday that investors will probably be disappointed if they’re wagering Argentina’s next president will negotiate an accord with creditors.

Argentina Economy Minister Axel Kicillof “is happy to leave their bonds in default,” Newman said.

The Economy Ministry’s press office didn’t respond to an e-mail seeking comment.

During her tenure, Fernandez has imposed currency controls, nationalized the country’s largest oil producer and swelled the deficit to a record. The policies have helped cause inflation to soar to 30 percent. Argentina’s fell 0.1 percent Tuesday to 8.9165 per dollar as of 2:38 p.m. in New York, leaving the currency down 5.1 percent this year.

Average Prices

Bond investors have been“massively optimistic” on the ability of the next president to quickly fix Argentina’s economic problems and settle with creditors, said Jim Barrineau, a money manager at Schroder Investment Management.

While they’ve slumped, Argentine bonds still trade about 10 cents on the dollar higher than their average price last year as investors speculate the next government will be better than Fernandez’s.

“It’s a longer-term bet that Argentine bonds will perform well regardless of who succeeds Cristina,” Luis Caputo, a money manager at Noctua Partners, said in an e-mail. “If Macri wins, of course the rally will be stronger, but if Scioli wins, they’ll do OK too.”

Nomura’s Kulesz said bond investors are likely to “test” Scioli early on in his presidency to gauge how committed he is to resolving the debt dispute.

“If markets don’t sense that policy is changing in a very radical way, we will be dealing with a very tough environment,” he said.

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