Argentine Default Sours Outlook for Peso as Talks Ordered
Investors are anticipating a 11 percent drop in the Argentine peso after the nation defaulted for the second time in 13 years last week.
Non-deliverable forwards that show traders’ expectations for the peso over the next 90 days fell to 9.25 per dollar at 4:35 p.m. in New York, the weakest in six months, after the country missed an interest payment due July 30 on $539 million of restructured bonds. In the spot market, where the peso’s level is managed by the central bank, the currency traded at 8.26. Benchmark bonds declined for a third day.
JPMorgan Chase & Co. says Argentina may act to bolster the peso should it weaken because of the country’s dispute with hedge funds led by Elliott Management Corp. While Argentina has the money to pay the interest it owes, a U.S. judge’s ruling bars it from passing the funds to holders before settling with the so-called holdout creditors that won an order for full repayment on defaulted debt from 2001. Argentine officials say the plaintiffs have rebuffed all offers for a deal. The judge in the case has ordered more talks.
“Traditionally, debt problems are highly correlated with devaluations,” Vladimir Werning, an economist at JPMorgan, wrote in a July 31 report. “The government’s stance on the holdout conflict raises risks to both domestic financial stability and macroeconomic performance if an agreement with holdouts is not reached.”
The government will probably support the peso more aggressively to help bolster its case that the default is the result of a legal impasse and not a lack of funds, according to JPMorgan. That may mean increasing capital controls, raising interest rates or delaying imports, Werning wrote.
At an Aug. 1 hearing, the U.S. judge overseeing the court battle with the hedge funds, which rejected offers of 30 cents on the dollar in debt restructurings in 2005 and 2010, ordered the parties to continue talking. Argentina held four weeks of negotiations with a court-appointed mediator and two days of face-to-face discussions with the holdouts that failed to produce an accord.
Argentina will ask Judge Thomas Griesa to replace mediator Daniel Pollack since he’s “incompetent” and has been been biased in favor of the holdout funds, Cabinet Chief Jorge Capitanich said today. The government will also seek information from the Securities and Exchange Commission as part of a probe into whether Elliott profited off the blocked debt payment by collecting on credit-default swaps, he said.
“We’ve seen fraudulent maneuvers with CDS,” Capitanich said. “They have restructured bonds, CDS and a court sentence where the judge has allowed them to decide on granting a stay or not, which allows for the use of privileged information to create volatility and make profits.”
While Argentina’s benchmark bonds due 2033 have fallen for three days since the default, prices show investors remain confident the dispute will be resolved. The securities sank 2.05 cents to 83.04 cents on the dollar today. The price compares with an average of 26 cents for government securities 30 days after a missed payment or during a debt swap, according to a Moody’s Investors Service analysis of defaults going back to 1998.
Economy Minister Axel Kicillof said July 31 that the government wouldn’t be opposed to solutions involving third parties. That would allow the country to skirt a requirement that any deal offered to Elliott needs also be extended to the investors who agreed to the 2005 and 2010 restructurings.
Even if the default is short-lived, “exchange-rate pressures would likely increase as international reserves would decline at a faster pace and economic activity would face additional headwinds,” Mauro Roca, an economist at Goldman Sachs Group Inc., wrote in a July 31 note to clients. “The impact on the economy will gain in importance the longer it takes to solve this situation.”
Argentina devalued its currency 19 percent in January as the nation struggled to hold onto dollar reserves amid annual inflation of about 30 percent. Over the year prior to the devaluation, Argentina’s central bank lost an average $1 billion of reserves per month. Since January, the peso has weakened an additional 2.9 percent.
In unofficial currency markets where dollar purchases aren’t limited by the government, the peso sells for 12.8 per dollar, according to data compiled by Ambito.com.
Argentine bonds posted the biggest two-day loss since 2012 at the end of last week as a committee ruled that the failure to pay interest will trigger $1 billion of credit-default swaps.
The International Swaps & Derivatives Association’s ruling on the contracts means Argentina is the first nation to trigger the insurance since Greece restructured its debt in 2012.
Argentines will look to bond prices as an indication of confidence in a resolution to the default, JPMorgan’s Werning wrote. Prices that remain stable in the mid-80s may have a positive impact on the peso market, he wrote.
If bond prices fall below 70 cents on the dollar, “residents may start losing faith in the official narrative emphasizing prospects of domestic stability,” Werning wrote.
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