Disappearing Dollars Compound Default Threat: Argentina Credit

Argentina’s cash hoard is falling at the fastest pace since 2006, depriving the government of the dollars its needs to pay bondholders as depositors rush to yank money from their savings.

Central bank reserves fell $1.6 billion this year to a five-year low of $41.7 billion as investors await a U.S. court ruling on whether the nation has to pay $1.3 billion to holdout creditors left over from its 2001 default. The extra yield investors demand to hold Argentine debt instead of U.S Treasuries jumped 2.66 percentage points to 12.57 percentage points this year, according to JPMorgan Chase & Co. That’s more than six times the premium that Brazil and Mexico pay.

Argentina told an appeals court yesterday that it won’t voluntarily comply with rulings that might force it to pay the holdouts and a decision in favor of the creditors would open it up to more than $43 billion in additional claims. Reserves that the country uses to pay foreign debt have tumbled as depositors pulled almost half their dollars from banks in the past 16 months on concern Argentina will seize their savings and convert them into pesos, according to Maximiliano Castillo, a former manager at the central bank.

“The situation has started to become critical, the level of reserves is worrisome.” said Aldo Pignanelli, a former central bank president. “I don’t think the government has a clear idea on how to stem this hemorrhaging.”

New Crisis

The central bank declined to comment on the drop in reserves and outlook for the rest of the year.

Jonathan Blackman, a lawyer for the South American nation, yesterday challenged a lower-court order that obliges Argentina to pay the defaulted bonds whenever it makes payments on restructured debt. The order violates Argentina’s sovereignty, exposes it to the possibility of a new financial crisis and threatens efforts by other countries to restructure overwhelming sovereign debt, Blackman told the three-judge panel.

Argentina “won’t voluntarily comply” with the rulings if the appeals court upholds them, Blackman said. “If that’s the confrontation the court seeks with the injunctions, that is the court’s decision.”

The yield on Argentina’s 2017 bonds issued under New York law during the 2010 restructuring surged 4.02 percentage points to 19.72 percent at 3:54 p.m. in New York, according to data compiled by Bloomberg. The price fell 9.62 cents, the most since Oct. 26, to 69.37 cents on the dollar.

Deposits Decline

The government has tapped more than $30 billion to pay debt since 2010, according to central bank President Mercedes Marco del Pont. Fernandez has earmarked $8 billion for the same purpose this year, according to the 2013 budget.

Pignanelli, now a director of Buenos Aires-based research company Saver, said he expects reserves to fall to less than $40 billion by the end of this year.

Dollar bank deposits fell to a four-year low of $7.6 billion on Feb. 8, accounting for 16 percent of central bank reserves, according to latest data from the monetary authority. When Fernandez was re-elected in October 2011, the deposits stood at $14.8 billion, or 31 percent of reserves.

“The drop in deposits hasn’t stopped, and reflects savers’ lack of confidence,” Castillo, who now runs economic research company ACM Consultores, said in a telephone interview from Buenos Aires. Reserves also suffered from a narrowing of January’s trade surplus to $280 million from $550 million a year earlier, said Castillo.

Wheat Exports

Savers are concerned they may see a repeat of 2002, when then-President Eduardo Duhalde converted dollar deposits into pesos, which weakened as much as 70 percent against the U.S. currency that year.

The drop in the January trade surplus in part resulted from a decline in wheat exports. The recently harvested crop fell to

9.4 million tons from 14.5 million tons the previous season, according to the Agriculture Ministry.

As a result, this year’s exports of the cereal will drop to $700 million from $2.5 billion in 2012, according to Juan Rey Kelly, an economist at the Argentine Rural Confederation, a Buenos Aires-based farm association.

Still, a bumper harvest of soybeans, the country’s main generator of export revenue, should cause reserves to rise as the crop is gathered and processed over coming months, said Hernan Lacunza, a former general manager at the central bank.

‘Reverse Trend’

The world’s third-biggest exporter of the oilseed will produce 48 million tons this year, compared with last season’s

40.5 million tons, according to the Rosario Grains Exchange.

Exports of soybeans and their products “will allow the central bank to reverse the trend between April and August and start accumulating reserves,” said Lacunza, who now runs Empiria Consultores in Buenos Aires. “The country may end with reserves for about $45 billion by year end.”

The price of credit-default swaps to insure $10 million of Argentine government debt against default for five years has surged 1,715 basis points this year to 3,157 basis points. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

The peso, which fell 13.6 percent over the past 12 months, weakened 0.1 percent to 5.0453 per dollar.

Warrants tied to Argentina’s gross domestic product, issued as part of the country’s 2005 debt restructuring, fell 8.56 percent to 5.28 cents.

Currency Controls

Since being re-elected in October 2011, Fernandez has imposed currency controls, including a ban on most dollar purchases, to stop money leaving the country.

While her measures caused capital outflows to drop to $3.4 billion in 2012 from $21.5 billion a year earlier, savers will continue to seek dollars as long as the government relies on the central bank to pay debt and fund spending, said Castillo.

Investors pay more than 50 percent over the official exchange rate for dollars in the unregulated market as they seek protection from inflation economists estimate at 25 percent and an accelerated weakening of the peso. The peso fell 12.5 percent against the dollar last year, the most of all currencies in Latin America.

The government’s continuing use of reserves “weakens the central bank’s balance sheet, which is reflected in expectations for a devaluation,” Castillo said.