Dollars Vanish as Tourists Grab Argentine Bondholder CashKatia Porzecanski
Argentina’s supply of dollars it needs to pay bondholders is dwindling at the fastest pace since the depths of the nation’s economic crisis 11 years ago.
Foreign reserves have plunged 12.2 percent this year to $38 billion, the biggest decrease since 2002. The holdings are now at a six-year low and will equal just 25 percent of Argentina’s $142 billion of foreign debt by the end of 2013, according to Credit Suisse Group AG. The financial strain is adding to the nation’s borrowing costs as the extra interest investors demand to hold Argentina bonds over Treasuries rose 2.3 percentage points this year, the most in emerging markets after Venezuela, to 12.21 percentage points, according to JPMorgan Chase & Co.
Argentina posted the worst deficit in its current account, the broadest measure of trade in goods and services, since its $95 billion default in 2001 in the first quarter as energy imports jumped and Argentines spent more abroad to skirt President Cristina Fernandez de Kirchner’s currency restrictions. After using $5.7 billion of reserves to pay debt last year, the central bank will need to spend $4.7 billion more through year-end to meet obligations, Credit Suisse said.
“The structural pieces of the economy are not favorable from the credit point of view,” Jeremy Brewin, head of emerging-market debt at Aviva Investors, which oversees $4.3 billion in fixed-income assets, said by telephone from London. “Foreign-exchange reserves have been run down. The fundamental structure of the Argentine model is getting more stressed.”
Eduardo De Simone, a spokesman at the central bank, didn’t return an e-mail seeking comment on the loss of reserves.
The nation’s dollar reserves are falling even after a $34 million boost in agricultural export revenue this year and stricter controls on dollar purchases. In the first six months of 2012, reserves had fallen $24 million, 0.5 percent of the decline this year.
The expropriation of oil-producer YPF SA last year has failed to limit crude imports. South America’s second-largest economy imported $4.6 billion of fuel and lubricants the year through the end of May, a 30 percent increase from the same period in 2012, according to data from the National Statistics Institute. The energy deficit quintupled from $445 million in the first five months of last year to $2.13 billion at the end of May.
Since Fernandez banned buying dollars for everything but travel since July, the nation has posted a deficit from tourism revenue of $223 million this year through April, a 10-fold increase from a year ago, as more Argentines went abroad to buy dollars at a cheaper exchange rate and the nation attracted fewer visitors.
On the black market, a dollar costs 8.05 pesos compared with the so-called “tourist dollar,” which is the official rate plus a 20 percent tax on credit cards, or about 6.44 per dollar. The peso fell 0.1 percent to 5.3682 per dollar in official market trading at 3:34 p.m. in Buenos Aires.
Argentines bought about $2.8 billion from the central bank for travel in the first quarter, a 67 percent increase from the same period a year earlier, according to the bank.
The government has a $349 million interest payment due June 30 on its so-called discount bonds, according to Credit Suisse.
While the country has enough reserves to service its debt through 2014, “their decreasing trend is worrisome when thinking about 2015, when dollar-denominated debt maturities rise to at least $10.3 billion,” Casey Reckman, an economist at Credit Suisse, wrote in a reported dated June 20.
Reckman estimates reserves will fall to $30.5 billion by the end of next year.
To restore confidence from investors demanding the highest yields in emerging markets, Fernandez should sign on to a standby facility with the International Monetary Fund to assure them that it has the funds to meet its obligations while removing restrictions on currency purchases, according to Walter Molano, head of research for BCP Securities LLC.
“The reserves are fine, debt service is very manageable,” Molano said by telephone from Greenwich, Connecticut. “They’re losing them at this pace because of political reasons. You could triple the reserves but if the people aren’t confident then they’re going to continue to run out the door.”
The cost of insuring Argentine bonds against default for five years surged 1,394 basis points this year, or 13.94 percentage points, to 2,794 basis points at 2 p.m. in New York, according to prices compiled by CMA Ltd. That level implies a greater than 80 percent probability of default.
In addition to the risk that Argentina loses its appeal of a U.S. court ruling that would block payments on restructured bonds unless holdout creditors are paid in full, potentially triggering a default, Fernandez isn’t likely to improve her policies ahead of mid-term congressional elections in October, said Aviva’s Brewin.
Argentina is considering changing the jurisdiction of its bonds issued under New York law to circumvent a negative ruling, Buenos Aires-based newspaper El Cronista reported yesterday, citing Economy Ministry officials it didn’t name.
Brewin said Aviva has sold all of the Argentine bonds in its benchmark emerging-markets debt fund. The notes are rated CC by Fitch Ratings, eight levels below investment grade.
“There are many fundamental and structural reasons why one would naturally want to be underweight,” said Brewin. “Remember, it’s already rated in the C’s, so further deterioration means you’re walking toward a single-C rating.”