Argentina Creditors Rewarded on Post-Default Dollar Jump

Two months ago, Argentina’s default crisis pushed its foreign-currency reserves to an eight-year low. Since then, the government has stockpiled the most dollars in a fourth quarter since 2009.

Since the start of October, reserves have risen 3.3 percent to $28.8 billion as the country brokered an agreement with grain exporters to bring in as much as $5.7 billion this quarter and obtained about $1.3 billion in yuan from China in a currency swap. Argentina also said Oct. 31 that it received $2.2 billion in bids from telecommunications companies such as America Movil SAB to develop the nation’s high-speed network.

Argentina is defying predictions from banks including Jefferies Group LLC, which said the economic fallout from its default in July, the second in 13 years, put the nation at risk of running out of money to pay for imports. Coupled with renewed optimism Argentina will finally resolve a decade-long legal dispute from its 2001 default, the boost in reserves has bond investors pouring into the nation’s debt securities.

The rally in the bond market reflects “more comfort that Argentina will be able to manage a reduction in reserves in the coming quarters,” Sebastian Vargas, an economist at Barclays Plc, said by telephone from New York.

The nation’s dollar-denominated bonds due 2024 and governed by local law have returned 11.1 percent this quarter versus a 1.8 percent gain for the Bloomberg Emerging Market Bond Index, which tracks 58 developing countries.

Soybean Dollars

After a tumble in soybean future prices and a slowdown in the depreciation of the peso prompted farmers to sell more crops sooner, grain exporting group Ciara-Cec pledged to accelerate dollar inflows by year-end, according to an Oct. 28 statement. Farmers have sold $3 billion of grains this quarter, a 25 percent increase from the same period a year earlier.

Argentina received $814 million from China on Oct. 30 as part of a three-year agreement signed in July in which the South American could receive the equivalent of $11 billion in yuan in exchange for Argentine pesos. Argentina conducted a second swap with China for $500 million worth of yuan yesterday, said a central bank official who asked not to be named because he isn’t authorized to speak publicly.

The yuan are convertible into any currency and can be used for any purpose the bank sees fit, including meeting debt obligations, the official said.

Market Predictions

“Lots of people were predicting an end of year with loss of reserves and much higher legal or illegal exchange rates,” Central Bank President Alejandro Vanoli said today at an event in Buenos Aires, according to a transcript. “Today, all that has been pushed into the realm of fantasy and not reality.”

Central bank coffers could also receive a boost from telecommunication investments after the government received bids from America Movil SAB, Telefonica SA, Telecom Argentina SA and Arlink SA in an auction of 4G mobile-phone airwaves last month. The winners will be announced this month.

“The dynamics of reserves and above all the expectations for reserves, dominates the entire economy,” said Luciano Cohan, the head economist at Buenos Aires-based research company Elypsis. “There’s a growing probability that next year reserve levels will stabilize.”

The main reason Argentina’s reserves stabilized is because $700 million of debt payments, which were blocked by U.S. court order, remain with the central bank, said Marcos Buscaglia, chief Latin America economist at Bank of America Corp.

The ruling states that Argentina must pay a group of holdout creditors led by billionaire hedge fund manager Paul Singer before it can resume paying its restructured debt.

‘Non-Payment’

“Part of the stabilization of reserves is due to non-payment of bonds,” Buscaglia, who maintains his August estimate that reserves will decrease to $25.4 billion by year-end, said by phone from New York.

Argentina has $805 million more in interest payments this year and about $585 million may be blocked by the court ruling, data compiled by the Economy Ministry show. Argentina has $9.2 billion due next year on foreign-currency bonds.

The government has also managed to preserve reserves by restricting imports at a cost for economic growth, which isn’t a sustainable policy, Buscaglia said.

While Argentina said gross domestic product was unchanged in the second quarter from a year earlier, JPMorgan Chase & Co. estimated the economy contracted 1.7 percent.

Slow growth, high inflation and falling productivity may push the government to resolve the debt case early next year so it can attract investment and obtain financing abroad, said Elypsis’s Cohan.

“The deterioration of the economy will influence economic policy,” said Cohan, who changed his estimates for reserves to $22 billion from $16 billion by the end of 2015. “Good news in January could generate optimism that causes an asset rally and some kind of market finance.”

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