Argentina Ballot Seen as First Step Toward Bond-Market Returnby
Investors have mostly priced in a ruling-party victory
Contest going to second round could be bullish for bonds
Argentina is moving a step closer toward returning to international bond markets for the first time since its 2001 default as this weekend’s election paves the way for a new government to reach a settlement with creditors who have sued the country.
No matter who becomes Argentina’s next president, the person will have to repair fiscal and monetary imbalances and reach a deal so it can raise overseas financing, according to UBS Wealth Management strategist Alejo Czerwonko. The nation is in desperate need of external funding as central bank reserves hover near a nine-year low and inflation soars because the government is printing money to fund itself.
Major polls show ruling-party candidate Daniel Scioli in the lead, though they’re split on whether he’ll meet the threshold needed to claim a first-round victory: at least 45 percent of the vote or 40 percent with a 10 percentage point difference over his closest rival. If the results are closer than that, he will probably head to a Nov. 22 run-off election with the leading opposition candidate, Mauricio Macri.
“There’s consensus that Macri would tackle these issues faster and more profoundly than Scioli, but both candidates represent an improvement over the status quo,” he said.
An outright win by Scioli in the first round is already being priced into the country’s securities, so there’s unlikely to be a significant market reaction if that’s the outcome, according to Joaquin Almeyra, a trader at Bulltick Capital Markets in Miami.
“Scioli has aimed to differentiate himself a bit from the current government,” said Almeyra, who specializes in fixed-income assets. “The market sees him as a change of scenery.”
Advisers to Scioli, a two-term governor of Buenos Aires province, have said his government would seek to negotiate with hedge funds led by Paul Singer’s Elliott Management that have sued in U.S. courts demanding better terms for defaulted bonds. The dispute has left Argentina unable to make overseas debt payments and all but locked out of international debt markets.
“Because of what settling with the holdouts means in terms of financing for Argentina, you’re in a position where you’re losing money if you don’t do it,” Juan Manuel Urtubey, the governor of Salta province and a Scioli ally, told reporters at the Council of the Americas in New York on Oct 2. “We need financing to grow.”
Should the election head to a second round, bonds may rally with the renewed possibility of an opposition win, according to Jorge Piedrahita, the chief executive officer of broker-dealer Torino Capital in New York, which trades more than $1 billion in securities per month, including Argentina bonds.
“It would be a positive surprise for the market,” he said.
The extent of the reaction will depend on how close the results are. Any indication that Macri has a good chance of victory in the second round would be viewed positively by investors, he said. “With a close difference, the story might still change.”
The worst outcome for investors would be a significant delay in results, according to Alejandro Bueno, the global head trader of BancTrust & Co., a boutique investment bank which specializes in high-yield Latin America debt.
With the country using a manual voting process, instead of electronic, there’s the possibility that the final decision will be delayed and the election will still be undecided by Monday morning. The results may also be affected by allegations of fraud, as they were earlier this year in Tucuman province.
This outcome “is the worst one,” Bueno said. “I don’t think the market has really considered what happens if the vote counting system says we need an extra week to figure out if there’s a second round. There will probably be some volatility, but with low volume. Those with short positions will probably exit them.”