Argentine bond prices fell on Thursday and country risk soared to levels not seen since 2005 after the government announced plans to extend maturities on about $100 billion in debt, raising fear of a full-blown financial crisis, Trend reports citing Reuters.
The latest round of volatility to buffet the recession- and inflation-racked country began when business-friendly President Mauricio Macri suffered a harsh defeat in an Aug. 11 primary election at the hands of populist-leaning Alberto Fernandez.
Investors fear a return of the left to power in Argentina could herald a new era of heavy government intervention in Latin America’s third-largest economy.
By the time Treasury Minister Hernan Lacunza said on Wednesday the government wanted to extend maturities of short-term debt, and would negotiate new time periods for loans to be paid back to the International Monetary Fund, a debt revamp was already widely expected.
Argentine spreads over safe-haven U.S. Treasury bonds, a measure of the perceived risk of default, nonetheless shot 204 basis points higher to 2,276 on Thursday, according to JP Morgan’s Emerging Markets Bond Index Plus.
Developing markets investment house Tellimer calculates that $7 billion of short-term debt, $50 billion in long-term debt and $44 billion of IMF debt may be earmarked for an overhaul.
Lacunza labeled the debt-extension operation a “reprofiling” of obligations that will affect institutional rather than individual investors.
The bond market gave the plan a collective thumbs down.
Argentina’s century bond traded at a record low of 40.222 cents on the dollar before inching up a couple of cents according to MarketAxess data. The January 2028 benchmark briefly dropped under 40 cents for the first time ever before edging up to trade at 40.3.
Closer on the maturity curve, the April 2021 issue dropped under 50 cents for the first time, while the January 2022 issue also hit a record low price.
Lacunza said he would send a bill to Congress to approve changes to bonds governed by local law. Talks with holders were expected to start soon, but would likely be concluded by the government that wins the October general election and takes office in December.
Fernandez, whose running mate is former President Cristina Fernandez de Kirchner, is now the clear front-runner. Populist icon Kirchner is loved by millions of Argentines who remember generous welfare spending during her 2007-2015 administration.
“We remain cautious,” Citi said in a note. “While we think the short-term funding needs have been addressed, political uncertainty remains high: any proposal on global bonds could be unwound by the potential new administration.”