Fears are rising that Argentina may be headed for another debt crisis, with president Mauricio Macri’s pummelling at the polls on Sunday leading to a sell-off of the country’s shares and debt.
The upset in the primary election — ahead of October’s presidential vote —both paves the way for a more protectionist government to take over in December and increases the view in the markets that outstanding bonds and an IMF programme will have to be renegotiated.
Credit-default swap trading now shows an implied probability that Argentina will suspend debt payments over the next five years at about 75% versus just 49% at the close of trading last Friday. Government dollar bonds lost about 25% on average yesterday, pushing prices to a range of 55-60 cents with yields spiking to as high as 35% on short-term notes.
“The market is starting to price in default,” said Edwin Gutierrez, the London-based head of emerging-market sovereign debt at Aberdeen Asset Management.
For a country with a long history of defaults which only resolved the previous debacle in 2016 under Mr Macri, the sudden shift in sentiment is jarring investors who have already suffered through years of high inflation, economic malaise and political division.
A 100-year bond issued during peak optimism of Mr Macri’s reform drive about two years ago is now trading at about half the value it was issued at. The peso tumbled 30% to a record-low 59 per dollar and the Merval stock index lost the most ever in intraday trading.
Part of the uncertainty for investors is around just who Alberto Fernandez is. While he was cabinet chief under former president Nestor Kirchner, he then fell out with Nestor’s wife, former head of state Cristina Fernandez de Kirchner, only to return as the presidential candidate on her ticket. Her eight years in office were marked by currency controls, data manipulation and protectionist policies on trade to protect national industry. Not to mention another default.
“We had argued, before, that a sovereign debt default in Argentina was more likely than not in the coming years, regardless of who won the presidential election. It now looks like default could come within a matter of months,” said William Jackson, chief emerging markets economist at Capital Economics in London.
Additional reporting Bloomberg