August 29, 2019 / 11:00 AM / 23 days ago

Argentine bonds plumb new lows as govt eyes extending debt maturities

LONDON, Aug 29 (Reuters) - Argentina’s international dollar bonds fell to new record lows on Thursday and its debt-insurance costs rocketed after the government announced plans to “reprofile” some debt, leaving investors scrambling to assess what kind of hit they might face.

The recession- and inflation-racked economy has struggled for years with debt problems. Its latest woes began when business-friendly President Mauricio Macri suffered an unexpected and crushing defeat in an Aug. 11 primary election at the hands of populist-leaning Peronist Alberto Fernandez.

That unnerved investors, who feared the return of the left to power could herald another debt restructuring in Latin America’s third-largest economy.

Treasury Minister Hernan Lacunza told a news conference on Wednesday that the government wanted to extend the maturities of short-term local debt instruments and would negotiate with holders of its sovereign bonds and with the International Monetary Fund.

This would first apply to short-dated debt denominated in pesos as well as dollars but issued under local law, Lacunza said. The measure will require approval from Congress.

The news put more selling pressure in early European trade on Argentina’s dollar-denominated bonds issued under foreign law.

The issue maturing in 2028 dropped around a cent to a low of 42 cents in the dollar.

Argentina’s century bond, issued in 2017, traded at a record low of 43.25 cents after slumping 4 cents on Wednesday. It has lost more than 30 cents since the Aug 11 primary election.

On Wednesday, Argentina’s international bonds maturing between 2020 and 2027 - perceived to be more vulnerable to a possible overhaul in debt - dropped between 5-8 cents in price after Lacunza’s announcement.

Its dollar-denominated but locally listed October 2020 bond, the immediate focus of Buenos Aires’ overhaul plans, tumbled as much as 23 cents on Wednesday. It was yet to trade on Thursday.

While markets understood the immediate action to be targeting short-term domestic sovereign debt denominated in dollars or Argentinian peso, it was still unclear exactly how international investors might be affected.

Some investors welcomed Argentina’s efforts to tackle its debt burden.

“They haven’t got the money, so some adjustment is necessary,” said Abhishek Kumar, lead emerging markets portfolio manager at State Street Global Advisors.

“The measures they take are still unknown, but anything is good because it realigns to the reality.”

Markets appear to have expected some kind of debt exercise by Argentina: Its stocks and bonds have been battered, and the peso has shed some 22% of its value against the U.S. dollar since the primary election.

The cost of insuring exposure to the country’s debt rocketed to 3093 basis points (bps) in the five-year credit default swaps (CDS) market, according to IHS Markit. The levels, which have risen 2000 bps since the primary vote, imply a roughly 50% probability of default over the next 12 months.

Calculations based on Wednesday’s closing levels indicate a default probability over the next five years of just over 83%.

Argentina’s current gross debt has surged to about $325 billion, or 103.5% of its annual gross domestic product, Deutsche Bank calculated.

“The liquidity crisis is real,” Deutsche Bank’s Hongtap Jiang wrote in a note to clients.

“Argentina faces both liquidity and solvency issues – the latter reflected in an increasing trajectory of debt ratios projected unless the peso appreciates or remains stable in real terms and optimistic growth and fiscal paths are assumed.”

There is little sign the latest developments will significantly impact other emerging markets. While the brewing Argentina stress has spilled into neighbouring Brazil, investors say its trade links with other emerging economies are limited and it comprises a small part of emerging bond and equity indexes. (Reporting by Karin Strohecker, Marc Jones and Tom Arnold; Editing by Hugh Lawson)

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