Bloomberg News

Denying Dollars to Holders Echoes ’02 Seizure: Argentina Credit

October 10, 2012

President Cristina Fernandez de Kirchner

Since her re-election a year ago, President Cristina Fernandez de Kirchner has banned most currency purchases, made insurers bring foreign investments back into the country and forced exporters to repatriate revenue as she tries to stem capital outflows and reduce the use of dollars in South America’s second-largest economy. Photographer: Paul J. Richards/AFP/Getty Images

A move by a soybean-growing province in northern Argentina to pay its dollar debt in pesos is raising the specter that holders of the nation’s $19 billion of local U.S. currency bonds won’t get their money back.

The yield on Argentina’s 2017 dollar bonds sold under local law jumped by the most in three months yesterday, rising 0.61 percentage point to 11.9 percent, after Chaco province said currency restrictions prevented it from obtaining dollars to make payments due last week. The gap over similar-maturity government securities issued overseas and covered by U.S. courts widened to 3.54 percentage points at 1:00 p.m. in Buenos Aires, the most on a closing basis since Sept. 13.

Chaco’s failure to honor its obligations reignited concern President Cristina Fernandez de Kirchner’s push to de-dollarize the economy may compel issuers of foreign-currency bonds to pay debt in pesos, according to Nomura Holdings Inc.’s Boris Segura. The gap between local-law and foreign-law sovereign notes will grow to at least 4 percentage points, the widest since June, when speculation peaked that Fernandez would convert foreign- currency contracts into pesos, he said. Argentina also converted deposits into pesos after its $95 billion default in 2001.

“They’re forcing a pesofication,” Segura, a Latin America strategist at Nomura, said in a telephone interview from New York. “It looks like unofficially the central bank’s policy is going to be to not give you dollars to pay local-law, dollar- denominated debt.”

Fernandez’s Moves

Since her re-election a year ago, Fernandez has banned most currency purchases, made insurers bring foreign investments back into the country and forced exporters to repatriate revenue as she tries to stem capital outflows and reduce the use of dollars in South America’s second-largest economy.

Chaco said in an Oct. 5 filing with the national securities regulator that it deposited 1.2 million pesos ($255,000) with the nation’s main clearing house to pay interest and amortization on dollar-denominated bonds due in 2015 and 2023. The province said it wasn’t able to make the payment in dollars because of the “current foreign exchange regulations.”

Officials at Chaco’s finance ministry didn’t return telephone calls seeking comment.

All bonds issued under local legislation must be paid in pesos, Chaco’s Governor Jorge Capitanich said in a news conference today, according to newspaper Ambito Financiero.

Currency Rules

Rules introduced by the central bank in July don’t allow for the purchase of the U.S. currency to pay local owners of domestic-law dollar-denominated bonds, according to a central bank official who asked not to be identified because of bank policy. Issuers can buy dollars to pay international investors, he said, adding that all of Chaco’s debt is owned locally.

The province’s use of pesos is “a worrisome development,” Casey Reckman, an analyst at Credit Suisse Group AG, wrote in an Oct. 8 report to clients. “It is not clear that the government considered the implications that this will have in the market. Nevertheless, this is a very negative signal. We expect investors to respond accordingly.”

The yield on Chaco’s $22.2 million of bonds due in 2023 rose 42 basis points, or 0.42 percentage point, to 10.9 percent yesterday, the biggest jump since Aug. 8, data compiled by Bloomberg show. The yield on its $10 million of 2015 bonds climbed 22 basis points to 9.9 percent. Argentine financial markets were closed for a national holiday Oct. 8.

Buenos Aires

Buenos Aires province’s international bonds due 2015 plunged today after Vice Governor Gabriel Mariotto said that he supports the actions taken by Chaco. Yields surged 230 basis points to a two-month high of 20.18 percent.

“What happened with Chaco is very good,” Mariotto said today in an interview with Buenos Aires-based Radio La Red. “The precedent set by Chaco is very important.”

Argentina’s provinces of Formosa and Tucuman are analyzing how to treat their dollar-denominated bonds issued under local law and may follow Chaco in making interest payments with pesos, Ambito Financiero reported today, citing people it didn’t identify.

Investors are overreacting to Chaco’s “selective default” as it’s no indication the government has a broader plan to convert all dollar contracts into pesos, which occurred after Argentina’s default in late 2001, according to Sebastian Vargas, an economist at Barclays Plc.

Dollar Reserves

Fernandez has ready access to dollars from the central bank, which she has used to pay overseas debt since 2010. Making payments in pesos instead of dollars would only send investors to the unofficial foreign exchange market to purchase the U.S. currency, Vargas said.

“Today, it’s not on the government’s agenda to pay a federal local-law bond in pesos,” Vargas said in a telephone interview from New York. “The only thing that does is generate pressure in the parallel market.”

The peso in the so-called blue-chip swap, which investors use to acquire dollars by buying assets locally in pesos and selling them abroad in the U.S. currency, has weakened 26 percent this year to 6.3979 per dollar. In the official market, the peso has dropped 8.8 percent to 4.7137 per dollar.

Vargas said he recommends investors buy government local- law bonds, known as bonars and bodens.

Bodens due in 2015 dropped 2.02 cents yesterday to 90.65 cents on the dollar while bonars due in 2013 fell 2.2 cents to 98.14 cents on the dollar, data compiled by Bloomberg show.

Default Swaps

The average yield on Argentina’s dollar bonds jumped 42 basis points yesterday to 10.87 percent, the highest in emerging markets after Belize and Venezuela, according to JPMorgan Chase & Co.’s EMBI global index.

Warrants tied to Argentina’s economy fell 0.35 cent to 11.85 cents today.

The extra yield investors demand to own Argentine government dollar bonds instead of U.S. Treasuries dropped 4 basis points to 884 basis points, according to JPMorgan.

The cost of Argentine five-year credit-default swaps jumped 60 basis points to 1,035 basis points, the highest on a closing basis since Sept. 11, data compiled by Bloomberg show. The swaps pay the buyer face value in exchange for the underlying securities or cash if a government or company fails to comply with debt agreements.

About $250 million of debt sold by other Argentine provinces may be affected by the same currency restrictions as Chaco, Vladimir Werning, an analyst at JPMorgan in New York, wrote in a report published Oct. 9.

“I just worry that it’s part of that slippery slope,” Andrew Feltus, who co-manages about $10 billion of high-yield debt at Pioneer Investment Management Inc., said in a telephone interview from Boston. “You can never remove the possibility that they won’t do something much more aggressive. That could be anything from pesofication to outright default.”

To contact the reporters on this story: Katia Porzecanski in New York at kporzecansk1@bloomberg.net; Camila Russo in Buenos Aires at crusso15@bloomberg.net

To contact the editors responsible for this story: Michael Tsang at mtsang1@bloomberg.net; David Papadopoulos at papadopoulos@bloomberg.net


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