When it comes to default risk, not even six more years of Hugo Chavez’s socialist revolution in Venezuela can compete with Cristina Fernandez de Kirchner’s Argentina.
While the cost of insuring Venezuelan debt jumped as much as 71 basis points after Chavez, who has seized more than 1,000 companies or their assets since he was first elected over a decade ago, won a landslide victory on Oct. 7, credit-default swaps on Argentina surged 77 basis points last week. The jump in the perceived risk of default by Argentina among credit- derivatives traders was the biggest for any country.
Fernandez’s ban on the use of dollars to pay local creditors, which caused Chaco province to pay its U.S. currency debt in pesos on Oct. 5, is raising the specter that holders of dollar-denominated bonds won’t be able to get their money back as Argentina tries to preserve its foreign reserves. Since her own re-election in October 2011, Fernandez has seized YPF SA (YPFD), Argentina’s biggest oil company, forced exporters to repatriate revenue and tightened limits on imports.
“There will continue to be some volatility in Venezuela, but in Argentina the fear will continue to be pesofication,” Enrique Alvarez, the head of Latin America fixed-income at research firm IdeaGlobal in New York, said. “Government policy is to raise the pressure, preventing the outflow of dollars.”
Argentine government dollar bond yields rose 18 basis points, or 0.18 percentage point, to 10.63 percent last week. Venezuelan yields increased 31 basis points in that period, while those on emerging-market debt fell three basis points, according to JPMorgan Chase & Co. EMBIG Index.
While Venezuela’s default risk jumped after Chavez’s election, the cost to insure the nation against non-payment for five years ended just 2.2 basis points higher last week to close at 777 basis points.
The swaps, which pay the buyer face value in exchange for the underlying securities or cash if a government or company fails to comply with debt agreements, on Argentina’s sovereign debt ended the week at 991 basis points, higher than any other country apart from Ecuador.
Fernandez, an ally of Chavez, has tightened controls over foreign-exchange markets and banned the purchase of dollars for savings and local debt repayments to stem capital outflows, which last year almost doubled to $21.5 billion.
Chaco, a soybean-growing province in northern Argentina, said in a regulatory filing this month that currency restrictions prevented it from obtaining dollars to make payments due last week. Chaco said it deposited 1.2 million pesos ($254,000) with the nation’s main clearing house to pay interest and amortization on dollar bonds due in 2015 and 2023.
Investor concern spread to other provinces including Formosa, Mendoza and Cordoba as Buenos Aires Vice Governor Gabriel Mariotto on Oct. 10 praised Chaco’s decision, saying that it was a “very significant precedent.”
The central bank that same day issued a statement saying that while there are no currency restrictions on federal government debt issued domestically or abroad, local governments and companies won’t have access to dollars for payments on bonds sold mostly to Argentines. Mariotto later said he didn’t mean to imply that Buenos Aires would pay its dollar debt in pesos.
Mauro Roca, a strategist at Deutsche Bank AG, says the central bank won’t renege on its pledge to expand currency restrictions. He maintained his overweight recommendation on Argentina’s sovereign debt.
“The bonds that are more interesting to investors, the sovereign bonds, won’t suffer pesofication, as the central bank said in the statement,” Roca said in a telephone interview from New York. “Argentine bonds are attractive and we don’t see financing problems in the short term.”
Roca said he forecasts the economy will grow this year less than the 3.26 percent threshold that would trigger a payment in December 2013 to holders of warrants linked to economic growth. While the World Bank says South America’s second-biggest economy will expand 2.2 percent this year, the government foresees 3.4 percent growth.
Chaco’s payment in pesos of its local dollar-denominated bonds was seen as “yellow, as opposed to red, lights,” according to an Oct. 11 statement by JPMorgan Chase & Co.
“The risk of debt-related pesofication has been overblown,” the statement said.
The extra yield, or spread, investors demand to hold Argentine government dollar bonds instead of U.S. Treasuries narrowed 14 basis points to 836 basis points at 12:06 p.m. in Buenos Aires, according to JPMorgan. Warrants tied to Argentina’s economic growth were unchanged at 12.88 cents. The peso was little changed at 4.7275 per dollar.
Chavez’s election victory may embolden his ally Fernandez to expand state control over the economy, according to IdeaGlobal’s Alvarez.
Both leaders “have strengthened their position by pursuing the same non-orthodox economics,” he said.
Chavez also made a habit of seizing companies, including the local units of Exxon Mobil Corp. (XOM:US) and Banco Santander SA (SAN), as part of his so-called 21st century socialist revolution.
Minutes after Chavez routed opponent Henrique Capriles Radonski by a surprise 11 percentage points, Fernandez broke a five-day silence on Twitter and posted a series of messages on the micro blogging website praising her ally.
“Hugo, today I want to say you’ve plowed the earth, planted a seed, watered it and today are harvesting its fruits,” she wrote. “Your victory is ours.”
While the 58-year-old Chavez, who has been battling cancer for more than a year, has solidified his support by tapping the world’s biggest oil reserves to subsidize food, provide low-cost housing and expand health care among the poor, the opposition’s showing in the election and the prospect of Chavez’s falling from power at some point provide support for Venezuelan bonds, according to Jefferies Group Inc.
“The elections were just phase one of regime change,” Siobhan Morden, the head of Latin America fixed-income strategy at Jefferies, said in a telephone interview from New York. “There’s still that latent expectation of regime change, which is supportive for Venezuela. You don’t have that same potential for positive credit shock in Argentina. In fact, as we’ve seen post-YPF, it’s increasingly negative headline risk.”
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