Argentina assets extend slump as election-fueled rout deepens

  • Investors dumped Argentinian stocks, bonds and currency en masse
  • The selloff has pushed the upfront cost to protect Argentine debt for five years with credit-default swaps to 45.8%

Julia Leite (with inputs from Bloomberg)
Updated13 Aug 2019
A man shows Argentine pesos outside a bank in Buenos Aires' financial district, Argentina.
A man shows Argentine pesos outside a bank in Buenos Aires’ financial district, Argentina. (Reuters )

Argentine assets extended an unprecedented slump as traders reassessed the new political outlook for the troubled South American nation after Sunday’s primary election upset.

The peso fell another 6% after losing 15% on Monday. Century notes fell to a record 49.85 cents on the dollar in New York, while yields on bonds due in 2021 surged to 46%. Argentina’s spreads over U.S. Treasuries have now surpassed Zambia, according to JPMorgan indexes, and trail only Venezuela.

The selloff has pushed the upfront cost to protect Argentine debt for five years with credit-default swaps to 45.8%, making it the most costly to insure against non-payment in the world, according to CMA data. That would imply a probability of default of about 80%.

Investors are concerned Argentina will return to populist policies that included currency controls after President Mauricio Macri’s stunning loss in primary elections over the weekend, seriously hindering his re-election chances in the Oct. 27 vote. While the opposition’s Alberto Fernandez said Monday that he doesn’t want a default, neither candidate has been able to assuage market concerns.

“So much of the path for peso is going to be determined by commentary now and I didn’t think Fernandez’s comments helped too much,” said Brendan McKenna, a currency strategist at Wells Fargo in New York. “It would have been more comforting to hear something along the lines of ‘we’ll find a way to not default’ or something to calm markets.'

While some investors like Jefferies have held firm through the turmoil, most have run for the exit -- and recommended clients do the same. Citigroup closed its recommendation to go long on 2020 Lecaps as Argentine assets, saying the country’s assets will likely to remain under pressure, while BTG Pactual said investors should reduce positions in the nation’s bonds trading above the mid-60 cents level on the dollar to underweight.

It’s the same for the currency: Morgan Stanley said the peso may still drop another 20% from Monday’s close in nominal terms in the months to come as traders clean out positioning and inflation expectations deteriorate. Analysts at Bank of America Merrill Lynch revised its forecasts to 70.5 per dollar by year-end, from 51.4 before, and 106.6 by 2020, saying the market collapse will have strong effects on the economy going forward.

Stocks have been the sole bright spot on Tuesday, with the Merval benchmark gauge rebounding 8.5% in dollar terms after falling a record 48% the previous day.


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