Latin Finance - July 2008 - (Page 36)

argentine local markets Investors Whip Argentina by Jason Mitchell T he contrast between Argentina and Brazil could not be starker. The latter goes from strength to strength and is the darling of the international buyside after securing investment grade from two major agencies. Its formerly superior southern neighbor continues to dig itself into a hole, setting the stage for a repeat of the 2001 crisis. “Investors have started to get tired of Argentina, there is such little positive news coming out of the country,” says Alejandro Cuadrado, LatAm economist at Merrill Lynch. “If the farmers’ strike drags on, investors will continue to punish Argentine bonds.” As of early June, it was unclear how long the agricultural dispute would last. Based on fundamentals, including a solid soft commodities base and ample human capital, Argentina should have a much firmer yield curve, particularly at the short to medium-end. But the five-year CDS is at around 600 basis points over swaps, implying a 30%-40% probability of default, Cuadrado adds. In January 2007, Argentina’s component of JPMorgan’s EMBI+ slipped below Brazil’s, bottoming at 185 basis points against Brazil’s 190. But since February 2007, when the Argentine government started to manipulate inflation data, the curve has been pounded. As of early June, Argentina was at 535 basis points versus 191 basis points for EMBI+ Brazil. In April, S&P revised its outlook on Argentina’s B+ rating to negative, following the resignation of the economy minister. “The yield curve was trashed during the last year and although we have seen a reasonable recovery in the short-end this year, the mid and long-ends remain at high yields,” says Marcos Esteves, head of global markets for Deutsche Bank in Argentina. Despite the pick up in yields, investors are repulsed by political risk. “Currently, Investors are punishing Argentina for heterodox economic management, undermining local markets activity. The situation will get worse before it gets better. grown at an average rate of 8.8% during the past five years, according to the IMF. Local economists estimate an annualized inflation rate of 25%. Technical Default? Some commentators say manipulation of the inflation data through government statistics agency INDEC amounts to a sovereign default, since the administration has saved interest on its CDRadjusted (index-linked) bonds to the tune of an estimated $1.6 billion between February last year and May 31 this year. “It took some time for the implications of the INDEC interference to sink in,” says a leading bond Looking out for number one: Kirchner drags Argentina down trader at an international shop. “Many hedge funds were long on subprime exposure, so they we will not invest in Argentina,” says decided to hedge by going short on Simon Lue-Fong, head of Pictet Asset Argentina. They were expecting Argentine Management’s $100 million LatAm local currency debt fund. “Government policy is assets to go even more negative, which has in fact been the case.” what really puts us off. It has the wrong Investors feel let down by the Cristina policy mix and now the government does Fernández de Kirchner administration. not have many tools left to sort out the Initial hopes of a more market-friendly country’s problems.” approach than the government of her Argentina has a fiscal surplus of 1.1% of GDP and an annual trade surplus of $12 predecessor and spouse quickly faded. This has had a knock on effect on funding, billion. Its central bank has a $48.8 billion which the government is looking cushion of dollar reserves. After stopping increasingly to Venezuela to provide. debt payments and enforcing a harsh In April, Argentina issued a Bonar 13 haircut on creditors, the economy has 36 LATINFINANCE July/August 2008

Table of Contents Feed for the Digital Edition of Latin Finance - July 2008

Latin Finance - July 2008 Contents Investment Banking Outlook Compensation Survey Colombia Investment Banking Borrowers vs. Investors Banorte Profile Braskem Financing Strategy Brazil Hydro Finance Peru Port Privatization Panama Money Flows Argentina Local Markets Guide to Banking Technology Who Said That?

Latin Finance - July 2008

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