Argentina’s supply of dollars it
needs to pay bondholders is dwindling at the fastest pace since
the depths of the nation’s economic crisis 11 years ago.
Foreign reserves have plunged 12.2 percent this year to $38
billion, the biggest decrease since 2002. The holdings are now
at a six-year low and will equal just 25 percent of Argentina’s
$142 billion of foreign debt by the end of 2013, according to
Credit Suisse Group AG. The financial strain is adding to the
nation’s borrowing costs as the extra interest investors demand
to hold Argentina bonds over Treasuries rose 2.3 percentage
points this year, the most in emerging markets after Venezuela,
to 12.21 percentage points, according to JPMorgan Chase Co.
Argentina posted the worst deficit in its current account,
the broadest measure of trade in goods and services, since its
$95 billion default in 2001 in the first quarter as energy
imports jumped and Argentines spent more abroad to skirt
President Cristina Fernandez de Kirchner’s currency
restrictions. After using $5.7 billion of reserves to pay debt
last year, the central bank will need to spend $4.7 billion more
through year-end to meet obligations, Credit Suisse said.
“The structural pieces of the economy are not favorable
from the credit point of view,” Jeremy Brewin, head of
emerging-market debt at Aviva Investors, which oversees $4.3
billion in fixed-income assets, said by telephone from London.
“Foreign-exchange reserves have been run down. The fundamental
structure of the Argentine model is getting more stressed.”
Energy Deficit
Eduardo De Simone, a spokesman at the central bank, didn’t
return an e-mail seeking comment on the loss of reserves.
The nation’s dollar reserves are falling even after a $34
million boost in agricultural export revenue this year and
stricter controls on dollar purchases. In the first six months
of 2012, reserves had fallen $24 million, 0.5 percent of the
decline this year.
The expropriation of oil-producer YPF SA last year has
failed to limit crude imports. South America’s second-largest
economy imported $4.6 billion of fuel and lubricants the year
through the end of May, a 30 percent increase from the same
period in 2012, according to data from the National Statistics
Institute. The energy deficit quintupled from $445 million in
the first five months of last year to $2.13 billion at the end
of May.
Travel Burden
Since Fernandez banned buying dollars for everything but
travel since July, the nation has posted a deficit from tourism
revenue of $223 million this year through April, a 10-fold
increase from a year ago, as more Argentines went abroad to buy
dollars at a cheaper exchange rate and the nation attracted
fewer visitors.
On the black market, a dollar costs 8.05 pesos compared
with the so-called “tourist dollar,” which is the official
rate plus a 20 percent tax on credit cards, or about 6.44 per
dollar. The peso was little changed today at 5.362 per dollar in
official market trading.
Argentines bought about $2.8 billion from the central bank
for travel in the first quarter, a 67 percent increase from the
same period a year earlier, according to the bank.
The government has a $349 million interest payment due June
30 on its so-called discount bonds, according to Credit Suisse.
While the country has enough reserves to service its debt
through 2014, “their decreasing trend is worrisome when
thinking about 2015, when dollar-denominated debt maturities
rise to at least $10.3 billion,” Casey Reckman, an economist at
Credit Suisse, wrote in a reported dated June 20.
Reckman estimates reserves will fall to $30.5 billion by
the end of next year.
‘Very Manageable’
To restore confidence from investors demanding the highest
yields in emerging markets, Fernandez should sign on to a
standby facility with the International Monetary Fund to assure
them that it has the funds to meet its obligations while
removing restrictions on currency purchases, according to Walter Molano, head of research for BCP Securities LLC.
“The reserves are fine, debt service is very manageable,”
Molano said by telephone from Greenwich, Connecticut. “They’re
losing them at this pace because of political reasons. You could
triple the reserves but if the people aren’t confident then
they’re going to continue to run out the door.”
CC Rating
The cost of insuring Argentine bonds against default for
five years surged 1,485 basis points this year, or 14.85
percentage points, to 2,886 basis points at 9 a.m. in New York,
according to prices compiled by CMA Ltd. That level implies a
greater than 80 percent probability of default.
In addition to the risk that Argentina loses its appeal of
a U.S. court ruling that would block payments on restructured
bonds unless holdout creditors are paid in full, potentially
triggering a default, Fernandez isn’t likely to improve her
policies ahead of mid-term congressional elections in October,
said Aviva’s Brewin.
Argentina is considering changing the jurisdiction of its
bonds issued under New York law to circumvent a negative ruling,
Buenos Aires-based newspaper El Cronista reported yesterday,
citing Economy Ministry officials it didn’t name.
Brewin said Aviva has sold all of the Argentine bonds in
its benchmark emerging-markets debt fund. The notes are rated CC
by Fitch Ratings, eight levels below investment grade.
“There are many fundamental and structural reasons why one
would naturally want to be underweight,” said Brewin.
“Remember, it’s already rated in the C’s, so further
deterioration means you’re walking toward a single-C rating.”
To contact the reporter on this story:
Katia Porzecanski in New York at
kporzecansk1@bloomberg.net
To contact the editors responsible for this story:
David Papadopoulos at
papadopoulos@bloomberg.net;
Michael Tsang at
mtsang1@bloomberg.net