Market sell off as Argentina asks to ‘reprofile’ $100bn of debt
Investors have sold off Argentine currency and bonds after the government announced it would seek more time to pay off its $100bn (£82bn) in debts, raising fears of a default.
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The Argentine peso has plunged over 20 per cent since market-friendly President Mauricio Macri lost a primary on 11 August that severely curtailed his chances of re-election.
Investors have been spooked by the prospect that the left could return to power in Argentina in the form of Alberto Fernandez, to whom Macri lost the primary.
Their nerves were rattled again further today when finance minister Hernan Lacunza said the government will negotiate with its creditors and the IMF to extend the payment times on its debts.
Lacunza said at a press conference that the government would “reprofile” the pay-back times debt owed to the IMF under a $57bn bailout agreement.
He said: “The priority today is to guarantee stability, because it is useless to launch reactivating measures if there is no stability.”
The move comes as Argentina tries to stave off its ninth sovereign default and its third since 2000. An election is due in two months’ time, which looks likely to install Fernandez as president.
Investors took a dim view of the move as they tried to work out what it meant for markets. The “spread” of Argentine bond yields over US Treasury bonds, which measures the perceived risk of debt default, rose over 150 basis points (1.5 percentage points) yesterday, according to Reuters.
The country’s Merval stock index had fallen four per cent by 5.45pm UK time.
Edward Glossop, Latin America economist at Capital Economics, said: “The Argentine finance ministry’s decision to extend the maturities of some of its short-term local-law debt, and enter talks with external bondholders, is tantamount to default.”
“A reprofiling is the least dramatic form of debt restructuring, since it doesn’t involve haircuts [creditors agreeing to receive less money] or up-front missed payments. But it still is still a form of default since it reduces the net present value of the debt.”
Glossop said he was optimistic bondholders would reach a deal with the government. “Investors would surely prefer to negotiate with Macri’s government than a post-election (likely) Fernandez government.”
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Yet he warned: “It’s not clear that maturity extensions on Argentine debt will be enough. While these will buy the government some time, it won’t necessarily ensure debt sustainability.”