n FRONT STORY LATIN AMERICA
Argentina bonds jump as market awaits IMF
Hopes grow of further official sector support
Government plans to eliminate deficit by end-2019
Investors hope a rejigged funding package
from the IMF as well as other sources will
finally serve as the circuit breaker needed to
stem the crisis in confidence enveloping
Argentina.
The sovereign’s bond prices certainly
moved higher on such expectations last
week as the finance minister met with both
IMF officials and US Treasury Secretary
Steven Mnuchin.
The sovereign’s 5.875% 2028s enjoyed a
post Labor Day surge of about five points to
hit 76.00 Friday morning, while the cost of
five-year default protection shrunk over
100bp to 690bp over the same period.
“I am surprised [credit spreads] haven’t
tightened more, but there is clearly a lot of
doubt about Argentina,” said Bryan Carter,
head of emerging markets fixed-income at
BNP Paribas Asset Management.
The market is now anxiously awaiting
how the IMF will react to Argentina’s
request to advance payments on its
US$50bn standby programme and its
endorsement of an ambitious fiscal plan.
The government, led by President Macri,
has agreed to cut its primary fiscal deficit to
2.6% from 2.7% this year and eliminate it
altogether in 2019.
“The jury is still out,” said Graham Stock,
head of EM sovereign research at BlueBay
Asset Management.
“We know what the government has said
in terms of fiscal adjustment but we are not
sure what the IMF response will be.”
Even so, a very public endorsement
from US President Donald Trump of the
government’s efforts only raised
speculation the Fund would come through
for the beleaguered country.
“Macri has very good relations not only
with Trump, but also with (IMF boss
Christine) Lagarde,” said Carter. “They
have political support and if anyone is
going to get extraordinary treatment it is
Argentina.”
Headlines that the US Treasury would
provide a US$5bn-US$10bn credit line to
Argentina - later denied by the finance
ministry - also appealed to a buyside still
heavily overweight the credit.US SUPPORT?
Whether true or not, the notion that the
US Treasury could enhance IMF aid - much
the same way it did during the 1994 Peso
Crisis in Mexico - helped lift prices.
“I don’t think they can get more out of
the IMF in terms of total funding,” said Jim
Barrineau, head of emerging markets debt
at Schroders.
“[But] a potential contingent credit line
with the Treasury would have a significant
positive impact for Argentina. If you have a
policy framework doing all the right
things and the market has not responded,
this is the next logical step.”
The administration of President Clinton
used the US Treasury’s Emergency
Stabilization Fund (ESF) during the Tequila
Crisis after Congress failed to bail out
Mexico, said Carter.
“An ESF loan was given as a complement
to the IMF funding at the time,” he said.
“That would be very much in line with
where Argentina is today...and given
Macri’s relationship with Trump I
wouldn’t be surprised if we see some news
surrounding this.”
One idea floating around the market is
that such funding could be used by the
government to buy back dollar debt, which
now looks very cheap.
“The IMF wouldn’t give them
permission to do that [with its money], but
it would make sense,” said Carter. “It gets
them out of their balance sheet
conundrum. It would be a nice solution.”
This way Argentina would bolster asset
prices and attend to concerns over
deteriorating debt metrics following a near
50% decline in the peso this year against the US
dollar.
“Argentina is not a country with low
leverage, which has been a mantra over
the last couple of years,” said Todd
Martinez, a director at Fitch Ratings.
The dramatic depreciation has already
pushed public debt to GDP to 80% from
60% over the last three months, not
accounting for any of the positive impact a
weaker currency will have on economic
growth, Stock said.“I don’t think the IMF will broach the
subject of debt reprofiling because near-term
debt servicing needs are manageable,” he said.
“A lot of debt is held by public entities and
can be rolled over near term, but if they
don’t make a credible fiscal adjustment, a
restructuring could be on the cards.”MORE MONEY
Either way, it is clear that the IMF’s US$50bn
stand-by arrangement has failed to shock
and awe the market in the manner the
government had hoped, despite being a
record size for the multilateral.
“Clearly Argentina needs a positive shock to
confidence,” said Siobhan Morden, head of Latin
America fixed-income strategy at Nomura.
“They need a bigger stock of reserves or access
to dollar assets to discourage dollar demand.”
The easiest way to calm markets may be
an even larger IMF package, say some
observers, though that is fraught with risks
for the multilateral which already has a
chequered history with Argentina.
Providing more funding and agreeing to the
government’s plan to cut the primary fiscal
deficit from 2.6% to zero in 2019 could be a tall
order and potentially expose the Fund to another
perceived failure in the South American country.
“A 2.6% primary balance compression is
virtually unheard of in emerging markets,” said
Ed Al-Hussainy, a senior interest rate and
currency analyst at Columbia Threadneedle
Investments.
“The IMF will have to revisit assumptions
it made two months ago. There has to be a
balance between throwing good money
after bad and the fact that the IMF’s
credibility is on the line as well.”
Indeed it is not at all clear how much
support the IMF is willing to give Argentina
as debt metrics deteriorate.
General government debt to GDP is now at
75% of GDP and heading to 90% - well within
the IMF’s “red zone,” said Fitch’s Martinez.
“This begs the question when the IMF
revisits the programme, will it say that debt
is still sustainable”, he said. “Because that is
a fundamental assumption for their ability
to be lending so much money to Argentina.”
Paul KilbyInternational Financing Review September 8 2018 57EMERGING MARKETS
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