(Adds possibility of increase China currency swap, bonds move)
By Sarah Marsh and Jorge Otaola
BUENOS AIRES, Sept 30 (Reuters) - With five days to go until payment is due on a $5.9 billion maturity of Boden 15 bonds, Argentina is leaving bondholders guessing whether it will pay the whole amount in cash or launch a last-minute swap in order to protect its foreign reserves.
The capital and interest payment on the dollar-denominated bond would take a large chunk out of foreign reserves that stand at $33.311 billion. Argentina uses those reserves to pay debt, finance imports and prop up its currency.
Argentine bonds rose on Wednesday in part on speculation the government would seek to rebuild reserves after the bond payment by increasing its currency swap line with China, traders said. Over-the-counter bonds were up 1.4 percent on average.
Economy Minister Axel Kicillof told local radio late last week that investors were “desperately” calling for a swap of the Boden 15 for other bonds, but he was still assessing market conditions. “It is better not to create expectations.”
“In our view the appetite for a swap is low, though it would depend on how attractive the swap offer is,” said Alejo Costa, chief strategist at local investment bank Puente.
Volatility in markets worldwide because of China’s slowdown, uncertainty over the timing of a U.S. interest rate increase and turmoil in emerging markets including neighboring Brazil make it a bad time for a swap, economists say.
A sell-off in Argentine debt after the government ordered mutual funds to adjust the way they value dollar bond portfolios has further complicated matters.
Last Friday, Argentina’s Neuquen province cited market conditions for postponing a bond sale. Initial pricing thoughts had seen a yield of about 10.25 percent. [ID:nL5N11W01G}
“It looks like the government is not willing to pay high rates for a roll over. On those lines, we believe there is a good chance they will simply make the payment,” Costa said.
Argentines vote in a presidential election on Oct. 25. Paying the bond redemption in cash would restrict the next government’s financial room for maneuver, although Argentina faces no more major debt payments until 2017.
Costa said it was expected public institutions like the pension funds would take a bond swap. Estimates for the amount of Boden 15 notes held by the public sector vary vastly from 10 to 50 percent.
Some economists fret payment of the Boden 15 would leave Argentina’s net foreign reserves, which exclude liabilities like reserve requirements for private banks and a currency swap with China, perilously low. They are currently estimated to be between $14 and 16 billion.
Yet Mauro Roca of Goldman Sachs said Argentina was not expected to have to have to pay back those liabilities in the near future so a balance of payments crisis was unlikely.
“Most of international reserves are readily usable,” he said in a recent note. “In the short run, the risk of a balance of payment crisis could remain contained.”
The Argentine central bank president is expected to meet with Chinese counterparts to discuss the possibility of increasing a currency swap at the annual meeting of the World Bank Group in Lima next week, local media reported (Reporting by Jorge Otaola and Sarah Marsh; Editing by Richard Lough, W Simon and Bernard Orr)