NEW YORK, Oct 5 (IFR) - Argentina had to dip into its dwindling reserves to make an almost US$6bn payment on its Boden 2015 bonds, which did little to boost confidence Monday in its troubled finances.
The country, locked out of the foreign capital markets after a pair of messy defaults, is set to price new bonds on Tuesday - but its debt picture is anything but rosy.
Argentina hopes to price a new local law 8% Bonar 2020 on Tuesday, amid some reports that its net reserves were down to just US$10bn in August before this weekend's US$5.9bn payment.
But many see no reason for investors to buy in.
"No creditor would lend money to an issuer to finance the continuation of unsustainable policies," said Sebastian Vargas, a strategist at Barclays.
Locals, who held approximately 40% of the Boden 2015s, will likely recycle the debt payments bank into bank deposits and keep vital dollars at home.
But it is a different story for the approximately US$3.5bn of Boden 2015s that Barclays calculates is still in foreign hands.
That money will leave the country unless those accounts decide to buy new Argentine debt issues - something that many see as unlikely.
"If there were a market (for a new issue from the sovereign), they would have done it before the Boden 2015," said Siobhan Morden, head of LatAm strategy at Jefferies.
She said the fact that yields jumped on the back of a recent forced sell-off by local mutual funds suggests that the market is unwilling to absorb more Argentine paper.
The leader who inherits the government from outgoing President Cristina Fernandez de Kirchner after elections this month will also take on a vast portfolio of woes.
An over-valued currency, a deteriorating current account deficit, diminishing liquid reserves and no access to dollar funding spell big problems for the new government.
Still, hopes that the next administration will end the long-running battle with holdout creditors over previously defaulted debt seem to be helping support sovereign debt prices.
"It shouldn't be trading as tight as it is," said Bryan Carter, head of EM debt at Arcadian Asset Management. "The country is not that good a credit."
Citigroup calculates fair price on the new Bonar 2020 to be around 92.25 or a Z-spread of 871bp, for a yield of 10%. (Reporting by Paul Kilby; Editing by Marc Carnegie)