August 29, 2019 / 12:10 PM / 5 months ago

UPDATE 2-Argentina bonds plumb new lows, country risk soars, as govt eyes debt 'reprofiling'

(Adds risk spread data)

By Hugh Bronstein and Karin Strohecker

BUENOS AIRES/LONDON, Aug 29 (Reuters) - Argentine country risk soared to levels not seen since 2008 and bond prices lurched to record lows on Thursday after the government announced plans to “reprofile” some debt, leaving investors scrambling to assess what kind of hit they might face.

The recession- and inflation-racked economy has struggled for years with debt problems. Its latest woes began when business-friendly President Mauricio Macri suffered an unexpected and crushing defeat in an Aug. 11 primary election at the hands of populist-leaning Peronist Alberto Fernandez.

That unnerved investors, who feared that the return of the left to power could herald another debt restructuring in Latin America’s third-largest economy.

By the time Treasury Minister Hernan Lacunza said on Wednesday the government wanted to extend the maturities here of short-term local debt instruments and would negotiate with holders of its sovereign bonds and with the International Monetary Fund, a debt revamp was already widely expected.

Argentine spreads over safe-haven U.S. Treasury bonds, which measures perceived risk of default, nonetheless rose 82 basis points to 2,154 early on Thursday on JP Morgan’s Emerging Markets Bond Index Plus.

The central bank spent $367 million of its reserves in foreign exchange market interventions on Wednesday alone, part of its effort to defend the beleaguered local peso.

“The pre-emptive announcement from the Macri administration to voluntarily re-profile debt shows cash flow desperation after consistent foreign exchange reserve loss,” said Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities in New York.

“It now looks like a disorderly phase of a debt restructuring with a piecemeal strategy of seeking debt relief without a comprehensive debt repayment plan,” Morden said in a note, adding, “capital controls could quickly follow as this official recognition of cash flow stress will only trigger further dollar demand and capital flight.”

The news put more selling pressure in early European trading on Argentina’s dollar-denominated bonds issued under foreign law. The issue maturing in 2028 dropped around a cent to a low of 42 cents in the dollar.

Developing markets investment house Tellimer calculates that $7 billion of short-term debt, $50 billion long-term debt and $44 billion of IMF debt may be earmarked for an overhaul.

Key players going forward will be the IMF, which has a $57 billion standby loan deal with Argentina and Fernandez, who is now the front-runner to become president at the end of the year.

Fernandez has said he wants to renegotiate the IMF pact, which calls for unpopular austerity measures that had damaged Macri’s popularity and set him up for the drubbing he took in the primary vote.

A crunch point could be Sept. 15, when the next IMF loan tranche - about $5.4 billion - is due to be disbursed.

“The re-profiling was already in the prices,” said Alberto Bernal, chief emerging markets strategist at XP Investments in New York.

“I expect the IMF to be supportive of the decision, not least because the IMF is already fully involved here,” he added. “As far as I understand this transaction does not trigger CDS (credit default swaps), but will force rating agencies to declare that Argentina is now once again in Selective Default.”

Selective default is when a country fails to make payments on one debt obligation but makes good on others.

Restructurings are a traumatic subject for voters who remember the country’s 2001/2002 default, which punctuated an economic meltdown that tossed millions of middle-class Argentines into poverty. Subsequent mini-defaults kept the country locked out of global capital markets for years.

Macri prided himself on getting the country out of default early in his administration and promised to reintegrate Argentina with the global markets. But Macri overestimated his ability to attract the foreign direct investment needed to provide Argentina with sustained economic growth.

Weakness in the peso has meanwhile damaged the government’s ability to repay its dollar-denominated obligations.

The re-profiling will first apply to short-dated debt denominated in pesos as well as dollars but issued under local law, Lacunza said. The measure will require approval from Congress.

While markets understood the immediate action to be targeting short-term domestic sovereign debt denominated in dollars or Argentinian peso, it was still unclear exactly how international investors might be affected.

Some investors welcomed Argentina’s efforts to tackle its debt burden.

“They haven’t got the money, so some adjustment is necessary,” said Abhishek Kumar, lead emerging markets portfolio manager at State Street Global Advisors.

“The measures they take are still unknown, but anything is good because it realigns to the reality.” (Reporting by Karin Strohecker, Marc Jones and Tom Arnold in London; Hugh Bronstein, Gabriel Burin, Walter Bianchi and Cassandra Garrison in Buenos Aires and Rodrigo Campos in New York. Editing by Hugh Lawson and Bernadette Baum)

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