August 30, 2019 / 12:02 PM / 20 days ago

UPDATE 1-German angst for Argentina bonds after S&P slashes rating

(Adds detail, background, prices)

By Marc Jones

LONDON, Aug 30 (Reuters) - Argentina’s battered bonds were driven lower again on Friday after a credit rating cut from Standard & Poor’s triggered automatic selling mechanisms at some of Germany’s giant pension funds.

S&P Global slashed Argentina’s rating to CCC- into the deepest area of junk debt, saying a plan announced on Wednesday by the country’s government to “unilaterally” extend maturities of many of its bonds had triggered a brief default.

Importantly, it also took the average rating between the big three rating firms - S&P, Moody’s and Fitch - down to CCC. For many big German institutions that level is classed as too risky to hold under Versicherungsaufsichtsgesetz or VAG rules.

It saw Argentina’s 2033 euro-denominated bonds slump nearly 5 cents and a 2027 version drop nearly 2 cents .

“A CCC rating is actually more meaningful than a default (rating),” Aberdeen Standard’s head of emerging market sovereign debt Edwin Gutierrez said.

“German pension funds can’t hold CCC so that is actually the bigger trigger for selling,” he said, adding that its rules weren’t as strict on default-stricken bonds.

Friday’s selling extended the rout in Argentina’s markets since business-savvy President Mauricio Macri was thumped by populist-leaning Peronist Alberto Fernandez in primary elections earlier this month.

Buenos Aires more widely held dollar bonds continued to suffer too. A benchmark 2028 bond lost another 0.7 cents while a 2022 one dropped 1 cent.

Investors in Argentina fear a return of the left to power could herald a new era of heavy government intervention in Latin America’s third-largest economy.

They also suspect that the plan to extend maturities will do little more than buy time and not be able to prevent a more serious default further down the line.

A hundred-year bond Argentina issue to much fanfare two years ago is trading at a record low of 40 cents on the dollar, showing the kind of write-down markets are now bracing for.

“We are probably around fair value (in bond prices) but it is the nature of these beasts that the price always overshoots (before it levels out),” said Gutierrez.

The cost of insuring exposure to Argentina’s sovereign debt also rose, with the country’s 5-year credit default swaps reaching 3,618 basis points, up 19 basis points from Thursday’s close, IHS Markit data showed.

Reporting by Marc Jones; Editing by Tom Arnold and Hugh Lawson

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