September 2, 2019 / 10:32 AM / 2 months ago

UPDATE 1-Return to capital controls sends Argentina assets tumbling

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By Karin Strohecker

LONDON, Sept 2 (Reuters) - Argentina’s international dollar bonds hit record lows on Monday while its financial stocks tumbled and risk premia shot up after President Mauricio Macri reimposed capital controls on Sunday as the country’s debt crisis spirals.

The about-face by Macri, who had previously lifted many protectionist practices of his predecessor, Cristina Fernandez de Kirchner, came after the government failed to stem heavy investment outflows and to shore up its tumbling currency.

The central bank has been authorized to restrict purchases of dollars as it burns through its reserves in an effort to prop up the peso.

Argentina’s benchmark international 2028 dollar bonds dropped more than 2 cents to a new low of 36.58 cents, according to Refinitiv data. Bonds maturing in 2023 and 2038 recorded similar losses.

American depository receipts (ADRs) of Argentina’s financial institutions also came under pressure. Grupo Financiero Galicia’s Frankfurt-listing tumbled 9.15% while Banco Macro SA fell 6.5%.

The risk premia demanded by investors to hold Argentina’s dollar bonds over safe-haven U.S. Treasuries rocketed to 2,534 basis points on J.P.Morgan’s index of hard-currency emerging market bonds - levels last seen in the wake of a major 2001 default.

“(Capital controls are) a sign of distress in the market and reflect that the new parameters on Argentina are weak and when the peso weakens further it weighs on the credit profile,” said Michael Bolliger, head of asset allocation for emerging markets at UBS Wealth Management.

“There remains a lot of pressure on the currency... There’s a limit to what they can do without capital controls.”

The peso has lost more than a third of its value in the year-to-date and following a more than 50% drop last year. The central bank has burned through nearly $1 billion in reserves since Wednesday in an effort to prop up the currency but failed to stem the slide.

“The key is to watch how the local market reacts today,” said Graham Stack at BlueBay Asset Management. “Will it reassure locals that their dollar deposits are safe or will it lead to attempts to get around the controls?”

Reporting by Karin Strohecker; Additional reporting by Tom Arnold and Marc Jones; Editing by Hugh Lawson

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