News Center

Kirchners Losing Argentina in Slump Leading to Default Crisis
Bloomberg
September 02, 2008

By Drew Benson

Sept. 2 (Bloomberg) -- The Kirchners, who delighted in their disdain for Argentina's creditors the past five years, are about to get their comeuppance.

President Cristina Fernandez de Kirchner has started courting bondholders as the two-month slump in commodities, the source of more than half the country's exports, increases investor concerns that tax revenue will ebb and force the government to default for the second time since 1991. Fernandez, 55, dispatched Treasury officials last month to buy Argentine bonds in a demonstration of her commitment to lenders.

Three years after her husband and predecessor, Nestor Kirchner, saddled bondholders with 70 percent losses by restructuring the nation's debt, odds of another debacle are rising. Investors in credit-default swaps are pricing in a 19 percent chance of default in two years and a 42 percent probability by 2013.

``They just don't learn,'' said Roberto Sanchez-Dahl, who manages $600 million of emerging-market debt at Pittsburgh-based Federated Investment Management. He dumped more than half his Argentine bonds in July and wants to sell more. ``They kind of repeat the same pattern over and over again.''

Costs to protect five-year Argentine debt with credit- default swaps rose to 7.93 percentage points a year, according to data compiled by Bloomberg. Among sovereign bonds, only Pakistan's debt costs more to insure, at 9.50 percentage points. Credit-default swaps, contracts to protect against or speculate on default, pay the buyer face value should a borrower fail to adhere to its debt agreements.

Slowing Growth

The rate means investors pay $793,000 to protect $10 million of debt. In September 2006, it cost $244,000, as record exports of wheat, soybeans and corn fueled an economic expansion that provided the government with five straight years of budget surpluses.

The 15 percent decline in the UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials since July 2 means growth, which averaged 8.8 percent over the past five years, will slow to 5.9 percent this year and 4 percent in 2009, according to the median forecast in a Bloomberg News survey of six economists.

Wheat fell 23 percent from this year's high on the Chicago Board of Trade while corn declined 25 percent and soybeans dropped 19 percent.

Net borrowing needs will climb to at least $11.3 billion next year from $6.1 billion, according to Barclays Capital, just as the country's financing options diminish.

``I see bad things happening to a country that has unsustainable economic policies that have up until now been bailed out by high commodity prices,'' said Jonathan Binder, who manages $2 billion of emerging-market assets at INTL Consilium LLC in Fort Lauderdale, Florida.

Tango 01

Lawsuits from investors who rejected the 2005 debt restructuring have cut the country off from international capital markets. Kirchner, 58, paid creditors about 30 cents on the dollar four years after the country halted payments on $95 billion of bonds, the biggest sovereign default ever. About one- quarter of bondholders rejected the offer.

The holdouts have attempted to seize everything from Argentine Naval and Air Force warehouses in Upper Marlboro, Maryland, to the Kirchners' presidential airplane, Tango 01. Concern the protestors would make claims on payments on new international bonds has kept the government out of the market.

The government also lost access to the local market as allegations that Kirchner rigged consumer price data last year eroded demand for inflation-linked bonds. The securities account for 85 percent of peso-denominated debt.

`Absolutely Stinks'

Daniel Fazio, a union leader at the National Statistics Institute, said during a protest in February 2007 that a Kirchner appointee forced workers to break from standard data- gathering procedures to hold down the inflation rate.

While the institute reports annual inflation was 9.1 percent in July, Goldman Sachs Group Inc. and Credit Suisse Group say it was closer to 30 percent, driven by a doubling of government spending over the past three years and a four-month farmers strike that sparked food shortages.

The Kirchners say the consumer price index is accurate.

Yields on benchmark 5.83 percent inflation-linked bonds due in 2033 jumped to 9.95 percent from 5.2 percent in January 2007.

``The local debt absolutely stinks,'' Sanchez-Dahl said. ``Who would buy that if it is totally unrealistic how they are pricing it? It's crazy.''

Government debt sales in the local market fell to $287 million this year from $3.6 billion in 2007. To help plug the gap, Fernandez leaned on Venezuelan President Hugo Chavez, who used record oil exports to lend Argentina $2 billion.

Debt Downgrade

Argentina's Economy Ministry said the plan to buy back dollar- and peso-denominated bonds, announced last month, was part of an ``integral financing strategy'' for 2008-2009. ``The first step in this strategy consists of intervening in the market to advance the payment of debt service due in the coming months and next year,'' the ministry said, without specifying how much it would spend.

Goldman, Morgan Stanley and Lehman Brothers Holdings Inc. issued default probability reports on Argentina in the past two weeks. Sanchez-Dahl said the country will avoid default at least in the ``short term,'' aided by near-record foreign reserves of $47 billion.

While finances are improving in most of Latin America's biggest economies, Standard & Poor's cut Argentina's foreign debt rating to B, five grades below investment-grade, on Aug. 11. Brazil and Peru were raised to investment grade this year, joining Chile and Mexico.

`Different Road'

Bonds rated at least BBB- by S&P and Baa3 at Moody's Investors Service are considered investment grade.

The yield on Argentina's benchmark 8.28 percent dollar bonds due in 2033 soared 2.59 percentage points this year to 11.25 percent. The price of the bonds, sold by the government in the 2005 restructuring, tumbled to 74 cents on the dollar from a high of 116.85 in April 2007. The price touched a record low of 67.9 cents on Aug. 8.

``Unfortunately, Argentina has chosen to take a different road,'' said Nick Chamie, head of emerging-market research at RBC Capital Markets in Toronto. ``Argentina went for short-term gain and I think they are in for a lot of long-term pain.''

Fernandez is considering tapping state-run Banco Nacion for additional funding, according to the Cronista newspaper. An Economy Ministry spokesman declined to comment on the report.

`Your Problem'

The government would have to change the bank's charter to allow it to finance the federal budget, a plan that Sanchez-Dahl said reminds him of the last-ditch financial moves the country tried before the default in 2001.

Settling with investors who refused the previous bailout to gain access to international markets is another possibility, the newspaper La Nacion reported, without saying how it obtained the information. Cabinet chief Sergio Massa denied the report on Aug. 27.

The move would be an about-face. In January 2005, four months before the restructuring was completed, Kirchner told creditors to ``enter now or it will be your problem.''

To contact the reporter on this story: Drew Benson in Buenos Aires at abenson9@bloomberg.net

Last Updated: September 2, 2008 00:01 EDT