Argentina default concerns grow after market crash

Cornelia Mascio
Agosto 13, 2019

Argentina last defaulted on its debt in 2001, an event which sparked years of recessions and economic crises.

The Merval stock index fell 30 per cent and declines of between 18-20 cents in Argentina's benchmark 10-year bonds left them trading at around 60 cents on the dollar or even lower.

The yen traded close to a seven-month high against the dollar on Tuesday, as unrest in Hong Kong and gyrations in Argentina's markets heightened investor risk aversion and fanned demand for the safe-haven Japanese currency.

"The hopes of Argentina becoming a sustainable, well-functioning economy have been shattered for now", said Patrick Wacker, fund manager for emerging-market fixed income at UOB Asset Management Singapore.

Argentina's largest state-run bank - Banco Nacion - lowered the exchange rate of the country's peso currency by nearly 11 percent to 61 per USA dollar.

Stocks could dip between 5 per cent to 10 per cent but prompt long-term investors to enter the market as valuations fall, he said.

Investors fear that if Macri doesn't win a second term in October, the opposing team of left-leaning Alberto Fernández and his running mate - the former leader Cristina Fernández de Kirchner - will undo the progress Macri has made to regain the trust of investors in Argentina and overseas.

It deepened worries his populist opponent, Alberto Fernandez, and Fernandez's running mate, former president Cristina Fernandez, will try to renegotiate its debts as well as its agreements with the International Monetary Fund.

The government and its subsidiaries now have US$15.9 billion in debt payments denominated in dollars and euros due this year, according to data compiled by Bloomberg. In an interview with a domestic TV channel in Buenos Aires, Fernandez said "Nobody believes Macri can pay back the debt".

In the primary over the weekend, Macri took home only 32% of the vote, while Fernandez won 47%.

Expected to trail his opponent by just a few points, Macri was instead pummeled at the polls Sunday, with voters giving Fernandez a 15-point lead.

Other safe havens like Treasury debt also saw prices fall as investors moved money into riskier assets.

On Monday, credit-default swaps indicated that traders were pricing a 75% chance that Argentina will suspend debt payments in the next five years, up from a 49% chance that was priced in on Friday, Bloomberg reported.

MSCI's gauge of stock performance in 47 countries fell 0.85 per cent, driven lower by tumbling USA stocks.

The yen rose to its highest in more than a year and a half versus the dollar on the prospect the Japanese currency could gain more in the case of a drawn-out US-Sino trade conflict.

In a press conference Monday, Macri said he still has a shot to reverse the trend in October and that his economic team is working on measures to address voter concerns on the economy.

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