Argentine ‘Soap Opera’ Creates Bond Buy Opportunity (Update3)
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By Drew Benson and Tal Barak Harif
Jan. 7 (Bloomberg) -- Argentine bond declines fueled by the government’s push to oust the central bank chief are creating buying opportunities because the notes will rebound when the country restructures its defaulted debt, according to RBS Securities Inc.
Government benchmark Boden notes slid the most since late November, dropping 3.35 cents on the dollar today to 81.9 cents, after President Cristina Fernandez de Kirchner and her cabinet signed a decree today removing Central Bank President Martin Redrado. Redrado, 48, had resisted the president’s attempt to fire him yesterday after he opposed a plan to use $6.6 billion of foreign reserves for debt payments.
“Despite this soap opera, the debt swap will proceed and that’s what’s really anchoring Argentine debt prices,” Boris Segura, an RBS analyst, said in a telephone interview from Stamford, Connecticut. “There might be some further downward pressure on the bonds, but they are well supported.”
Fernandez plans to unveil this month terms of a settlement offer to creditors holding $20 billion of defaulted bonds, paving the way for the South American country to regain access to international markets for the first time since it halted payments on $95 billion of bonds in 2001. About 25 percent of the debt holders rejected the government’s 2005 offering of 30 cents on the dollar.
Redrado told opposition legislators yesterday that only congress has the power to dismiss him, Senator Gerardo Morales said yesterday after the meeting.
Argentina’s dollar bonds returned 133 percent last year, the most since JPMorgan Chase & Co. began tracking the data in the 1990s, in part on speculation that the government would gain better access to financing after completing a restructuring.
The rally extended last month when Fernandez said she would borrow the reserves to service debt, a step that helped assure investors the government wouldn’t default for a second time this decade.
The reserves plan sparked gains because it “enhances the government’s short-term ability to pay,” said Edwin Gutierrez, who manages about $5 billion in assets for Aberdeen Asset Management Plc. in London.
The price of the government’s 7 percent dollar Boden bonds due in 2015, one of the country’s most traded securities, climbed to a 2 1/2-year high of 86.8 cents on the dollar on Jan. 5 from 81.2 cents on Dec. 11. The yield dropped 91 basis points, or 0.91 percentage point, over that time to 10.55 percent, according to data compiled by Bloomberg.
Segura said the bonds are unlikely to fall beyond the 81.2- cent level they were at in mid-December before rebounding in the coming weeks as the government advances with the restructuring.
While Fernandez’s attempt to dismiss Redrado shows that “policy makers are not strong and not very predictable” in Argentina, “the bigger issue is: are they going to solve their problems with the holdouts?” said Gabriel Torres, an analyst at Moody’s Investors Service in New York. “If they don’t resolve it and don’t have access to markets, things will get worse.”
Moody’s rates Argentine foreign debt B3, or six levels below investment grade. Standard & Poor’s rates the country B-, also six levels beneath investment grade.
Fernandez, 56, published a decree Dec. 15 that said the government will give the central bank 10-year notes that would initially pay a zero interest rate in exchange for the reserves. Cabinet Chief Anibal Fernandez said yesterday that Redrado, who used a surge in the country’s commodity exports to engineer an almost tripling of reserves to $48 billion since he took office in 2004, was fired because he didn’t carry out the plan.
Opposition lawmakers, including former central bank President Alfonso Prat-Gay, say the reserve plan is illegal because it would usurp congressional authority over the bank. Argentina’s Supreme Court is reviewing a legal challenge by San Luis province to the government’s plan.
“I’m not one to praise Redrado’s administration, but this time he is doing the right thing by not resigning,” Prat-Gay told Todo Noticias television channel last night.
Former Economy Minister Roberto Lavagna said Fernandez’s use of foreign reserves reflects her reluctance to cut spending ahead of presidential elections in 2011. He estimated government spending has been climbing at a 30 percent annual pace for the past three years and said inflation is poised to quicken in South America’s second- biggest economy.
“There is an urgent need for cash,” Lavagna said on Todo Noticias yesterday. “The heart of the issue is out-of-control public spending.”
Economy Minister Amado Boudou defended the plan last night.
“The central bank is the central bank of Argentina,” he told C5N news channel. “It has to be a central bank that responds to the needs of the country.”
Bond losses will be short-lived should the government complete the debt restructuring, said Enrique Alvarez, head of Latin America fixed-income research at IDEAglobal Inc. The government is waiting for regulatory approval from the U.S. Securities and Exchange Commission to proceed with the offer.
“It’s such a pressing event for Argentina to get credit,” Alvarez said in a phone interview from New York. “Investors are willing at this point of time not to concentrate on this battle as long as the other processes are going through.”