The bond markets have meted out another beating to Argentinian government bonds in the latest signs of trouble for Latin America’s third-largest economy.
Standard & Poor’s on Thursday cut its rating on Argentina’s creditworthiness further into junk bond territory as it judged the country to have defaulted on its debts again.
Buenos Aires said on Wednesday that it was extending the maturity of many of its government bonds, in other words, telling lenders they would be getting their money back further into the future than they were expecting.
S&P said this amounted to a default – making it the ninth time Argentina has reneged on its debts and the third time this century.
Accordingly, S&P said it was cutting Argentina’s credit rating to CCC, the lowest possible.
The response on Friday was aggressive selling of Argentinian government bonds by investors, particularly big German pension funds, sparking a slump in prices.
The yield – which rises as the price of a bond falls and which is akin to an interest rate – on the benchmark Argentinian bond due for repayment in 2028 shot up to 22.2%.
At the beginning of the month, the yield on such bonds was 9.57%.
The cost to investors of insuring against a debt default by Argentina also shot up, while most Argentinian government bonds are now trading at just under 40 cents to the dollar, implying investors do not expect to get all of their money back.
The sell-off represents the latest event in a crisis that began when in May last year, Argentina’s central bank was forced to raise interest rates to record levels to try and prevent a run on the peso, the country’s currency.
The situation worsened when, earlier this month, President Mauricio Macri – whose business and market-friendly reforms had done much to clear up the mess he inherited in 2015 – heavily lost in primary elections to opposition leader Alberto Fernandez, a left-wing populist.
That has raised concerns that Mr Macri will lose to Mr Fernandez in October’s general election and raised concerns that Argentina could, once again, elect a free-spending government that will play fast and loose with the country’s finances and meddle in how businesses are run.
Those concerns have been amplified by the fact that Mr Fernandez’s running mate is Cristina Fernandez de Kirchner, Mr Macri’s predecessor, whose term in office from 2007-2015 was pockmarked by widespread corruption, price and currency controls and forced nationalisation of assets.
Mr Fernandez has threatened to “re-work” Argentina’s $57bn (£47bn) standby agreement with the International Monetary Fund and unwind the austerity measures imposed as a condition of that support.
The IMF has so far handed Argentina $43bn (£35bn) in loans as part of the agreement.
The latest crisis in the debt markets threatens further to unwind the work Mr Macri’s government had done to restore economic stability after the chaos of Ms Fernandez de Kirchner’s presidency.
On being elected, he cut benefits, which were sucking up around a third of government spending – money the country did not have – and brought down tariffs to make Argentina more competitive.
He introduced reforms to the government’s statistics, which had been shamelessly manipulated by his predecessor to create a false picture of the economy, in a bid to establish credibility with markets.
He also cut wasteful government spending, reducing the state’s payroll by 95,000 in the process, while also lowering electricity subsidies to households. The result is that Argentina’s budget deficit – the amount the government receives less the amount it spends – has been halved.
However, while all of these measures and achievements have impressed international investors and increased the country’s competitiveness, they did not attract sufficient overseas investment to generate the kind of economic growth Mr Macri had been expecting or hoping for.
Meanwhile, faced with higher electricity bills – Ms Fernandez de Kirchner had frozen prices, depriving Argentina’s cash-starved energy utilities of much-needed capital – the public quickly grew weary of austerity.
The result was this month’s setback for him in the polls.
The question now is whether Mr Macri can stave off a full-blown crisis.
Daniel Tenengauzer, head of markets strategy and insights at the bank BNY Mellon, said Mr Macri’s government had not cut the subsidies introduced by previous administrations quickly enough.
He added: “[This leaves] the next government to choose between two options. The first is to continue cutting subsidies and engage in a relatively small reprofiling of Argentina’s debt.
“The alternative is to rupture its agreement with the IMF, close down the country’s statistical office and re-implement a similar macroeconomic regime to that observed before President Macri took office in December 2015.”
Mr Tenengauzer said that, because Argentina was a relatively closed economy, another crisis posed little systemic risk to the wider economy in Latin America or further afield.
Another question concerns whether Argentina can convince its creditors to accept a restructuring of its debts.
Analysts at JP Morgan told clients today that Argentina would present an “interesting test case” because the country has a number of different types of debt, including bank lending, foreign currency bonds and loans from the IMF.
They added: “During Argentina’s 2001-2005 default episode, their debt to the IMF was…eventually repaid in full.”
Although a number of investors look like taking a haircut on their bonds, via a restructuring, many will wish Mr Macri well.
The alternative is that the country descends into the familiar depressing cycle of electing a populist government that spends money it does not have, running into a debt crisis and then electing another government to introduce discipline in the public finances, but in the process alienating the public.
Mr Macri’s election was seen as a chance to break that cycle.
It is ironic indeed that his problems are now effectively a result of investors fretting that voters may be about to turf him out of office.
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