Argentina’s future divides analysts
Stabilization of FX reserves and progress on Paris Club debt push Bank of America-Merrill Lynch to recommend buying Argentine debt — yet Moody’s sees things going in the opposite direction
Argentina's dollar debt won a vote of confidence from Wall
Street on Monday despite a downgrade of the sovereign's
external bonds by ratings agency Moody's.
Bank of America-Merrill Lynch upgraded Argentine bonds to an
effective buy, following an apparent stabilization in its
foreign exchange reserves and fresh indications the country
could finally resolve $10 billion in outstanding debt owed to
the Paris Club group of creditor nations following the
sovereign's 2002 default - a necessary step for any normalizing
of its international financial relations.
Relaunching negotiations with Paris Club creditors - and
publishing more accurate data on inflation - has been partly an
initiative of Axel Kicillof, economy minister since November.
But as LatinFinance discusses in its March/April
the minister has adopted elements of the populist style dear to
Argentine president Cristina Fernández de
||Argentine finance minister Axel
Source: Fotografia Mecon
"We expect several positive developments in the coming weeks
that will support bond prices. These include a positive harvest
that will help building reserves, potential subsidy cuts, and
continued negotiations with the Paris Club and holdouts," BAML
analysts wrote in the note. The bank accordingly moved its
Argentina recommendation to overweight from market weight.
This came as Moody's downgraded Argentina's government bond
rating to Caa1 from B3, with a stable outlook. The ratings
agency cited a "significant fall" in official reserves - which
have plummeted to $27.5 billion from a high of $52.7 billion in
2011 - together with an "inconsistent policy environment" that
is likely to put pressure on reserves and foreign-currency debt
service obligations for the foreseeable future.
Argentine bonds reacted little in secondary market trading
on Monday according to one credit analyst, who saw the
sovereign's 2033 euro notes marked around 70 cents and its 2017
dollar bonds around 87 to 88.
David Rees, an economist at Capital Economics in London,
said Argentina's reserves were only enough to cover five months
of imports and would likely to drop to the three-month minimum
level by the middle of this year. The decline has raised
concerns over Argentina's ability to service its debts and
sustain the peso at a target of 8 per dollar. Rees said the
peso was likely to drop to 10 by the end of 2014. The
government is betting that a surge in agricultural exports will
reverse the slide in foreign currency reserves.
But Rees said authorities would nevertheless "have a pretty
tough job on their hands to prevent hard currency from leaking
out of the economy". The Paris Club - which includes creditor
nations Japan, the US, Germany and France - said on Friday it
had invited Argentina to begin talks to settle outstanding debt
during the week of May 26. LF
ARGENTINA ECONOMY: On a knife edge