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Argentina’s future divides analysts

Mar 18, 2014

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.

     
     
  Argentine finance minister Axel Kicillof
Source: Fotografia Mecon
 
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 edition, domestically the minister has adopted elements of the populist style dear to Argentine president Cristina Fernández de Kirchner.

"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

See also: ARGENTINA ECONOMY: On a knife edge



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