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Argentine Bonds Rally After Kirchner Loses in Midterm Election
Bloomberg
June 29, 2009

By Drew Benson

June 29 (Bloomberg) -- Argentine bonds climbed on speculation yesterday's congressional election defeat for President Cristina Fernandez de Kirchner's ruling coalition may prompt her to seek an International Monetary Fund accord to shore up the slumping economy.

The yield on the country's benchmark 8.28 percent dollar bonds due in 2033 dropped 1.6 percentage points to 15.5 percent at 6 p.m. New York time, according to JPMorgan Chase & Co. The bond's price rose 5.75 cents on the dollar to 52.5 cents. The peso rose 0.2 percent to 3.7893 per dollar, from 3.7985 on June 26.

Nestor Kirchner, Fernandez's husband and predecessor, headed a ticket that came in second to rivals from his Peronist party in the bellwether province of Buenos Aires, a "weakening of the Kirchners that the market sees positively," said Edwin Gutierrez, who manages about $5.5 billion in emerging-market debt for Aberdeen Management Plc in London.

"Hopefully pragmatism will reign and the powers that be in the Peronist party will come in and say 'look, you've got to start to be a little bit more cooperative and get things back on the right path,'" Gutierrez said. "That includes an IMF deal."

The defeat "increases chances" that Fernandez will clear defaulted debt with the Paris Club of creditors and reach an agreement with the holders of $20 billion of debt stemming from the nation's 2001 default, he added.

Fernandez said during a news conference today that IMF agreements depend on the "conditionality" of the terms, which may be addressed during a meeting of central bankers during the next Group of 20 summit in Pittsburgh in September. Talks with the holders of defaulted debt will resume when "markets are calmer," she said.

Extra Yield

Kirchner announced today that he resigned as the head of the Peronist party, naming Daniel Scioli, the governor of Buenos Aires province, his successor.

The extra yield investors demand to own Argentina's dollar bonds instead of U.S. Treasuries shrank 1.44 percentage points to 9.98 percentage points, according to JPMorgan.

Five-year credit-default swaps based on Argentina's bonds dropped 3.56 percentage points to 19.67 percentage points, according to Bloomberg data. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Credit-default swaps, which are used to hedge against losses or to speculate on a company's or a country's ability to repay its debt, pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent.

'Substantial Defeat'

Yesterday's "substantial defeat" will likely lead the government to assume a "do-not-rock-the-boat-like management," Barclays Plc analysts Guillermo Mondino and Sebastian Vargas wrote in a report today. "This would in principle rule out sudden and sharp devaluation, or a domestic involuntary rescheduling of debt," although the government may seek to nationalize the Argentine unit of Spanish energy company Repsol YPF.

A financing accord with the IMF, reform of export taxes and a "cleansing" of the government's statistics agencies are also more likely now, the report said.

Economic growth in Argentina slowed last year to 6.8 percent after expanding by more than 8 percent in each of the previous five years. The economy is expected to contract by 3 percent this year, according to the median forecast in a Bloomberg News survey of seven economists.

In the foreign-exchange market, the peso rebounded after Argentines sought refuge in dollars last week before the elections, said Gustavo Quintana, a currency trader with Buenos Aires-based Lopez Leon Brokers.

'Recovering'

"The peso is recovering from the pressure at the end of last week, without any intervention from the central bank," Quintana said.

The peso will likely weaken to as low as 3.9 per dollar "in the next few weeks to avoid further erosion of external reserves," Bulltick Capital Markets analyst Alberto Bernal wrote in a report today from Miami.

"Capital flight will likely continue to take place for as long as the world environment remains difficult," Bernal wrote.

The new congress takes office in December.

To contact the reporter on this story: Drew Benson in Buenos Aires at abenson9@bloomberg.net.

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