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Argentina Bonds Climb After Senate Rejects Farm Export Tax
Bloomberg
July 17, 2008

By Drew Benson

Argentine bonds gained the most since March after the Argentine Senate rejected a farm export tax bill that sparked protests and food shortages.

The extra yield investors demand to own Argentine dollar debt rather than U.S. Treasuries narrowed 25 basis points, the most since March 18, to 6.32 percentage points at 4:24 p.m. New York time, according to JPMorgan Chase & Co.'s EMBI Plus index. One basis point equals 0.01 percentage point.

The Senate vote, decided by a pre-dawn tie-breaker cast against the measure by Vice President Julio Cobos, culminated a four-month dispute between President Cristina Fernandez de Kirchner and farmers that undercut support for the government.

The Kirchners did not immediately comment on the vote publicly, although the president's press office said Fernandez would speak at an evening airport opening ceremony in Chaco province. Analysts said the government still faces fiscal and political challenges.

``I didn't expect it,'' farm leader Alfredo De Angeli told reporters at a daylong roadside celebration in the city of Gualeguaychu in Entre Rios province. Barclays Capital also said in a report that the vote ``came as a surprise.''

The yield on Argentina's benchmark 8.28 percent bonds due in 2033 fell 15 basis points, or 0.15 percentage point, to 11.30 percent, according to Bloomberg data. The bond's price increased 1 dollar to 73.50 pesos, the highest since July 10.

The yield on the country's inflation-linked peso bonds due in 2033 fell 9 basis points to 10.07 percent, according to Citigroup Inc.'s local unit.

`Good For Assets'

``The attitude is 'what's bad for the government is good for assets,''' said Igor Arsenin, an emerging-market fixed- income strategist at Credit Suisse Group in New York.

Argentina's peso strengthened 0.2 percent to 3.0212 per dollar as grain exporters exchanged overseas dollar earnings for pesos, said Hector Blanco, a currency trader with Buenos Aires- based brokerage ABC Mercado de Cambio.

``Volumes are low as people try to read the political situation,'' he said.

The president sent the farm tax to lawmakers for approval in June after farm groups protested Fernandez's imposition of the measure by decree in March. ``Now we have a country where democracy functions as it should,'' farm leader De Angeli said at the roadside celebration.

Fernandez began her four-year term in December and has maintained plans set in place by her husband, Nestor Kirchner, who preceded her. Investors sold Argentine debt last year after workers at the National Statistics Institute said in February 2007 that the Kirchner administration manipulated monthly inflation reports.

`Attractive Instruments'

Fernandez and Kirchner have said the data is accurate. The statistics agency reported July 11 that consumer prices rose at an annual rate of 9.3 percent in June, below a 25 percent estimate from Merrill Lynch & Co.

The bond market's reaction to the Senate vote may be short lived, Arsenin said. ``It's difficult to be positive about this, because it is a defeat for the government, which makes it weaker and less likely that it will be able to put measures needed to contain inflation in place,'' he said.

Alberto Bernal, an analyst with Miami-based Bulltick Capital Markets, wrote in a report today that ``the short-term reaction of markets should be a positive one, with dollar- denominated bonds being the most attractive instruments to play in the rebound.''

He expects the government to increase public spending to shore up support in the months ahead and ``it is safe to assume that under all possible situations the fiscal situation will somewhat deteriorate, and inflation could increase'' on higher government spending.

`Considerable Stress'

Barclays Capital analysts Eduardo Levy-Yeyati and Sebastian Vargas wrote that ``more financing will be needed'' by the government due to the likelihood of increase public spending and the loss of additional revenue the tax increase would have brought in.

``In a context of dwindling investor interest and a financial program that was not anticipating (nor preparing the ground for) borrowing from the voluntary capital markets, such a small amount could add considerable stress to a sensitive audience,'' they wrote