The Daily Update - Argentina, for the Extremely Brave

With 60% interest rates, a currency which fell 25% just last month against the US dollar and CPI released yesterday at 30% year on year, Argentina’s attempt to balance the budget by 2019 appears rather optimistic.

The emergency measures announced yesterday with about $9bln in export taxes, follows a government hiring freeze and reduced subsidies on utilities but the big test will be the coalition’s ability to enact cuts to public spending in the 2019 budget which will go before congress later this month. This will further anger the population that has become frustrated by rising prices at the same time as stagnant wage growth.

President Macri’s recent televised speech saying Argentina needed an early disbursement from the IMF $50bln credit line negotiated back in June to fund the budget without going further into debt has led to complaints from investors who claim the government has disjointed plans and poor communication. The market reacted by selling the peso off a further 7.3% and pushing Argentina’s ten year bonds down to a price around 75.50 from the 100.00 level they were at just four months ago.

Indeed ‘B2’ rated US dollar denominated Argentine sovereign debt trades at a spread of 775bp over US Treasury bonds, double the spread from the turn of the year. However, even at this spread the market is under 2 credit notches cheap according to our model, and is being priced close to a Caa1 rating. A move to a ‘Fair Value’ spread would equate to a 15 point rally in the bond price and with the 10.63% per annum yield; for the extremely brave, this does offer some potential.

As one observer said ‘The fundamental story remains weak and leaves Argentina assets among the most vulnerable to drifts in risk appetite and global financial conditions’. Very well put, something we don’t need to worry about as Argentina remains excluded from our mandate.

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