PUNTO DE VISTA – As the price of Argentine bonds plummets, the JP Morgan indicator hit a new high since the debt swap; its impact on the real economy.
Argentina’s country risk rose this Friday to a new maximum since the debt restructuring, to be close to 1600 basis points.
This JP Morgan indicator measures the rate differential of US Treasury bonds with emerging issues. In the case of Argentina, it reflects the disarmament of portfolios of government securities in dollars with foreign law, due to the growing distrust of investors about the progress of the local economy, hit by the pandemic, high inflation, fiscal deficit and growing poverty. , while negotiations with the International Monetary Fund for a stand-by loan of USD 44,000 million are delayed.
Five reasons behind this escalation can be identified:
1 – “Sell off global”. After recent all-time highs, Wall Street indicators went through a period of marked profit-taking this week. Investors decided in the short term to take refuge in “cash” and there was a significant drop in share prices that also hurt emerging assets, such as Argentine bonds.
2 – Good news for the economy, bad for the market. Employment data in the US, among other indicators, suggest a revival and, therefore, increased fears of higher inflation in the future. Investor demand for a higher rate that will reward investment in US Treasury bonds also impacts emerging debt, considered riskier, and its yields.
Thus, the 10-year US Treasury bond rate surpassed 1.6% annually on Friday, the highest since February 2020, before the pandemic. “A rise in risk-free rates raises the waterline of the rest of the global debt. In other words, it increases the cost of financing for countries and companies, regardless of their risk spreads. In other words, bond prices are correcting down to accommodate the new reality ”, explained Nery Persichini, Head of Strategy at GMA Capital.
3 – “We are” effect. Beyond the change in the international financial scenario, signs of great weakness have persisted in the domestic economy for three years, threatening asset prices. In fact, the Argentine country risk failed to break the 1,000 point floor not even last September, immediately after the successful swap agreed with private creditors for more than USD 100,000 million.
“The bonds are priced by parity – an average value of 36 cents on the dollar – more than by rate, because the expectation of default is 90%, despite the fact that in the coming years the payments in dollars are meager. The deterioration of the expectations has its best reporter in the parities ”, commented Persichini.
The Global 2030 bond in dollars with foreign law, (GD30) is operated this Friday at USD 35, with a price drop of 31% since it began to operate in the secondary market on September 10. On average, restructured securities have lost 13% so far in 2021, and 30% since September 10 of last year.
4 – Bad political signs. President Alberto Fernández’s speech before the Legislative Assembly last Monday was not well received by the market, in particular his decision to initiate a criminal complaint against the administration of his predecessor, Mauricio Macri, for his policy of indebtedness with the outside.
“The view that a criminal complaint must be filed is disproportionate given that there have already been actions in this regard. Judicializing the actions of the government is not positive ”, reflected Eduardo Fracchia, director of the Economy Area of IAE Business School.
5 – An agreement with the IMF is delayed. Another of the axes of Fernández’s speech at the opening of ordinary sessions of Congress was that of the negotiations for an agreement of extended facilities with the International Monetary Fund, to which some USD 44,000 million is owed.
The head of state said: “We do not want to rush to close the agreement with the IMF, our only hurry is to put up the production and work of thousands of families who have plunged into poverty.” He also said that “the program agreed with the Fund will be sent to the National Congress.”
For market analysts, a lack of agreement with the agency will require significant disbursements this year, some USD 6,100 million to meet maturities with the Paris Club and other multilateral entities, a very heavy burden for which it will be necessary to resort to the scarce reserves Central Bank international
How does the rise in country risk affect the daily economy?
1 – Lack of financing. The economist Aldo Abram, director of Libertad y Progreso, explained to Infobae that “the more country risk implies that people have more doubts to bring their savings or provide financing for productive investments in the country.” And he recalled that “in terms of growth and recovery it would be very different to have an economy that is receiving a lot of capital -like other emerging economies-, for example to recover employment through productive investments.”
For the financial analyst Christian Buteler, “a country risk of 1,500 or one of 1,600, basically, they are telling you the same thing: that the country does not have access to credit. Obviously, the higher the rate, the further you are from going back to financing.”
“From the companies’ side, it is where you are going to feel the impact the most, because somehow when evaluating what rate a company has to pay, the country risk of the place of residence is also taken into account, since its activities mainly located in that country. So, in a certain way, it does not prevent access to credit for companies, but it makes it more expensive, ”Buteler told Infobae.
2 – Fears of a new default. Aldo Abram advised “to look at it from the other side: every time the bonds go down, the country risk rises and we must remember that these bonds are the ones that we give to the creditors in exchange for the ones they had before the restructuring and to which they are made a take away. These new papers are being negotiated at a price that means that those who buy and sell think that in four years at most Argentina will be restructuring its debt with a reduction similar to what has already been done ”.
3 – Expectations of low growth. The low appetite for government securities and high country risk, which prevents the possibility of new sovereign issues, not only anticipate scarce financing, but also shorten the growth horizon.
“We are talking about a country that is going to grow little in the future. Who is going to invest -whether Argentine or foreign- in a country that has these prospects? Clearly, from a macroeconomic point of view, it is a problem because nobody wants to put money to produce or to offer financing, when, in fact, today we have an extremely favorable international context due to the enormous liquidity generated by central banks to boost economies by the pandemic, ”said Abram.
“It continues to favor that we are going to export a lot, because hard currencies – including the dollar – have been falling and that has made the prices of exportable goods rise sharply in recent months and that will benefit us,” added the director. of Freedom and Progress.
4 – Inflationary risk. “The citizen standing in what can impact him the most is that a country with a significant fiscal deficit needs to finance it in some way. And if he finances it with issuance, he ends up impacting inflation ”, defined Christian Buteler.
“The greater the country risk, there is an impact in terms of inflation, because the less financing the State will have. And the less financing in the voluntary credit market, the more money it will have to ask the Central Bank, with which that is more issuance and more depreciation of the currency and subsequent higher rise in local prices ”, agreed Aldo Abram.
“Unfortunately, more inflation is more impoverishment of Argentines and especially of the poorest, who are affected the most because most of their savings are in pesos and they cannot defend themselves from inflation as easily as those who have more money”, the economist of Libertad y Progreso said.
