Keeping Up With The Kirchners
The Kirchners continue to make a fine mess of everything economic related in Argentina. The administration was almost brought to its knees in July, when President Fernández’ second-in-command (after hubby Nestor, naturally) Julio Cobos decided to flex his congressional muscles and use his deciding vote to reject the controversial export tax on grains – incidentally, the first good economic decision to come out of Argentina for some time. Since then, the government has done a fine job of burying its head in the sand. With this in mind, Risk Watchdog came across a shocking chart showing the spread of Argentina’s 5-Year CDS over another sovereign at the risky end of the credit pool, Pakistan. Argentina has typically traded around 30bps outside Pakistan – unsurprising given its far-from-glorious credit history. However, the spread has now shot back up to a staggering 168bps and could yet challenge the all-time high of 211bps set at the height of the farmers fiasco back in April.
Wait a minute… is this the same Pakistan whose president is facing impeachment, where inflation is soaring at 30-year highs, and whose currency is in freefall (down 17% on the year)? It took the assassination of Pakistan’s opposition frontrunner Benazir Bhutto back in December for investors to perceive Argentina as the less risky credit – hardly a ringing endorsement for the current policy mix being orchestrated from Buenos Aires.
Is the spectre of default returning? I think probably not, or least not just yet anyway. The old adage ‘once burned, twice shy’ is probably apt. Having gone through the painful process of bond restructuring following the 2001-02 crisis, the authorities are unlikely to want a repeat, especially while the fiscal books are relatively healthy. However, unless the Kirchners get their act together, Argentina’s CDS will continue to underperform. And if the alarm bells weren’t already ringing, the recent plunge in front-month soy prices should act as a warning that the good commodity times won’t last forever.