Argentina: Fernández And The Reserves
In the latest twist to the heavily publicised reserve kerfuffle, President Cristina Fernández has this week replaced her contested decree to tap the country’s foreign exchange buffer with a slightly tweaked order to the same end. According to local media, the central bank, now governed by one of Fernández’s close allies, has already started transferring money into the treasury coffers. The move, which comes despite strong congressional opposition, reflects a dogged determination on the part of the government to get its hands on the reserve pool – currently standing at around US$48bn – to alleviate mounting fiscal strains. The opposition sees a clear political rationale behind the reserve plan, namely to load the bazooka ahead of the 2011 presidential elections. These suspicions cannot be brushed aside given the headwinds facing the Kirchners, and their proven proclivity for fiscal largesse.
In her state of the union address to congress on March 1, Fernández said that she had inked decrees that will see US$2.2bn worth of reserves used to pay back multilateral lenders and some US$4bn to service debt to private creditors. Whether the opposition, which now dominates the lower house, will be able to derail this attempt remains to be seen. The attendant uncertainty could also mean a further delay of the long-awaited swap deal with hold-out investors (those creditors who refused to accept the knock-down terms of the 2005 restructuring), although I still believe that exchange will eventually have to take place.
While Fernández’s latest manoeuvre is sure to anger opposition lawmakers, and raises serious questions about the independence of the central bank, bond investors may take short-term comfort in the payments guarantee that the reincarnated decree constitutes. Indeed, yields on benchmark bonds have eased in recent days, as has the spread on Argentina’s credit default swaps (CDS), suggesting that the market is not overly concerned about the political fallout of the reserve row. Argentina’s 5-Year CDS contract has subsided from 1,200bps in late February to 1,088bps at the time of writing, while the yield on the benchmark US$ Global 2033 bond has dipped back below 13%.
In the FX markets the outlook is hazier, with downside pressures on the peso spot rate having been arrested in recent days. However the 1-year non-deliverable forward (NDF) outright remains on a subtly depreciatory trajectory. The NDF is currently suggesting a 15% drop in the value of the peso against the greenback over the coming 12 months, to ARS4.4137/US$. This supports my long-held concerns regarding the health of Argentina’s financial markets, which have been strengthened by the president’s recent antics.