The Star: Argentina overtakes Venezuela as South America’s biggest default risk

May 29, 2012 8:10 am0 commentsViews: 3

BUENOS AIRES — Argentina’s risk of default is the highest versus Venezuela in three years as the nationalization of the country’s biggest oil company heightens capital flight and drives the peso to a record low in the forwards market.

The cost to insure Argentine bonds against non-payment for five years has soared 394 basis points, or 3.94 percentage points, to 1,316 basis points this year while the cost to protect Venezuelan debt rose seven basis points to 945, according to data compiled by Bloomberg. The gap of 370 basis points is the biggest since Sept. 8, 2009. Argentina’s foreign debt is rated B by Standard & Poor’s, one level below Venezuela’s B+ ranking.

President Cristina Fernandez de Kirchner’s seizure of YPF SA is deepening the government’s financing needs just as a worsening of Europe’s debt crisis erodes demand for Argentine commodities and further cuts the country off from international bond markets. The takeover caused more Argentines to circumvent Fernandez’s currency controls and move money into dollars, driving the unregulated exchange rate to a record low and prompting traders to bet the government will allow the rate in the official market to plunge.

“It’s a very dangerous combination of being increasingly isolated from markets and at the same time having greater financing needs,” said Juan Pablo Fuentes, an economist at Moody’s Analytics in West Chester, Pennsylvania. “If the situation in Europe deteriorates, we could see Argentine risk reach 2009 levels. The difference is that they were in a much better position financially back then.”

Argentina, whose dollar bonds are the highest-yielding among major developing nations, hasn’t issued debt abroad since its record sovereign default in 2001.

The cost to insure the country’s debt for five years topped 3,900 basis points in January 2009, five months after the collapse of Lehman Brothers Holdings Inc. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to comply with debt agreements.

Yields on Argentine notes due in 2015 surged 663 basis points in the past two months to 15.23 per cent, the highest level since June 2010. Borrowing costs surpassed those of Venezuela after Fernandez announced on April 16 she was taking over 51 per cent of YPF from Madrid-based Repsol YPF SA. In June of last year, the average yield on Venezuelan dollar bonds was 5.36 percentage points higher than Argentine debt, according to JPMorgan.

Venezuela’s default swaps have dropped from an 11-month high of 1,280 in September as investors bet that President Hugo Chavez’s struggle with cancer will weaken his bid for re- election in October, paving the way for a new government that seeks to reverse his economic policies.

Chavez deepened his drive to install socialism in Venezuela after his re-election in 2006 by nationalizing oil, steel, cement and banking assets while tightening currency controls he introduced in 2003. Chavez also used reserves for spending and has jailed brokers to fight capital flight. Similarities between Argentine and Venezuelan policies have increased since Fernandez won a re-election to a second four-year term on Oct. 23.

Since then, Fernandez tightened controls over the exchange market in a bid to slow record capital outflows, boosted import restrictions to protect local industry and changed the central bank charter to increase the amount of reserves the government can use to fund spending. The measures are prompting Argentines to pull dollars from the economy through the black currency market or by withdrawing their U.S. currency deposits.

Argentines have sent about $200 billion (U.S.) overseas because of Fernandez’s economic policies, according to Claudio Loser, a former Western Hemisphere director for the International Monetary Fund who now runs the Centennial Latin America research company based in Washington.

The capital flight helped stem the increase in Argentina’s international reserves. They dropped to $47.2 billion (U.S.) last week from a six-month high of $47.8 billion at the end of April.

The central bank’s reserves are Argentina’s main source of financing to meet its obligations. The country will use $5.7 billion of the funds to pay debt this year, according to the 2012 budget.

While Argentina’s finances are worsening, the country will be able to avert default for at least a year because the economy continues to expand and government debt is increasingly held by federal agencies, said Aryam Vazquez, an economist for global emerging markets at Wells Fargo & Co.

“They’ll be able to get by at least for a year,” Vazquez said. “Default risk is thin at this moment because the economy is still growing on track, above 4 per cent.”

South America’s second-biggest economy will grow 3 per cent this year after expanding 8.9 per cent in 2011, according to the median estimate in a survey of eight analysts by Bloomberg.

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