Effects of 2001 bond default still linger



Twelve years after defaulting on an unprecedented $95 billion of bonds, Argentina is still struggling to regain the trust of its people.

The country’s foreign reserves have plunged 29 percent this year, heading for the biggest annual drop since 2002, when they sank 47 percent in the aftermath of the default. The $12.6 billion decline this year, triggered by Argentines pulling money from the country to escape inflation approaching 30 percent, has left reserves at a six-year low of $30.5 billion this month. That’s less than half the amount held by Peru, which has an economy 42 percent the size of Argentina’s.

While the government’s bonds have surged this year on speculation President Cristina Fernandez de Kirchner will be succeeded by a more market-friendly leader in 2015, the nation’s borrowing costs are still the second-highest in emerging markets. With foreign-exchange controls failing to prevent reserves from heading to a record 14th straight monthly decline, investors are concerned Argentina is running out of the hard currency it needs to keep servicing its debt, according to JPMorgan Chase & Co.

“Currency controls are collapsing reserves, when the very reason you put those controls in place was so reserves wouldn’t collapse,” Jose Luis Espert, who runs research firm Espert & Asociados, said in a telephone interview from Buenos Aires. “And why? Because once again, you’ve destroyed the people’s confidence.”

Argentina’s overseas dollar-denominated bonds yield 11.25 percent on average, more than 45 of the 46 other emerging markets tracked by JPMorgan. Only Venezuela has higher bond yields. Argentine bonds have returned 18.3 percent this year, second only to Belize among developing nations.

The gains accelerated after Fernandez failed to obtain the congressional majority she needed in midterm elections on Oct. 27 to run for a third term.

Restrictions that include bans on the purchase of dollars for savings as well as higher taxes on vacations abroad, online shopping and luxury cars have failed to keep reserves from falling as inflation accelerates to 27 percent.

Unless the government addresses inflation, the drain on dollars that have been used for public spending and payments to bondholders since 2010 will deepen by at least $7 billion next year, according to Vladimir Werning, an economist at JPMorgan.

Argentina is “becoming increasingly illiquid. The pace of reserve loss is going to continue to be a fundamental focus for the market,” Werning, who in April predicted an accelerated drop in reserves, said in a telephone interview from Buenos Aires. “To stop the decline in reserves, authorities need to tackle the root cause of inflation, not just the symptoms.”

Argentines expect consumer prices to rise 30 percent over the next 12 months, according to a poll of 1,200 people taken by Torcuato Di Tella University and published Dec. 19. The government reported annual inflation of 10.5 percent in November, less than half the rate estimated by private economists. At least eight people have died this month in looting across the country sparked by police strikes demanding higher wages to cope with the surging cost of living.

In an interview on Argentina’s Radio del Plata Dec. 24, Central Bank President Juan Carlos Fabrega said the bank will try to slow money supply growth next year from about 25 percent.

Since the re-election of Fernandez in 2011, when capital flight almost doubled to $21.5 billion, she has put into effect more than 20 measures to keep money from leaving the country.

While controls boosted capital inflows of $95 million in the third quarter on a net basis, money has escaped through the nation’s widening energy and tourism deficits even after the government seized oil producer YPF SA and taxed travel abroad.

Economy Minister Axel Kicillof declined to comment on the nation’s slumping reserves. The government’s plan for gradually rebuilding reserves includes financing from multilateral institutions, boosting exports and promoting foreign direct investment, Cabinet Chief Jorge Capitanich told reporters Dec. 5.

Since Fabrega’s appointment as central bank president in November, authorities have sped up the peso’s decline to an average 1.4 percent a week from 0.5 percent in the two prior months. At 6.4405 per dollar, the peso is still 51 percent stronger than the currency in the black market.

Fernandez, whose term will end in 2015, has also tried to lure capital from foreign oil companies. YPF formed a $1.24 billion shale accord with Chevron Corp. in July.

Argentina hasn’t sold bonds abroad since its default. Following a four-year recession, the country froze bank savings in 2001 to stem capital flight and ceased payments on its foreign obligations.

The government has almost $14 billion in debt payments in the next two years, according to the Economy Ministry. It budgeted $9.9 billion of reserves for payments in 2014.

After limiting exporters’ local borrowing to make them bring in funds from abroad, the government on Dec. 13 began selling them dollar-linked peso notes to compensate for a weakening exchange rate.

The measure is also aimed at giving farmers incentives to sell their produce instead of holding back on expectations they will receive more pesos in the future.

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