Falling bond prices. Speculation over a currency devaluation. Locals rushing to the bank to buy dollars. Theres a horrible sense of déjà vu about Argentina as some investors believe the country could default on its debt for the second time in less than a decade.
One banker reckons the market is now pricing in a 35% probability of a default on hard-currency debt. Argentinas bond prices have lost one-fifth of their value since president Cristina Fernández de Kirchner took office in December. The sovereigns risk premium is at its highest in three years, according to Bloomberg: Argentinas five-year CDS is trading at 618 basis points over swaps; its five-year dollar debt is trading at 950bp over US treasuries; its inflation-linked peso bonds due in 2033 are trading at 980bp over US Tips.
There are other numbers to worry about. Public-sector debt stands at $150 billion the same level as when the sovereign defaulted in 2001. And although the level of debt that the government needs to service this year is only $3.5 billion, that rises to $10 billion in 2009, according to think-tank Inter-American Dialogue. That amount might require the sovereign to issue a Eurobond for the first time since the debt default a task that might be highly risky given that there are investors still intent on making claims against the government after the previous debt restructuring.
There are, though, critical differences between 2001 and now. In the short to medium term, at least, Argentina has the capacity to pay its debts. It has $50 billion of international reserves and a $12 billion trade surplus. The debt-to-GDP ratio is a manageable 50%, three times below what it was in 2002. In addition, Argentinas local market can help absorb the sovereigns funding pressures to a much greater degree than seven years ago. The government can also call on Venezuelas help, something it does regularly, through bond sales.
The issue, then, is less about the sovereigns ability to pay than its willingness to do so. So far, the government has not suggested that it will not pay down its debt. But investors are becoming increasingly concerned about its actions as it lurches from one crisis to another. The latest is a conflict with farmers, over taxes on agricultural exports. In April and May, farmers went on strike in protest at the tax, disrupting the economy in the process.
The government introduced the tax in an attempt to redistribute wealth and to curb inflation, which continues to soar. Officially the inflation rate is 8.9%, although Morgan Stanley reckons it is 23%, up from 14.3% last year. The controversy over what the true inflation rate is has cast doubt on the reliability of government macroeconomic indicators. Whats equally worrying is that the government appears to have no idea about how to control the jump in price rises.
In April, economy minister Martin Lousteau resigned after clashing with other senior figures, including Cristinas husband, former president Néstor Kirchner, over the best way to tackle inflation and the farmers grievances. Although Néstor Kirchner does not hold an official position in the government, he still has great influence over economic policy.
Whats particularly disappointing is that a lot of Argentinas wounds are self-inflicted. Still, the countrys finances are sufficiently healthy to ensure that a default is unlikely for now. No one in the country has forgotten what happened seven years ago. Its up to the government to make sure that there is no repeat.