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Argentina’s time for decisiveness

Growing concerns about another default need to be assuaged quickly by the government.

Falling bond prices. Speculation over a currency devaluation. Locals rushing to the bank to buy dollars. There’s 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. Argentina’s bond prices have lost one-fifth of their value since president Cristina Fernández de Kirchner took office in December. The sovereign’s risk premium is at its highest in three years, according to Bloomberg: Argentina’s 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.

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