Fears of a looming default on Argentine bonds are sending all but the bravest investors to the exits after a U.S. judge ruled against the country’s government in a decade-old dispute over sovereign debt.
Argentine spreads on JPMorgan’s EMBI Global sovereign bond index blew out 55 basis points on Thursday to yield 12 percentage points above underlying U.S. Treasuries, heading for a level hit last month that was the widest in three years.
While the moves happened in thin trade on the U.S. Thanksgiving holiday, they add to a 300 basis-point rise in yield spreads since early October when jitters began to mount that the South American country could be headed for default exactly 10 years after its $100-million (U.S.) smash in 2002.
Fund managers said Argentine bonds were marked roughly 10 per cent down across the board while credit default swaps, used to insure against default, are near the highest since May, 2009, above 2,400 basis points, according to data from Markit.
That’s up from less than 1,000 basis points in early October.
“We haven’t had a default on our portfolio since we started the fund 12 years ago and sometimes the signals are so strong you know something bad is going to happen,” said Jeremy Brewin, a portfolio manager at Aviva Investors.
“At a time like this you want to be neutral or underweight.”
New York federal judge Thomas Griesa on Wednesday ordered Buenos Aires to immediately pay “holdout” investors who shunned two exchanges of defaulted sovereign debt in 2005 and 2010.
If Griesa’s ruling is upheld and Argentina defies it, U.S. courts could stop payments to creditors who accepted previous restructurings. That could trigger technical default on around $24-billion of debt, issued under previous debt exchanges.
President Cristina Kirchner has vowed not to pay “a single dollar” to holdout funds that Argentina terms vultures. That raises the possibility of default as early as next month.
Argentina must pay $40-million in interest on its 2017 dollar bond on Dec. 2 but the main obligation falls due on Dec. 15 when it owes holders of GDP warrants $3-billion. Some fear non-payment of this will trigger cross-default on the $24-billion that is outstanding in external debt.
The 2017 bond issued during the 2010 debt swap fell to 70 cents on the dollar on Tuesday, matching the record low hit earlier in November. The GDP warrants fell 8.9 per cent in local trade.
Sam Finkelstein, head of emerging debt at Goldman Sachs Asset Management in London, said he was “very cautiously positioned” on Argentina. Like many fund managers, Mr. Finkelstein had been overweight the bonds until earlier this year.
“There’s a lot of legal risk and a non-trivial probability that Argentina opts to default rather than deal with the holdouts. They have the money to pay all creditors but that’s a political decision,” he said.
The developments are a huge reversal for Argentine bonds that until recently were in high favour because of double-digit yields, rare even in emerging markets. Argentine debt yields more than 10 basis points more than U.S. Treasuries, compared with a 1.5 percentage point premium paid by Brazil.
Even now, not all investors have bailed out.
Rob Drijkoningen, head of emerging debt at ING Investment Management remains overweight, noting that Argentina is willing to pay holders of restructured debt and has the funds to do so.
“In this regard the yield spreads are very juicy,” he said.
Mr. Drijkoningen was critical of the court ruling.
“One thing the judge seemed to forget was that without the ... restructured debt holders such as ourselves, Argentina’s debt would not have been sustainable,” he said.
“Restructured debt holders wrote off 67 per cent of the original debt and on the back of that improvement in debt profile, the plaintiffs are getting their way for now.”
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