First is Iceland, then Ukraine, follow by Pakistan. Now look at the Latin American market starting with Argentina
21 October 2008
(Bloomberg) – Argentine bond yields soared above 24 percent and stocks sank the most in a decade as the government proposed a takeover of pension funds, a move analysts said is a bid to seize assets and stave off the second default this decade.
“It’s horrible,” said Jaime Valdivia, who manages $1 billion of assets for Emerging Sovereign Group in New York. “We’re going back to the dark ages. Not even in times of the worst financial stress did the government ever think about taking over the private pension system.”
President Cristina Fernandez de Kirchner has struggled to cover financing needs that have ballooned as the global financial crisis pushed down prices on the country’s commodity exports. The government’s borrowing needs will swell to as much as $14 billion next year from about $7 billion in 2008, RBC Capital Markets, a Toronto-based unit of Canada’s largest bank, said today.
Yields on the government’s 8.28 percent bonds due in 2033 surged 4.27 percentage points to 24.69 percent, the highest since the country issued the debt in a 2005 restructuring, according to JPMorgan Chase & Co. The price sank 7.8 cents to 29.11 cents on the dollar, leaving it just pennies above the price on defaulted debt that some investors kept out of the 2005 renegotiation.
Argentina’s benchmark Merval stock index tumbled as much as 13.8 percent yesterday to a four-year low. The index ended the day down 11 percent, extending its losses this month to 35 percent.
The South American country hasn’t had access to international capital markets since it defaulted on $95 billion of bonds in 2001. Holders of some $20 billion of those bonds rejected the government’s 2005 payout of 30 cents on the dollar, the harshest sovereign restructuring since World War II.
‘Enormous Error’
Fernandez said at a rally in Buenos Aires today that she will send off a bill to Congress to nationalize the pension funds, which would give the government control of $29 billion in retirement accounts. Amado Boudou, head of the country’s social security administration, said at the rally that the government wants to take over the pensions because their privatization in 1994 was an “enormous error.”
Nestor Kirchner, Fernandez’s husband and predecessor, began tightening restrictions on private pension funds last year, requiring them to keep more investments in the country as part of an effort to sustain a five-year-old economic expansion. Argentina aimed to phase out the government-run system when it created the private accounts in 1994.
About 55 percent of the 94.4 billion pesos held by the country’s 10 private pension fund managers are in government debt, according to the pension regulator’s Web site.
Nationalization would allow the Fernandez administration to write off the government bonds held by the funds, said Javier Salvucci, an analyst with Buenos Aires-based Silver Cloud Advisors.
‘Last-Ditch Measure’
“The government is explicitly saying that it has problems meeting debt maturities and this is a last-ditch measure to do so,” Salvucci said. “For accounting purposes, this debt will no longer exist.”
Argentine bonds have lost 37 percent this year, putting them on pace for the worst year since the 2001 default, according to a Merrill Lynch & Co. index. The bonds lost 62 percent that year.
The attempt to take over the funds may add to capital flight as Argentines seek the safety of U.S. dollars, RBC Capital Markets said.
The peso was little changed today, rising 0.1 percent to 3.2190 per dollar, as traders said the central bank intervened in the foreign exchange market to shore up the currency. The bank sold “large amounts” of dollars, said Gustavo Quintana, a trader with Lopez Leon Brokers in Buenos Aires. A central bank spokesman didn’t return a phone call seeking comment.
‘Closer to the Abyss’
The cost of protecting Argentina’s bonds against default soared. Five-year credit-default swaps based on Argentina’s debt jumped 2.38 percentage points to 32 percentage points, according to Bloomberg data. Credit-default swaps, contracts to protect against or speculate on default, pay the buyer face value should a borrower fail to adhere to its debt agreements.
That price means it costs $3.2 million to protect $10 million of the country’s debt from default. In September 2006, it cost just $244,000 as record exports of wheat, soybeans and corn fuelled economic growth and swelled government coffers.
Commodities have dropped 40 percent from a record high reached on July 2 as the global financial crisis has deepened a global economic slowdown, according to UBS Bloomberg CMCI Index of 26 raw materials.
Growth in South America’s second-biggest economy, which gets more than half its export revenue from commodities, will slow to 5 percent this year and 2.5 percent in 2009, RBC Capital Markets said. The economy expanded 8.8 percent on average over the past five years as Kirchner and Fernandez used surging tax receipts to boost government spending on everything from civil servant pay rises to energy subsidies.
“Argentina is ever closer to the abyss,” RBC said in today’s report.
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First is Iceland, then Ukraine, follow by Pakistan. Now look at the Latin American market starting with Argentina
21 October 2008
(Bloomberg) – Argentine bond yields soared above 24 percent and stocks sank the most in a decade as the government proposed a takeover of pension funds, a move analysts said is a bid to seize assets and stave off the second default this decade.
“It’s horrible,” said Jaime Valdivia, who manages $1 billion of assets for Emerging Sovereign Group in New York. “We’re going back to the dark ages. Not even in times of the worst financial stress did the government ever think about taking over the private pension system.”
President Cristina Fernandez de Kirchner has struggled to cover financing needs that have ballooned as the global financial crisis pushed down prices on the country’s commodity exports. The government’s borrowing needs will swell to as much as $14 billion next year from about $7 billion in 2008, RBC Capital Markets, a Toronto-based unit of Canada’s largest bank, said today.
Yields on the government’s 8.28 percent bonds due in 2033 surged 4.27 percentage points to 24.69 percent, the highest since the country issued the debt in a 2005 restructuring, according to JPMorgan Chase & Co. The price sank 7.8 cents to 29.11 cents on the dollar, leaving it just pennies above the price on defaulted debt that some investors kept out of the 2005 renegotiation.
Argentina’s benchmark Merval stock index tumbled as much as 13.8 percent yesterday to a four-year low. The index ended the day down 11 percent, extending its losses this month to 35 percent.
The South American country hasn’t had access to international capital markets since it defaulted on $95 billion of bonds in 2001. Holders of some $20 billion of those bonds rejected the government’s 2005 payout of 30 cents on the dollar, the harshest sovereign restructuring since World War II.
‘Enormous Error’
Fernandez said at a rally in Buenos Aires today that she will send off a bill to Congress to nationalize the pension funds, which would give the government control of $29 billion in retirement accounts. Amado Boudou, head of the country’s social security administration, said at the rally that the government wants to take over the pensions because their privatization in 1994 was an “enormous error.”
Nestor Kirchner, Fernandez’s husband and predecessor, began tightening restrictions on private pension funds last year, requiring them to keep more investments in the country as part of an effort to sustain a five-year-old economic expansion. Argentina aimed to phase out the government-run system when it created the private accounts in 1994.
About 55 percent of the 94.4 billion pesos held by the country’s 10 private pension fund managers are in government debt, according to the pension regulator’s Web site.
Nationalization would allow the Fernandez administration to write off the government bonds held by the funds, said Javier Salvucci, an analyst with Buenos Aires-based Silver Cloud Advisors.
‘Last-Ditch Measure’
“The government is explicitly saying that it has problems meeting debt maturities and this is a last-ditch measure to do so,” Salvucci said. “For accounting purposes, this debt will no longer exist.”
Argentine bonds have lost 37 percent this year, putting them on pace for the worst year since the 2001 default, according to a Merrill Lynch & Co. index. The bonds lost 62 percent that year.
The attempt to take over the funds may add to capital flight as Argentines seek the safety of U.S. dollars, RBC Capital Markets said.
The peso was little changed today, rising 0.1 percent to 3.2190 per dollar, as traders said the central bank intervened in the foreign exchange market to shore up the currency. The bank sold “large amounts” of dollars, said Gustavo Quintana, a trader with Lopez Leon Brokers in Buenos Aires. A central bank spokesman didn’t return a phone call seeking comment.
‘Closer to the Abyss’
The cost of protecting Argentina’s bonds against default soared. Five-year credit-default swaps based on Argentina’s debt jumped 2.38 percentage points to 32 percentage points, according to Bloomberg data. Credit-default swaps, contracts to protect against or speculate on default, pay the buyer face value should a borrower fail to adhere to its debt agreements.
That price means it costs $3.2 million to protect $10 million of the country’s debt from default. In September 2006, it cost just $244,000 as record exports of wheat, soybeans and corn fuelled economic growth and swelled government coffers.
Commodities have dropped 40 percent from a record high reached on July 2 as the global financial crisis has deepened a global economic slowdown, according to UBS Bloomberg CMCI Index of 26 raw materials.
Growth in South America’s second-biggest economy, which gets more than half its export revenue from commodities, will slow to 5 percent this year and 2.5 percent in 2009, RBC Capital Markets said. The economy expanded 8.8 percent on average over the past five years as Kirchner and Fernandez used surging tax receipts to boost government spending on everything from civil servant pay rises to energy subsidies.
“Argentina is ever closer to the abyss,” RBC said in today’s report.
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