(Bloomberg) -- The biggest drop in Argentine borrowing costs in nine months is paving the way for President Cristina Fernandez de Kirchner to sell international bonds for the first time since the country's 2001 default."They are getting all their stars in line to do it," said Sergio Trigo Paz, who oversees $3 billion of emerging-market debt, including Argentine bonds, at Fortis Bank SA/NV in London.
The average yield on Argentina's dollar bonds tumbled 85 basis points, or 0.85 percentage point, since July 1 to 10.89 percent yesterday, according to JPMorgan Chase & Co.'s EMBI+ index. The decline, the largest seven-day slide since October, followed the completion of Argentina's debt restructuring and a Fitch Ratings upgrade of the country from default.
Argentina, South America's second-biggest economy after Brazil, is aiming to raise capital in international markets for the first time since stopping payments on $95 billion of debt, the biggest-ever government default. Average bond yields are within 100 basis points of the 10 percent level that Economy Minister Amado Boudou said in June was a limit for selling $1 billion of 2017 dollar securities.
"In a rallying market, that would be perceived as a very positive step," Trigo Paz said in an interview yesterday.
The extra yield investors demand to hold Argentine dollar bonds instead of U.S. Treasuries widened 16 basis points to 759 today and is down from 814 on June 1, according to JPMorgan indexes. The yield spread for Brazil rose 7 to 228.
The cost of protecting Argentine debt against non-payment for five years with credit-default swaps fell 4 basis points to 882, according to data compiled by CMA DataVision. Similar contracts for Brazil rose 3 to 124.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
Argentine Economy Ministry spokesman Sergio Poggi said the government is "continuing to monitor market conditions."
The yield on Argentina's benchmark dollar bonds due in 2015 rose 26 basis points to 11.99 percent today, according to pricing from Deutsche Bank AG. Warrants linked to gross domestic product slid 0.1 cent to 8.3 cents on the dollar, while the peso was little changed at 3.9342 per dollar.
Argentine borrowing costs will remain among the highest in the region until the government reaches an agreement to restructure $6.7 billion of defaulted loans with the Paris Club group of creditor nations and stops underreporting inflation data, Miguel Kiguel, a former Finance Undersecretary who is now head of research company Econviews, said. Among the Latin American countries in JPMorgan's EMBI+ index, only Ecuador and Venezuela have higher benchmark yields than Argentina.
Economists have questioned the government's inflation data since former President Nestor Kirchner began changing personnel at the national statistics institute in January 2007. Consumer prices rose 11 percent in June from a year earlier, the statistics agency said yesterday. Credit Suisse Group AG economist Carola Sandy estimates actual inflation is about 20 percent.
"These issues generate a sense that Argentina can still give negative surprises -- that it's a country that doesn't play by the rules that other nations play by," Kiguel, who worked at the economy ministry when the country defaulted, said in a telephone interview in Buenos Aires.
Quickening inflation, government caps on utility prices and the seizure of pension funds are also deterring investment, Federico Sturzenegger, president of Banco de la Ciudad de Buenos Aires, said in a June 17 interview.
Foreign-direct investment in Argentina totaled $4.9 billion in 2009, compared with $26 billion for Brazil and $17 billion for Chile, according to the United Nations Economic Commission for Latin America. Brazil is the largest economy in South America followed by Argentina, Venezuela, Colombia and Chile, according to data compiled by Bloomberg.
Argentine bonds rallied as a rebound in global stocks that sent the Standard & Poor's 500 Index up six-straight days this month fueled investor demand for higher-yielding, emerging- market assets.
The country's GDP warrants climbed as Goldman Sachs Group Inc. lifted its forecast for economic expansion this year to 8 percent on July 12, up from a previous estimate of 5.3 percent, because of "lax" fiscal and monetary policies, a record harvest and higher commodities prices.
Argentine bonds also gained after Fitch on July 12 raised the country's credit rating to B, citing the government's swap of defaulted securities that will be settled next month.
The South American nation's Fitch rating is in line with that for Ukraine, whose spread over Treasuries is 203 basis points less. Argentina's borrowing costs will fall to levels similar to that of Ukraine, said Fortis' Trigo Paz, who has held an "overweight" position on Argentine debt for more than a year.
"We look at Argentina's fundamentals and we are getting paid very well for the risk we are taking," he said.
By Drew Benson
(c) 2010 Bloomberg News
Source: http://www.washingtonpost.com/wp-dyn/content/article/2010/07/15/AR2010071503000.html
