(Bloomberg) -- Argentina is drawing on central bank profits to meet financing needs, putting off plans to sell its first international bond since 2001 as yields tumble.The central bank’s board on July 29 approved a transfer of 3 billion pesos ($762 million) from the bank’s 23.5 billion pesos in 2009 profits to the government, following a 1.5 billion peso transfer in February, spokesman Fernando Meanos said.
Argentine debt led the best month for emerging market bonds since September last month after President Cristina Fernandez de Kirchner’s $12.9 billion debt restructuring and a credit rating upgrade helped restore investor confidence. Economy Minister Amado Boudou shelved plans to sell up to $1 billion in dollar bonds due in 2017 as part of the bond exchange, saying the country would wait for the benchmark yields to drop below 10 percent. The yield on the government’s existing bonds due in 2017 fell to 10.03 percent last week, according to pricing from Deutsche Bank AG.
“Everyone expects that 10 percent is the magic number -- that’s what they keep saying,” said Edwin Gutierrez, who manages about $5 billion of emerging-market debt at Aberdeen Asset Management Plc in London. “Maybe they’re trying to squeeze the market a bit further.”
Provincial Sale
Chubut province, the nation’s top oil producer, last month sold $150 million of notes backed by oil and gas royalties paid by BP Plc-controlled Pan American Energy LLC, Argentina’s biggest oil exporter. The southern province offered the notes through a trust to yield 9.66 percent, placing $104 million on international markets and $46 million in Argentina.
The federal government doesn’t need to rush to sell bonds overseas and will wait until yields reflect what the country should pay, an Argentine Economy Ministry official said July 30, speaking on the condition he not be identified in accordance with government policy.
Fernandez, 57, said the government has used $2.7 billion in central bank reserves to pay off debt due this year. Foreign holdings at the central bank hit an all-time high of $51.1 billion last week as a record soybean harvest brought in dollar revenue.
The use of central bank funds, as well as the sale of debt to government agencies, means the government “is not desperate for cash,” Gutierrez said in a telephone interview. “They’ve got themselves financed.”
Brazil Comparison
Boudou, 47, said in an April 14 interview with Bloomberg that the debt structuring completed in June will help reduce Argentina’s borrowing costs by a third to about two percentage points over that of neighboring Brazil within a year.
The extra yield investors demand to own Argentine government bonds instead of U.S. Treasuries has risen 89 basis points, or 0.89 percentage point, since then to 707 at the end of last week. The yield spread for Brazilian debt over Treasuries was 214 basis points on July 30.
The cost of protecting Argentine debt against non-payment for five years with credit-default swaps rose two basis points to 792 July 30, leaving it down 179 in July, according to data compiled by CMA DataVision. 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 warrants linked to economic growth 0.3 cent to 9.95 U.S. cents. The peso fell 0.1 percent on July 30 to 3.9408 per dollar.
Pakistan Bonds
Argentina is rated B3 by Moody’s Investors Service, the same level as Pakistan. Argentina’s 2017 bonds yield about 2 percentage points more than Pakistan’s bonds due the same year, according to prices compiled by Bloomberg.
While tapping central bank profits to meet spending needs may spur inflation, the government’s decision to put off the international debt sale is “right” because it will help set benchmark borrowing costs for Argentine provinces and companies, said former central bank President Javier Gonzalez Fraga in a July 30 phone interview in Buenos Aires.
“The markets are disposed to buy debt,” Gonzalez Fraga said. “So it’s OK to wait.”
--Editors: Bill Faries, Alan Mirabella.
To contact the reporters on this story: Drew Benson in Buenos Aires at This e-mail address is being protected from spambots. You need JavaScript enabled to view it ; Eliana Raszewski in Buenos Aires at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
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Source: http://www.businessweek.com/news/2010-08-01/argentina-squeeze-cuts-yields-as-central-bank-profits-drawn.html
