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Transparency, Yield Drop Seen After Kirchner: Argentina Credit

28 Octubre 2010

By Bloomberg

The death of former Argentine President Nestor Kirchner is spurring speculation that the nation’s statistical reporting will become more transparent, helping the country lower its borrowing costs.

Bonds rallied, cutting their yield spread over U.S. Treasuries to the smallest since June 2008, after Kirchner died of a heart attack yesterday. The 60-year-old former lawyer, who underwent heart surgery twice this year, was rushed to the hospital in the company of his wife, President Cristina Fernandez de Kirchner, after falling ill at their home. The government declared three days of mourning, and Kirchner will lie in state at the government palace in Buenos Aires today.

Kirchner’s death makes it more likely that an opposition candidate will win next year’s presidential election, paving the way for an overhaul of the statistics institute, where he replaced key personnel in 2007 before being succeeded by Fernandez, according to Augustus Asset Management Ltd. Goldman Sachs Group Inc. and Barclays Plc estimate annual inflation is about 25 percent in South America’s second-biggest economy, more than double the 11.1 percent rate reported by the agency.

“One of the key policies with which Kirchner was most closely associated was the manipulation of the inflation data,” said Paul McNamara, who oversees $4.5 billion of emerging-market debt, including inflation-linked peso bonds, at Augustus in London.

‘Sympathy’ Votes

Kirchner said in July that either he or Fernandez, 57, would run for president next year.

The yield on the inflation-linked notes due in 2033 dropped 60 basis points, or 0.6 percentage point, yesterday to 8.21 percent, compared with a 59 basis point drop to 8.94 percent on its dollar bonds due that same year, according to Itau Unibanco Holding SA. The inflation-linked bond yield rose one basis point today, while the dollar bond was unchanged at 9:18 a.m. New York time.

The extra yield investors demand to hold Argentine bonds instead of U.S. Treasuries sank 49 basis points yesterday, the most in a year, to 533, according to JPMorgan Chase & Co.’s EMBI+ index. It fell another five basis points today.

The gains are “a vote of no confidence from financial markets” in Kirchner and Fernandez, Siobhan Morden, an analyst at Royal Bank of Scotland Group Plc in Stamford, Connecticut, said in a phone interview. The rally may be limited should Kirchner’s death create “sympathy” for Fernandez among Argentines, bolstering her chances in next year’s election, Morden said.

Bond Rout

“These recent gains could quickly reverse,” she said.

The yield gap over Treasuries is down from 807 at the end of May and 910 in June 2005, when Kirchner completed the harshest sovereign debt restructuring since World War II, according to Arturo Porzecanski, an international finance professor at American University in Washington. The government defaulted on $95 billion of debt in 2001.

“The normalization of statistics will accelerate” after Kirchner’s death, Miguel Kiguel, a former finance undersecretary who runs research company Econviews in Buenos Aires, said in a telephone interview. “It’s inevitable that Argentina does it, whether this government or the next, but there’s now a possibility that some progress can be made.”

Workers at the statistics institute, including Graciela Bevacqua, the former consumer price index director, said the inflation reports were being manipulated by the government. Kirchner and Fernandez have said the institute’s figures are accurate.

Yields on the government’s inflation-linked bonds due in 2033, one of the securities turned over to creditors in the 2005 restructuring, soared 275 basis points in 2007 as the data- rigging concerns prompted investors to dump the securities.

Defaulted Debt

In the 2005 settlement, Kirchner offered bonds to creditors worth 30 cents on the dollar in exchange for $95 billion of debt the government defaulted on in 2001. That offer was rejected by about 25 percent of investors, prompting Fernandez to settle with holders of $12.2 billion of the securities in June.

Creditors including billionaire investor Kenneth Dart and Elliott Management Corp., a New York-based hedge fund, are still suing the government in international courts for repayment of the debt.

Warrants linked to economic growth rose 0.17 cent to 13.08 cents today after jumping 0.45 cent yesterday, according to data compiled by Bloomberg. The peso slid 0.1 percent to 3.9612 per dollar today, from 3.9568 on Oct. 26. Local markets were closed yesterday for a nationwide census.

‘Strong, Confrontational’

The cost of protecting Argentine debt against non-payment for five years with credit-default swaps tumbled 52 basis points to 647 yesterday, according to data provider CMA. 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 debt agreements.

A shift to a more “market-friendly” government may push down Argentina’s five-year default swaps to about 350 basis points after the elections, Royal Bank of Canada’s Eduardo Suarez said.

Argentine dollar bonds have returned 36 percent this year, more than double the 16 percent gain in emerging-market debt, as the June debt restructuring and a quickening economic expansion helped restore investor confidence in the country.

Argentina’s 8.73 percent average dollar bond yield is still more than 300 basis points over the 5.32 percent average yield on emerging-market debt. Only debt issued by Venezuela and Ecuador yields more in JPMorgan’s benchmark EMBI+ index.

Kirchner took office in 2003, in the wake of Argentina’s default and a devaluation that forced his elected predecessor, Fernando de la Rua, to resign amid deadly protests.

Kirchner was “a politician and president with strong, confrontational policies,” Kiguel said. “That has been negative for the country.”