Fears of a full-blown financial crisis in Argentina have once again come rushing to the fore.
In the wake of Argentine President Mauricio Macri’s stunning rout in primary elections over the weekend, investors dumped its stocks, bonds and currency en masse in a selloff that left much of Wall Street wondering whether the crisis-prone nation was headed for yet another default.
The upset, widely seen as a preview of October’s presidential vote, threw the doors open to the very real possibility a more protectionist government will take power come December and unravel the hard-won gains that Macri made to regain the trust of the international markets.
It deepened worries his populist opponent, Alberto Fernandez, and Fernandez’s running mate, former president Cristina Fernandez, will try to renegotiate its debts as well as its agreements with the IMF.
The nation has billions in foreign-currency debt due over the coming year.
“The market is starting to price in default,” said Edwin Gutierrez, the London-based head of emerging-market sovereign debt at Aberdeen Asset Management.
“The market is unwilling to give [Alberto] Fernandez the benefit of the doubt,” he added.
Credit-default swaps showed that traders were pricing in a 75 percent chance that Argentina would suspend debt payments in the next five years. On Friday last week, the likelihood was just 49 percent.
Its US dollar-denominated government bonds lost about 25 percent on average, pushing down prices to as low as US$0.55 on the dollar. Yields on shorter-maturity notes soared past 35 percent.
The peso on Monday tumbled as much as 25 percent to a record-low 60 per US dollar and the Merval stock index lost the most ever in intraday trading.
Argentina has a long history of fiscal crises and it was only in 2016, under Macri, that the nation put its most recent sovereign default behind it. Argentines still remember the 15-year default saga and deep recessions following a record default in 2001.
The government and its subsidiaries currently have US$15.9 billion in debt payments denominated in dollars and euros due this year, according to data compiled by Bloomberg.
There are another US$18.6 billion in bond principal, loans and interest payments issued in pesos.
Investors are fearing the worst.
Alberto Fernandez was Cabinet chief under former Argentine president Nestor Kirchner, while his vice presidential pick, Cristina Fernandez, led the republic for eight years before Macri came to power.
During her time in office, Argentina was marked by currency controls, data manipulation and protectionist policies on trade to protect national industry. It was also punctuated by another default that made the country an international pariah for years.
“The hopes of Argentina becoming a sustainable, well-functioning economy have been shattered for now,” said Patrick Wacker, fund manager for emerging-market fixed income at UOB Asset Management Ltd in Singapore. “I do not see a silver lining in the results.”
The company expects to cut its exposure further on Argentine bonds once prices stabilize, he said.
“It is going to be an extremely tough period for Argentinian assets,” said Marcin Lipka, a senior analyst at brokerage Cinkciarz.pl in Zielona Gora, Poland. “Without moderation of the Fernandez duo and regarding increasing expectations of another fight with the IMF, I would not exclude that the peso could hit 100 level to the [US] dollar in the next 12-month period.”