Cause of Argentine Bond Selloff

While foreign reserves tumble, the president remains in hiding, spurring confusion and concern.

Argentine bonds are posting the worst rout in emerging markets on concern the government is absent as foreign reserves sink, inflation soars, and the peso depreciates.

The nation’s debt has lost 7.5 percent since Dec. 19, the last day that President Cristina Fernandez de Kirchner appeared in public after she had an operation to remove a blood clot near her brain in October. Developing-nation bonds have gained an average of 0.9 percent in the same period.

During Fernandez’s absence, Argentina’s foreign reserves have tumbled to a seven-year low, the black-market peso has lost 17 percent against the dollar, and inflation has quickened to 28 percent, the fastest in at least two years. Her disappearance from public view is fueling speculation that the government has no plan to confront a looming balance-of-payments crisis, according to Guillermo Calvo, an economist at Columbia University in New York.

“People have to guess what she’s thinking,” Calvo, who was chief economist at the Inter-American Bank for five years until 2006, said in a telephone interview. “There’s confusion, and that doesn’t help investor confidence at all.”

Presidential spokesman Alfredo Scoccimarro didn’t return a phone call seeking comment. In Fernandez’s absence, Cabinet Chief Jorge Capitanich has held daily press conferences in which he’s said Argentina will shore up reserves this year.

Capitanich said today that Fernandez is still in charge of the government and rejected any speculation arising from her absence.

“I can assure you that the president is carrying out her duties every day wherever she finds herself,” Capitanich said during a press conference in Buenos Aires. “She’s doing it with the same spirit, creativity, enthusiasm, and passion as always.”

Reserves have been tumbling an average of $1.3 billion per month in the past year, falling below $29.7 billion yesterday for the first time since 2006. Fernandez uses the funds to pay foreign creditors and finance spending. The government said in September it will tap a record $9.86 billion of reserves to make foreign debt payments in 2014.

As the peso falls in the illegal street market to 11.65 pesos per dollar, the government has allowed the official exchange rate to depreciate to 6.825 pesos per dollar yesterday in a bid to make exports more competitive and close a record gap of 70 percent between the two rates.

 

‘Inspire Confidence’

Fernandez’s government also faces mounting pressure from unions to raise public-sector wages as inflation quickened to 28.4 percent in December, according to estimates by private economists published by opposition lawmakers. The government said consumer prices rose 10.9 percent in the same period.

“It doesn’t inspire confidence that the executive recognizes these problems nor that they have a strategy to deal with them,” Siobhan Morden, the head of Latin American fixed-income strategy at Jefferies, said in a telephone interview from New York. “If you’re going to take tough decisions, you need somebody in charge.”

Sebastian Vargas, a New York-based economist at Barclays Plc, said Fernandez is still in charge and that she has reduced her public exposure as her government implements policies of negotiating with holdout creditors that she has previously opposed.

Argentina formally presented an offer to settle about $10 billion it owes to the Paris Club of creditors, 13 years after the country’s record $95 billion debt default, the spokeswoman for the group of creditors said. Paris Club members on Jan. 22 will discuss the offer delivered yesterday by Argentine Economy Minister Axel Kicillof to Paris Club Chairman Ramon Fernandez, said Clotilde L’Angevin, the club spokeswoman.

The government has also said it would comply with International Monetary Fund demands by publishing a new inflation index after being the first country to be censured by the Washington-based lender for misreporting economic data.

“She has always shown herself to be inflexible and that’s why, while she’s ordering her ministers to resolve these issues, she’s maintaining a low profile,” Vargas said in a telephone interview.

The cost of protecting Argentine debt against non-payment for five years with credit-default swaps has risen 4.23 percentage points, the most in the world, since Dec. 19, to 20.96 percentage points, according to data compiled by CMA in New York.

“The market is worried that Argentina could enter a period of ungovernability,” Jorge Piedrahita, the chief executive officer at Torino Capital LLC, said in a telephone interview from New York. “Fernandez could find herself in a situation where she can’t do anything.”

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