Although Argentina’s dollar debt maturities look low in the short term for the size of the Argentine economy, the market continues to perceive a very high probability of default.
This can be seen in the value of Argentina’s default insurance, which is worth almost 20 times more than the average for the region.
The reasons why the market sees risks of default, even with limited maturities in the short and medium term, respond to other economic variables and reputations that affect the debt.
Faced with the chances of default priced in the debt, the market is beginning to worry about the January due date for US$1.1 billion with private parties.
Reserves: the BCRA bought dollars again but barely cuts the red of the month
Argentine bonds are coupled to global dynamics and fall again
reservations are a concern
One of the key variables that affects the debt is the deteriorated balance sheet of the BCRA, fundamentally with regard to the part of assets. That is, reservations.
The fact that the BCRA has lost reserves causes the market to perceive default risks since what is happening is that the Central Bank loses resources to meet its commitments, raising the risks of seeing a credit event.
Currently net reserves are located at u$s 845 million approximately, which implies an extremely low value.
In addition, gross reserves drilled US$37 billion and are at their lowest level since 2016placing itself in the lowest value of the government of Alberto Fernndez.
In January, a little more than US$1 billion expires, and for this reason the market sees greater risks of default since it suspects that said commitment will not be able to be paid.
Due to the poor technical position of the BCRA’s balance sheet, the market is beginning to worry not only about the medium-term maturity profile, but also about the very short-term one.
In this way, analysts are beginning to look with concern at the chances of seeing a breach of the commitment with private companies in January.
Norberto Sosa, Director of Grupo IEB, said that during much of this year there was a marked correlation between Argentine bonds and emerging debt (EMB), except at the beginning of the year when Argentina ran the risk of not being able to agree with the IMF.
However, Sosa points out that Argentine global bonds are delayed in their recovery with respect to the rest of the emerging bonds issued in dollars in recent weeks.
for Sosa, Part of the explanation for this weakness in bonds is due to the poor position of net liquid reserves.
“Unfortunately, with the current patrimonial situation of the BCRA and with the scarce capacity that the monetary authority is showing to accumulate dollars, it is not only very difficult to project the first amortization payment in July 2024, but it is also that it is difficult to project the ability to pay the January rent coupons“, alert.
He also added that the economic team is convinced of honoring said commitments, however he warned that “it is necessary for the BCRA to accumulate reserves to increase the probability of payment and therefore moderate the probabilities of default,” Sosa said.
Today Argentine bonds operate with implicit probabilities of default of 95% at 10 years and 75% at 4 years. This higher risk of default is reflected in Argentina’s default insurance, which is well above the average for the region.
CDS are insurance against default or against a credit event.
Argentina’s default insurance fell 25% in recent weeks thanks to the 20% rally in debt.
The CDS went from 4000 to 3000 points today and this decline is clearly good news as the market perceives less risk of default at the margin.
Nevertheless, They are still very high values compared to the current values seen within the region.
Brazil’s CDS are worth 252 points, Peru’s are worth 116 points and Chile’s are worth 130 points. On average (excluding Argentina), the region has a CDS value of 160 points.
This means that Argentina’s CDS are worth 18 times more than the region’s average. The implicit probability of default of the Argentine debt is above 90% at 10 years and above 75% at 4 years.
Mauro Mazza, researcher at Bull Market Brokers, warned that Argentina’s CDS are rather a derivative of reserves and the ability to add dollars, rather than an indicator of the structural solvency of the Argentine state.
“The reserve situation generates an extra premium over country risk rate spreads. Without reserve risk, CDS should be at values similar to country risk with an attenuated premium. the reserves cause it to have an exaggerated premium, precisely because the Government pays the debt against the stock of reserves and not through market placements or own savings“, comment.
Precisely, the fact that the BCRA has failed to accumulate reserves puts investors in a more pessimistic position and puts pressure on the debt.
In line with the concern of the January compromise, Mazza warns that if the BCRA fails to rebuild reserves in the next 60 to 90 days, the January payment will once again be at risk and we may see another abrupt rise in CDS.
“Today, with liquid reserves around -6,700 million dollars, the CDS could return to maximums. The magnifying glass should not be on the CDS but on the BCRA reserves, and the January payment does not go against a thick harvest like those of July but against what wheat can leave us in December, which is usually little,” Mazza said.
Behind the values of insurance against a default, not only the risks of non-compliance are strictly implicit, but also other variables.
Among them are the lack of reserves, the credit history, the lack of access to global markets and the respective impossibility of rolling debt, which increases the chances of seeing a default.
Roberto Codina, a trader at Aurum Valores, affirmed that the reasons why the Argentine debt operates with such probabilities of default are multi-causal.
“It is not only due to restructuring risk, which exists and clearly has a significant probability. There are other causes such as the non-accumulation of reserves and the fiscal deficit. These are fundamental factors to be able to resume access to international credit markets, said Codina.
In the remainder of 2022, close to US$12 billion of debt expires, of which a large part is debt with the IMF since just over US$1 billion is debt with private parties.
The same happens with the debt towards the end of 2023 and in which in total close to US$36 billion are due, although much of it is with the IMF. With private companies, until the end of 2023, less than US$3.5 billion are due.
In other words, today due to the maturity profile there are greater risks of non-compliance with the IMF than with private debt.
However, private debt, and bonds show strong falls and very depressed values, which it reflects the mistrust that the market has regarding the Government’s capacity and/or willingness to pay for its financial commitments.
Despite the fact that debt maturities with private companies in the coming months do not look high, the bonds still perceive high chances of seeing some credit event in Argentine debt. That’s why bonds are down nearly 60% from their highs.
Maximiano Bagilet, Commercial Retail and Institutional Referent of TSA Burstil, of the Transatlantica Group remarked that despite the relative improvement in the CDS, the probability of default or restructuring is still high and probable.
“The maturity profile is very demanding in the medium term and the available and future foreign exchange is almost insufficient to meet imports and there are no signs of macro reforms that will allow this to be corrected,” he warned.
On the other hand, Bagilet added that maturities in foreign currency in the period 2027 to 2032 are above US$20,000 million, a figure that requires access to the capital market to be able to face it and there are still no movements in this sense
“Argentine CDS, trading today up to 20 times compared to their peers in the region, are no longer a valid reference to justify or not an imminent restructuring. A fall of 50% is not even enough to think of an improvement in the medium-term scenario. Just by analyzing the macro data of our peers such as Peru, Chile and even Paraguay we can justify these exorbitant levels in the Argentine CDS”, warned Bagilet.
Roberto Codina understands that since the payments to be made on the debt with private companies in dollars (without OI or IMF) in the next few years will be below 2 points of GDP, the risk of default should be much lower.
“The factors that affect the debt just mentioned prevent seeing an improvement in prices and therefore the debt remains at depressed levels, so the CDS are located at high values. This will be the case until the fiscal, exchange and political signals are substantially different”Codena said.
Finally, Tomas Ruiz Palacios, a strategist at Consultatio, maintained that Argentina’s debt currently has a much more negative scenario discounted than, for example, stocks.
“Bonds have discounted a negative scenario than stocks. We see the difference more because of the technical position of the funds that many Argentine bonds had even since the Macri era“, I say.