Argentina: Sinking

Bloomberg has changed its headline from the alarmist "Argentina Default Looms" to the slightly more sober "Argentine Bonds Sink as Pension Takeover Fuels Default Concerns". But it was right, the first time round, as is evidenced by the prices on Argentine bonds:

The yield on the government's 8.28 percent bonds due in 2033 surged 3.2 percentage points to 27.91 percent at 9:14 a.m. in New York, according to JPMorgan Chase & Co. The bonds yielded 12.16 percent a month ago. The price dropped 4.11 cents to 25 cents on the dollar, leaving it down 11.91 cents in the past two days.

Yep, Argentina's benchmark long bond is back to trading at 25 cents on the dollar, after having been the darling of emerging-market fixed-income investors for much of this decade. Argentina's sovereign spread is now a whopping 1,627bp, CDS spreads are over 35 percentage points, and money is flooding out of the country: volume in the foreign-exchange market was a record $620 million yesterday, and for much of the day there was only one buyer of pesos -- the central bank. In JP Morgan's daily emerging-markets research note, Argentina analyst Florencia Vazquez said, ominously, that "mutual funds were sellers of central bank paper". One wonders what they're buying: what's safer than the central bank?

This morning, Argentina's Merval stock index is down 12% at 922; that's on top of an 11% fall yesterday. It was above 2,000 for most of 2007, and as recently as July of this year. The reason for the latest plunge is president Cristina Kirchner's decision to privatize nationalize Argentina's pension funds. The fear is that they will be forced to dump all their long-term holdings and buy sovereign debt instead: Argentina might need to borrow as much as $14 billion next year, and there's no one willing to lend it that kind of money.

If Argentina does default on its foreign debt, as the markets seem to expect, that'll raise very interesting questions about equal treatment of creditors, specifically as regards the relative treatment of new and old (defaulted) bonds. But that's down the road. For the time being, Argentina is going through its second economic implosion in a decade, and it's not a pretty sight. The only thing I can say for sure? If the goverment does default, Kirchner will be out. So she's going to continue to attempt harmful measures like privatizing the pension funds before that happens; the next step might well be some kind of bank holiday or freeze on deposit accounts. I suspect the ferry to Montevideo is quite full, these days, with Argentines moving their savings to the much safer country across the River Plate.