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Argentine Bonds, Stocks Sink as Takeover Fuels Default Concerns

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Argentine Bonds, Stocks Sink as Takeover Fuels Default Concerns

By James Attwood and Drew Benson
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Oct. 22 (Bloomberg) -- Argentina's stocks headed for their biggest drop since 1990 and dollar bond yields topped 30 percent as a planned takeover of pension funds heightened concern the government is headed for its second default this decade.
The benchmark Merval stock index tumbled 16.4 percent on speculation President Cristina Fernandez de Kirchner plans to use the funds' $29 billion to meet financing needs that have swelled as prices on the country's commodity exports tumbled. Argentina hasn't had access to international debt markets since its 2001 default and demand for its local bonds has dried up on concern the government is underreporting inflation.
``It's the final of many nails in the coffin from an institutional investor perspective,'' said Bill Rudman, who helps manage $3 billion of emerging-market equities at WestLB Mellon Asset Management in London. Argentina is ``disappearing into irrelevance,'' he said.
Yields on Argentina's 8.28 percent bonds due in 2033 surged 4.54 percentage points to 29.23 percent at 12:26 p.m. in New York, after earlier topping 30 percent, according to JPMorgan Chase & Co. The bonds yielded 12.16 percent a month ago.
The bonds' price dropped 5.5 cents to 23.6 cents on the dollar, leaving it down 13.31 cents in the past two days. The benchmark Merval stock index sank to a four-year low, extending its decline this week to 28 percent.
The rout in Argentine markets sparked declines across developing nations. Neighboring Brazil's currency, the real, sank 5.5 percent while Turkey's lira dropped 4.7 percent. The extra yield investors demand to own developing-nation debt swelled 64 basis points, or 0.64 percentage point, to 7.53 percentage points, the most since January 2003, according to JPMorgan's EMBI+ index.
Global Crisis
Fernandez, 55, announced her plan to take over 10 private pension funds during a speech in Buenos Aires yesterday. She said the proposal would protect retirees from the global financial crisis and denied trying to ``grab the cash'' to pay off debt or to finance new programs or projects. The last time Argentina sought to tap workers' savings was in 2001, just before it halted payments on $95 billion of bonds.
``Tapping into the pension funds makes it blatantly obvious that it needs funds,'' said Aryam Vazquez, an emerging markets economist with Wells Fargo & Co. in New York. ``This is bad news any way you look at it.''
The private retirement system, set up in 1994 to help bolster capital markets, owns about 5 percent of companies listed on the Buenos Aires stock exchange and 27 percent of shares available for public trading, data compiled by pension funds show.
International Lawsuits
The government's proposal to take control of the funds, including units of London-based HSBC Holdings Plc and Bilbao, Spain-based Banco Bilbao Vizcaya Argentaria SA, still needs congressional approval. BBVA fell 9.1 percent today.
Argentina's borrowing needs will swell to as much as $14 billion next year from $7 billion in 2008, RBC Capital Markets, a Toronto-based unit of Canada's largest bank, said yesterday.
Fernandez made a bid to regain access to international markets last month, instructing her economic aides to pursue a renegotiation with creditors who rejected the country's 2005 payout of 30 cents for every dollar of defaulted debt.
Holders of about $20 billion of bonds turned down that 30- cent offer, which was the harshest sovereign restructuring since World War II, and many have filed lawsuits against Argentina.
The cost of protecting Argentina's bonds against default soared today. Five-year credit-default swaps based on Argentina's debt jumped 3.92 percentage points to 36.08 percent, according to Bloomberg data.
`Immense Damage'
Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality.
The peso was little changed today, sliding 0.1 percent to 3.2216 per dollar, as traders said the central bank sold dollars in the foreign exchange market to shore up the currency.
The proposed takeover ``makes the chance of default in the short-term less likely by inflicting immense damage to the long- term credibility of the government and the financial system with its own people,'' said Paul McNamara, who helps manage $1.2 billion of emerging-market assets at Augustus Asset Managers Ltd. in London.
About 55 percent of the 94.4 billion pesos ($29.3 billion) held by the private pension funds is invested in government debt, according to the pension regulator's Web site. A takeover would allow the Fernandez administration to write off the sovereign bonds held by the funds, said Javier Salvucci, an analyst with Buenos Aires-based Silver Cloud Advisors.
`Short-Term Fix'
``It's a short-term fix that may cause more fiscal and macro pain in the long haul,'' said Will Landers, who manages $5 billion in Latin American equities at BlackRock Inc.
Nestor Kirchner, Fernandez's husband and predecessor as president, began tightening restrictions on private pension funds last year, requiring them to keep more investments in the country to sustain economic growth.
Foreign emerging-market funds sold about $250 million in Argentine stocks through August this year in the biggest outflow since 2000, according to fund flow tracker EPFR Global in Cambridge, Massachusetts.
Concern is mounting that a 42 percent drop in commodity prices since July -- fueled by the global economic slowdown -- will throttle growth in South America's second-biggest economy and crimp tax receipts. Argentina gets more than half its export revenue from wheat, soybeans, corn and other commodities.
Growth will slow to 5 percent this year and 2.5 percent in 2009, RBC Capital Markets said. The economy expanded 8.8 percent on average over the past five years as Kirchner and Fernandez used surging tax receipts to boost government spending on everything from civil servant pay rises to energy subsidies.
`Much, Much Worse'
Seven years ago, as the government tried in vain to stave off a debt default, it pressured the pension funds to participate in bond swaps that pushed forward repayment dates. That December, strapped for cash to pay salaries, it ordered the funds to transfer $3.2 billion in bank deposits to state-owned Banco de la Nacion.
The latest move is ``much, much worse,'' said McNamara at Augustus. ``It's not just shoving a little bit of debt in at the edge, it's taking over the whole system.''
To contact the reporters on this story: James Attwood in Santiago at [email protected]Drew Benson in Buenos Aires at [email protected]
Last Updated: October 22, 2008 12:52 EDT
 
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