Argentina’s new government takes over in less than two weeks. No one knows who is going to lead this country’s economy through what amounts to another bankruptcy reorganization. But everyone knows what new president Alberto Fernandez thinks about matters of foreign intrigue in Latin America.
There has been no formal transition team and no formal collaboration with the outgoing government of Mr. IMF, Mauricio Macri.
To whit, there has been no talk of an economic plan. “Foreign relations are more glamorous then the burden of resolving the economic crisis,” says Siobhan Morden, head of Latin America fixed income for Amherst Pierpont Securities in New York. The initial plans will have to focus on budgetary stress with re-profiling domestic debt and raising export taxes to shore up funds needed to keep the government afloat.
If Fernandez and his ex-president VEEP Cristina Kirchner introduce populist subsidies, then this will complicate negotiations with creditors who are basically keeping the lights on down there.
“It’s still early,” says Morden. “There’s no team and no plan and (bond) prices are still vulnerable to high volatility of the reactive approach from Fernandez. Difficult choices ahead.”
Fernandez has his work cut out for him, but some emerging market bond fund managers think the IMF … [+] will protect Argentina from another default.
(Photo by Mario De Fina/NurPhoto via Getty Images)
NurPhoto via Getty Images
Recent headlines suggest Fernandez will pick his economic team on December 6, slightly ahead of Inauguration Day, December 10. This should set the seating arrangements for who will be negotiating payments on the roughly $20 billion owed to the IMF in two years.
There has been a lot of speculation about the potential proposals to come from the Fernandez team. The initial investor meetings with economist and former country IMF negotiator in the default of 2003, Guillermo Nielsen, could be moot if Fernandez validates a Reuters story from October hinting he will bring ex-Cristina central bank bureaucrats Matias Kulfas and Cecilia Todesca — both advisors to his campaign — on board instead of Nielsen. Wall Street bond lords would see this as too much Cristina, not enough Alberto. Vultures are circling.
Meanwhile, the IMF said their new mission chief would be Venezuelan economist Luis Cubeddu, a man billed as an expert on alternative solutions to emerging market economic crises.
“I really think Argentina is going to end up being the best performing bond market over the next 12 months,” says Jan Dehn, head of research for the Ashmore Group in London. Ashmore has around $95 billion in assets under management. “The market is pricing in a 60% haircut or a default. If fair value on Argentina’s bonds are $70 and they’re trading at $40, you can nearly double your money if the IMF deals.”
She’s baaa-aaack. Argentina’s new vice president, Cristina Kirchner. She has been put in charge of … [+] foreign policy. So far, foreign policy has been all that’s come out of Buenos Aires since she and Fernandez beat Mauricio Macri in the first round. (Photo by Amilcar Orfali/Getty Images)
Before leaving office, Macri became more like Kirchner than himself. He capped prices, installed currency controls that gave rebirth to Cristina’s wildly popular mercado azul — a parallel peso market — and spooked investors. In other words, he became like every other Argentine president since the turn of the century (and probably farther back).
Macri is now a non-existent political force.
It’s the Fernandez-Kirchner show now. And so far, the stars of the show have been Chilean leftwing activists breaking public transportation turnstiles, Evo Morales, whom they believe was the victim of a coup, and former Brazilian jailbird president Luiz Inacio Lula da Silva. They’ve been getting the praise, and the attention.
Fernandez’s first trip abroad was to Mexico, apparently to convince President Andres Manuel Obrador Lopez (AMLO) to join the emerging Puebla Group, an alliance of former left wing leaders gunning for conservative governments — claiming the woes of inequalities can only be remedied by their leadership, and calling election losses examples of their party’s political persecution.
AMLO wisely declined his invitation as it would be viewed as anti-Trump, Mexico’s most important and relevant partner. Some former Mexican presidents are members.
Grupo de Puebla? No thanks, President of Mexico Andres Manuel Lopez Obrador reportedly told … [+] Argentina’s new president during a recent visit.(Photo by Hector Vivas/Getty Images)
The last government job Fernandez had was as chief of staff from 2003 to 2008 – the guy in charge of getting things done for two presidents, one of them being Cristina. He was her subordinate. Now his rhetoric sounds more like hers, with Argentina investors willing to believe that Fernandez is just going along for the ride and will get going on the economy next month.
“Hopefully, when the (staff) announcements come and the plans become clear, it will have been worth the wait and there will have been some evident design behind why it took so long,” says Kevin Ivers, vice president of the DCI Group in Washington, D.C. “Problem is, we measure everything Fernandez has been saying against everything he has not, the doubts become harder to suppress.”
Wall Street investors holding Argentina know that the IMF does not give haircuts on loans, but will extend maturities, likely taking them out to 2025 and possibly beyond. If so, bondholders buying now in the secondary market will be better off than the ones that bought Argentina’s bonds in the first few years of the Macri government.
The IMF is all that matters right now.
A modest haircut on bonds and an extension of the IMF loan is the base case. “That will at least keep them in the capital markets,” says James Barrineau, a bond manager for Schroders in New York.