Stockholm (Ekonamik) – The S&P Merval Index tumbled 48% on Monday (the second-largest single-day drop in any global stock market since 1950) following the unexpected defeat of Argentina’s president, Mauricio Macri, in Argentina’s primary elections this past weekend by the Peronist Alberto Fernández and his running mate, former president Cristina Fernández de Kirchner. The MSCI Argentina Index fell 40%.
Mr Macri, who had secured a $56 billion bailout from the International Monetary Fund in 2018 and was running on a campaign of austerity, won only 32.1% of the vote, to 47.7% for the Fernández ticket. The stock market crash was followed by a precipitous fall on the U.S. stock market Wednesday, while the German and U.K. economies appear to be contracting and growth in China slows.
The peso lost 15% of its value against the U.S. dollar and continued in free-fall Tuesday amid investor fears that the insurgents will undo Mr Macri’s progress in regaining the trust of domestic and foreign investors if they win power in October. Government bonds fell 25% on average, while the yield on Argentina’s 100-year bond soared 5%, following a rough month in which the bond (issued two years ago for $90 with a rate of 7.125%) lost 37%, according to a note from Bank of America Merrill Lynch.
Investors fear that the Fernández ticket will attempt to renegotiate Argentina’s debts with the IMF, following two rounds of debt restructuring in the 2005 and 2010 and debt defaults in 2001 and 2014, the latter when Ms Fernández de Kirchner last held office. Argentina has $15.9 billion in foreign-currency debt due this year, with another $18.6 billion in bond principal, loans and interest payments. 80% of Argentina’s debt is in foreign currency.
Traders are pricing in a 78% chance that Argentina will suspend debt payments in the next five years. “The market has reacted by pricing into bonds, at least temporarily, a very high probability of default and a zero chance of a Macri win in general elections in October,” according to James Barrineau, Head of Emerging Markets Debt Relative with Schroders. “Debt investors will look for… a demonstration of the central bank’s ability to limit currency volatility. A substantial depreciation of 20% or more after today could spark another round of higher inflation and a spiral of further depreciation, and render debt metrics unsustainable for the medium term.”
Radical comments from both opposition candidates coupled with uncertainty as to what Mr Fernández’s economic policies are actually going to be is contributing to the market selloff and further undermining Mr Macri’s chances of an October comeback. Mr Macri’s restrictive monetary and fiscal policies and IMF external financing needs bailout require at least another year to demonstrate that the country is on the path to economic normalisation.
“[The] currency, market drop and bond market reaction is likely to impact confidence and bring back inflation, making economic momentum by October worse than it is today, and hence making it likely for Fernández to retain a large lead,” commented Schroders Head of Latin American Equities Pablo Riveroll. “Given the large stock of U.S.-denominated debt and significant financing needs in 2020 and 2021, the currency depreciation will increase the ratio of debt to GDP, putting further pressure on the fiscal accounts. Solvency and liquidity risk are therefore likely to increase significantly if Fernández wins the October election.”
Picture from Wikicommons