Argentina’s $1 billion bond buyback baffles investors

(Bloomberg) – Argentina’s plan to buy back $1 billion of its troubled dollar bonds has emerging market investors scratching their heads.

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Economy Minister Sergio Massa announced on Wednesday the plan to buy back securities maturing in 2029 and 2030 at 30 cents per dollar. Tickets hit their highest prices in more than a year after Massa’s speech, extending a rally that had already produced returns of 60% for investors since October.

While buying back the bonds at a fraction of their face value could ultimately save the country hundreds of millions of dollars in interest and principal payments, investors point out the government doesn’t have much room in the coffers. from the central bank to finance such a lavish takeover. . Argentina’s long-standing financial difficulties are, of course, part of the reason why bonds were so cheap to begin with.

The plan makes so little sense that market gains may be short-lived once investors sort out the details, according to Pablo Waldman, senior strategist at Inviu in Buenos Aires.

“Resources are very limited and it’s a very risky way to deploy them,” Waldman said. “If they don’t follow through on further action, the very limited scope of this plan is unlikely to drive bonds up any further.”

Argentina’s $16.1 billion in dollar bonds due 2030 pared gains on Thursday, slipping 0.9 cents to around 34.6 cents to the dollar, at 1:24 p.m. in Buenos Aires.

The announcement is all the more disconcerting because while central bank reserves have climbed in recent months, net reserves are still dangerously low at just over $6 billion, according to local brokerage firm Portfolio Personal Inversiones. The nation is under pressure to bolster those reserves to meet targets set out in its $44 billion program with the International Monetary Fund, and it faces a severe drought that is expected to keep export dollars from flowing to the central bank later this year.

While the Economy Ministry has provided few details about the plan, officials plan to use dollars held by the Treasury to fund the takeover. Some of the money comes from expectations of lower energy imports in 2023. The economy ministry declined to comment.

Some investors believe the buyback plan could be an attempt by the government to appear market-friendly ahead of the October election. Others think it could be the first step in a complicated process to help support the peso in unofficial foreign exchange markets.

Alejo Costa, chief Argentine strategist at BTG Pactual in Buenos Aires, said he believed it was most likely a ploy by the authorities to prop up the peso, but he did not rule out motives. more purely political.

“The government may think it’s improving market sentiment,” Costa said. “All Massa knows is politics and rhetoric, and he can believe that rhetoric is improving the context ahead of this year’s election.”

A senior official at the economy minister said the plan aims to narrow the gap between Argentina’s official and parallel exchange rates.

Argentina’s parallel exchange rate, known locally as the prime swap, weakened to a record 363 pesos to the dollar earlier this week. Argentina’s official exchange rate, held steady by capital controls, weakened 0.2% to around 183 pesos to the dollar.

Regardless of Argentina’s motive, investors say the buyout would have been more beneficial to the government if it had taken place last year, when bond prices were even lower.

“I think they’re just screaming out loud just to get something on the front pages of the newspaper,” said Joaquin Almeyra, a fixed-income trader at Bulltick LLC in Miami. “It would have made more sense to do this months ago.”

–With the help of Patrick Gillespie.

(Updates with the latest bond prices in the sixth paragraph)

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