“Personally, I continue to think that Argentina will lose on pari passu, while I don’t think that it will be a decision that kicks the table over for New York. There is a very high uncertainty on that regard,” the analyst said.

Ambito Financiero

Fear of a default: insurance spikes to 3,000 points

CDS at 5 years go back up over an eventual adverse ruling in the U.S.; accumulates an increase of 700 points in one month

 

Tuesday, May 14, 2013

 

Only the passage of time managed to worsen, little by little, the fears of investors over the decision that could come from the U.S. Court of Appeals about the litigation that Argentina is maintaining with the holdouts.  In recent days, despite there being no news until now about the sentence, the risk that the market perceives about the government’s capacity to pay debt went back up soaring to 3000 basis points for five-year terms.

 

The market for Credit Default Swaps (CDS) from Argentina, insurance that pays investors to protect themselves from an eventual non-payment of the country’s debt, fell in recent weeks to be relatively illiquid and is reacting, for this, with exaggerated volatility.  In a context of scarce dollars at the local level, and facing a possible adverse ruling for the country, investors now presume that the likelihood that Argentina will incur a default before 2018 is almost 80%.  This estimate comes from a formula made by the Reuters news agency starting from prices that insurance is showing for the five-year term, which closed yesterday at 3023 basis points, after rising almost 700 points in the last 30 days.  For the term of one year, panic seems to be lesser: CDS closed yesterday at 5780 basis points, meaning a likelihood of non-payment of 55% in the coming months.

 

"The rise seems to respond more than anything to a specific bet about what the Court of Appeals will decide, since at any moment it could decide something, while the timing for the court is unknown,” said an analyst for the investment bank Bulltick Capital Markets in an interview with this newspaper.  “Personally, I continue to think that Argentina will lose on pari passu, while I don’t think that it will be a decision that kicks the table over for New York.  There is a very high uncertainty on that regard,” the analyst said.

 

The risk that investors see on the capacity (or will) to pay from the Argentine government also is seen in the yield that Argentine warrants are showing.  The Boden 2015, for example, yielded 14.1% yesterday.  In line with this, ratings have been getting modified from risk ratings agencies on Argentina’s debt warrants.

 

The agencies already assume that, from an adverse ruling in the United States, they will see themselves obliged to again lower the ratings that already were changed in recent months on Argentine debt warrants.

 

Moody's was the last to make a decision of this kind about the country, downgrading last March by one scale, from B3 to Caa1, its rating on bonds with foreign legislation, with the rise in risk of non-compliance of obligations that come from the lawsuit with the holdouts.  At Fitch, the current grade for Argentine foreign debt is CC, and reflects the opinion of the agency that default is likely.  With an adverse ruling, starting from where Argentina does not honor service on current debt, the rating would fall two categories, to RD (restricted default).  At Standard and Poor’s, lastly, they are looking at a determining factor: if the ruling in the United States ends up impeding the country, or not, from paying through intermediate banks.  For this case, the agency believes that there would be a high likelihood of default.