Argentina Will Buy Bonds From Local Funds Hit by Withdrawals

Ignacio Olivera Doll, Jonathan Gilbert and Aline Oyamada
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Argentina Will Buy Bonds From Local Funds Hit by Withdrawals

(Bloomberg) -- Argentina’s central bank is trying to stem investor panic and stabilize the mutual fund industry after many of the country’s biggest funds suspended investor withdrawals in the wake of the government’s default on $7 billion of local debt.

The bank offered to buy local notes held by the funds, providing liquidity that they in turn can use to meet a surge in investor redemption requests. The rush for the exits was so intense Thursday after the cash-strapped government announced it was forcing local bond investors to accept longer maturities that more than a dozen mutual funds halted withdrawals.

The payment delays and plans to seek a “voluntary” reprofiling with holders of longer-term debt are part of a series of dramatic measures announced this week by President Mauricio Macri’s administration to staunch capital outflows and stabilize the peso amid a deepening financial crisis. Late Thursday, S&P Global Ratings said the forced extension of local bond maturities constituted a “selective default.”

Overseas bonds extended their decline Friday, with notes due in 2028 sinking 1.9 cent to a record 38.3 cents on the dollar and bringing the monthly loss to more than 40 cents. The peso slumped 2.2%, extending its August drop to 26%.

Argentine assets sold-off across the board after an Aug. 11 primary election -- which acted as something of a dry run for the actual Oct. 27 vote -- showed that Macri, a free-market advocate, was trailing the leftist candidate Alberto Fernandez by a wide margin.

Investors withdrew more than 70 billion pesos ($1.2 billion) from money-market mutual funds on Thursday, equivalent to almost 10% of the industry’s total assets, according to preliminary data compiled by local consulting firm 1816 Economia & Estrategia. Money-market funds were generally open to redemptions on Thursday, in contrast to those that focused on short-term notes that didn’t allow trading.

Jorge Garbero, an investment adviser at Banco Nacion in Buenos Aires, said his phone was ringing nonstop on Thursday. The calls came in, one after another, from mutual fund clients desperate to pull out their money.

“It’s been a deluge,” Garbero said while grabbing lunch downtown.

With the economy mired in a deep recession, inflation soaring and most investors unwilling to roll over short-term debt, Macri had little choice but to take drastic measures in the run-up to an election he will almost certainly lose.

It’s unclear how successful Macri will be with his bid to ratchet back the financial pressure his administration faces. Argentina is looking to delay payments on $7 billion of short-term bills coming due by year-end, $20 billion of local-law bonds and $30 billion of foreign-law bonds.

Foreign-currency reserves have plunged $10 billion over the past month, including a decline of about $900 million Thursday, to less than $60 billion now.

S&P cut Argentina’s foreign and local debt rating to “selective default” late Thursday, saying that the plan to unilaterally extend maturities on short-term bills “constitutes default under our criteria.”

Macri took office less than four years ago amid a wave of optimism for South America’s second-largest economy. He settled creditor lawsuits that had dragged on more than a decade and returned to global capital markets with a splash, selling bonds that wouldn’t mature for 100 years.

But obstacles, from persistent inflation he couldn’t tame to a global trade war, thwarted his free-market goals. An expected economic surge never materialized, leaving the government with a debt load that’s now too big for it to handle.

Garbero, the investment adviser at Banco Nacion, feels fairly well protected from the economic tumult. He doesn’t have much in the way of savings, so isn’t concerned about a devaluation. And, in fact, since he has peso-denominated debts, a bout of inflation and a weaker currency would actually make it easier to pay back his obligations.

--With assistance from Philip Sanders, Justin Villamil and Carolina Millan.

To contact the reporters on this story: Ignacio Olivera Doll in Buenos Aires at ioliveradoll@bloomberg.net;Jonathan Gilbert in Buenos Aires at jgilbert63@bloomberg.net;Aline Oyamada in Sao Paulo at aoyamada3@bloomberg.net

To contact the editors responsible for this story: Daniel Cancel at dcancel@bloomberg.net, ;David Papadopoulos at papadopoulos@bloomberg.net, Brendan Walsh, Julia Leite

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