Apparently, the 25% correction in the ARS vs. the USD that we were expecting by the beginning of the week was not enough for the markets as some analysts and investors are now anticipating a first round victory for the Fernandez-Fernandez formula. The Argentine peso has lost approximately 40% in just three days after the results of the primaries, and is now at ARS 63/USD, while Argie CDS were marked at 2,720 bps, up from Friday’s close of 1,017. According to IHS Markit, given the current level of the 5-yr CDS the probability of an Argentine government debt default is now 78% in the next five years…
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Apparently, the 25% correction in the ARS vs. the USD that we were expecting by the beginning of the week was not enough for the markets as some analysts and investors are now anticipating a first round victory for the Fernandez-Fernandez formula. The Argentine peso has lost approximately 40% in just three days after the results of the primaries, and is now at ARS 63/USD, while Argie CDS were marked at 2,720 bps, up from Friday’s close of 1,017. According to IHS Markit, given the current level of the 5-yr CDS the probability of an Argentine government debt default is now 78% in the next five years.
Desperate Measures?
Following the devastating defeat that he suffered last Sunday, President Macri announced a ‘new package’ of incentives yesterday covering 17 million workers in the country, with an aggregate cost for the state of ARS 40.000 million (approx. US$635 mn). Reduction & Return of taxes, price freeze of gasoline for 90 days, and higher subsidies are some of the main incentives President Macri announced in an effort to recover from his poor showing in the primaries (he has roughly eight weeks before the Presidential elections). But this is not the only challenge Macri is facing: he has the same eight weeks to explain to voters what went wrong with his financial plan and to convince people about the new one he wishes to instigate should he get elected again. In the meantime, presidential candidate Alberto Fernandez – or should we say, Cristina Fernandez de Kirchner, his running mate, and former President – is in a more comfortable situation as the 15% points of difference in the primaries gives room to play the ‘everything is wrong’ card against the current administration, giving leverage ahead of the October election.
The situation remains hard to predict. What we know now is that, in a phone call with each other, both candidates agreed on the fact that they must provide confidence to the financial market. But according to markets, it may simply not be enough.
Miguel Ovalle has been a credit analyst covering Latam spectrum for corporates and macroeconomics related issues. He previously worked within S&P Global as a credit research analyst.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)