Argentina is drawing on central bank profits to meet financing needs, putting off plans to sell its first international bond since 2001 as yields tumble. The central bank’s board on July 29 approved a transfer of 3 billion pesos (762 million USD) from the bank’s 23.5 billion pesos in 2009 profits to the government, following a 1.5 billion peso transfer in February, spokesman Fernando Meanos said.
Argentine debt led the best month for emerging market bonds since September last month after President Cristina Fernandez de Kirchner 12.9 billion USD debt restructuring and a credit rating upgrade helped restore investor confidence.
Economy Minister Amado Boudou shelved plans to sell up to 1 billion in dollar bonds due in 2017 as part of the bond exchange, saying the country would wait for the benchmark yields to drop below 10%.
Chubut province, the nation’s top oil producer, last month sold 150 million USD of notes backed by oil and gas royalties paid by BP Plc-controlled Pan American Energy LLC, Argentina’s biggest oil exporter. The southern province offered the notes through a trust to yield 9.66%, placing 104 million on international markets and 46 million in Argentina.
The federal government doesn’t need to rush to sell bonds overseas and will wait until yields reflect what the country should pay, an Argentine Economy Ministry official said July 30, speaking on the condition he not be identified in accordance with government policy.
Mrs. Kirchner said the government has used 2.7 billion in central bank reserves to pay off debt due this year. Foreign holdings at the central bank hit an all-time high of 51.1 billion USD last week as a record soybean harvest brought in dollar revenue.
Boudou said in an April 14 interview with Bloomberg that the debt structuring completed in June will help reduce Argentina’s borrowing costs by a third to about two percentage points over that of neighbouring Brazil within a year.
The extra yield investors demand to own Argentine government bonds instead of U.S. Treasuries has risen 73 basis points, or 0.73 percentage point, since then to 691. The yield spread for Brazilian debt over Treasuries is 205 basis points.
The cost of protecting Argentine debt against non-payment for five years with credit-default swaps increased two basis points to 792 on July 30, leaving it down 179 in July, according to data compiled by CMA DataVision. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
Argentina is rated B3 by Moody’s Investors Service, the same level as Pakistan. Argentina’s 2017 bonds yield about 2 percentage points more than Pakistan’s bonds due the same year, according to prices compiled by Bloomberg.
While tapping central bank profits to meet spending needs may spur inflation, the government’s decision to put off the international debt sale is “right” because it will help set benchmark borrowing costs for Argentine provinces and companies, said former central bank President Javier Gonzalez Fraga in a July 30 phone interview in Buenos Aires.
“The markets are disposed to buy debt,” Gonzalez Fraga said. “So it’s OK to wait”.