International Investment Bank Morgan Stanley has shifted its long-held view on Argentina sovereign credit to “like,” as risks were flexed upside after a lot of bad news had been priced into bonds, including, increasingly, a delay to an IMF program and a further complication with the Club of Paris payment.
After Argentina last year defaulted on its sovereign debt for the ninth time, investors have been waiting for the government to make progress with the International Monetary Fund over a deal to restructure around US$ 44 billion in debt.
Morgan Stanley’s “muddle-through” thesis was playing out, with no IMF program expected to be up and running in 2021, Morgan Stanley economist Fernando Sedano and his colleagues said in a research note on Friday.
With bond prices at new lows and the bank’s belief that a willingness to pay would remain, Morgan Stanley said it saw reasons to add risk.
Argentina’s 2041 issue is Morgan Stanley’s preferred bond because it believes long-end bonds would break even by the second half of 2024 under a conservative estimate of a 25% recovery rate. With coupon payments stepping up in July, the current yield will get closer to those of the rest of the emerging markets, it said.
The bank said those making the decisions in Argentina’s ruling coalition were willing to wait on an IMF deal because they did not want to implement the much-needed fiscal, monetary and FX policy adjustments, given the short-term impact on inflation and economic growth.
Policymakers also knew that, by and large, it would not be popular to partner with the IMF during an election year in Argentina, Morgan Stanley said.