Funds increase bet against Argentine government bonds – 09/04/2023 – Market

Hedge funds increased their bets against Argentina’s bonds as the rise of radical right-wing candidate Javier Milei sparked investor fears that the country will elect a leader who will struggle to govern amid an economic crisis.

The total value of Argentine bonds borrowed by investors to bet on falling prices has risen 65% since Milei, a self-described “anarcho-capitalist”, won primary elections last month, ahead of presidential elections in October.

His plans to radically cut public spending and dollarize the struggling economy have roiled the country’s currency and fixed-income markets. The value of short positions against Argentine bonds borrowed by international custodial banks is currently US$41 million (R$201.6 million), a sharp increase from US$25 million (R$122.9 million) before of voting in mid-August, according to data from S&P Global Market Intelligence.

Although the numbers are small compared to the overall value of Argentina’s debt, the increase comes despite the fact that the bonds are already being traded in an environment of profound difficulties.

The caution of international investors comes after a period of turbulence for Argentina’s unstable economy. Inflation is above 113%, foreign exchange reserves have reached dangerously low levels and the peso has lost more than half of its value against the dollar in the last 12 months.

“Given Argentina’s dire macroeconomic situation, there is no room for error,” said Alejandro Arevalo, head of emerging-market debt at Jupiter Asset Management.

He added that investors are concerned about the difficulty Milei would have implementing much-needed reform policies without a majority in Congress or the backing of Argentina’s powerful unions, as well as the risks of running with Milei, an inexperienced and radical leader.

“The question is not so much whether the proposed cuts in public spending will trigger social protests, but rather how Milei will react to these protests,” Arevalo said.

Investors say the most market-friendly candidate is the more moderate rightist Patricia Bullrich, who is also proposing a fiscal consolidation program. While Milei has said she would drastically cut government spending, her stance has raised concerns about the viability of the proposals.

“Top candidate Javier Milei’s dollarization plan is radical and problematic, and it’s not clear whether it’s achievable or worthwhile,” said Paul Greer, manager of emerging markets debt and currency portfolio at Fidelity International. “The market will have a hard time dealing with it if it tries.”

The result of the primary elections also prolonged a period of political paralysis. With the electorate split roughly in three between voters in Milei, the main center-right party and the populist incumbent Peronists, October elections are hanging in the balance, and analysts say a November runoff is all but certain.

Investors are worried about what could happen in Argentina through November, as the devaluation of the exchange rate puts even more pressure on the country’s rising inflation problem.

“A dire situation in the short term is likely to become even more dire,” said Peter West, economic adviser at EM Funding. “I’m not predicting that to happen, but there is a chance Argentina could slide into hyperinflation – monthly inflation will likely be in the double digits for the next few months.”

The price of Argentine dollar bonds fell by as much as 15% immediately after Milei won more than 30% of the vote on Aug. 13, and the value of the peso at parallel exchange rates declined. The central bank quickly responded, devaluing its official exchange rate by as much as 18% to 350 pesos to the dollar, which helped bonds recoup some of their losses.

The blue-chip swap rate, a floating exchange rate for international investors who buy stocks and bonds, continued to weaken, reaching more than 780 pesos to the dollar on Friday (1).

_{Translated by Luiz Roberto M. Gonçalves}