The pending Argentina sovereign debt restructuring could set a dangerous new precedent for bondholders in defaulted emerging market credits and could spark further outflows as default fears escalate in conjunction with spread widening. "That it appears [Argentina] will get away with highway robbery will set a bad precedent... they've forced an unprecedented 70% [net present value] haircut," commented Christian Stracke, head of emerging market research at CreditSights, who noted 24% of bondholders refused to participate in the offer and Argentina plans to pay those creditors nothing.
To be sure, emerging market bondholders have been burned in the past with Russia imposing a 50% haircut and Ecuador devaluing its obligations by 40%, but the Argentina default could prove to be the most painful to date, Stracke added. And as spreads widen and defaults become more of a reality, the next sovereign could be more likely to pursue a restructuring if such generous terms are achievable, he said.
The ripple effect from the exchange offer could be yet another factor contributing to market volatility, which is already on the rise as global liquidity conditions tighten. Over recent weeks, the J.P. Morgan Emerging Bond Index widened to around 400 basis points over Treasuries from a low of 335bps over, and the Brazil 8s of '40, considered the benchmark for liquid Latin American names, dropped 10 bond points from its high of 118. Stracke anticipates spreads will wind up around 475bps over by the second half of the year, with Brazil, Colombia and the Philippines most vulnerable to widening. Mutual funds reported a relatively large $26.9 million outflow for the week ending March 23.
