Credit default swap prices on sovereign Argentina widened late last week after Domingo Felipe Cavallo replaced Ricardo Lopez Murphy as economy minister and announced his plans to stimulate economic recovery. Bid levels for one-year protection skyrocketed to 1,050 basis points from around 850bps after Callo announced that he planned fewer spending cuts than the market expected, according to an emerging markets credit derivatives trader in New York.
Argentina needs to either cut its fiscal deficit or increase its borrowings to finance the deficit, said the trader. When Cavallo announced that he was not planning as many spending cuts as the market sought, protection levels surged as players grew more skeptical of Argentina's ability to service its debt. Cavallo's plan relies less on cutting spending and more on stimulating growth, according to the trader.
Prior to the announcement, credit derivatives traders had high hopes for Cavallo. He had originally engineered the pegging of the Argentine peso to the U.S. dollar, and was seen as more likely to be able to impose fiscal discipline on Argentina than his predecessor, Lopez Murphy, said Mohammed Grimeh, senior v.p., emerging markets credit derivatives trading at Lehman Brothers in New York. When Cavallo was appointed in the middle of the week, bid levels fell from their previous highs of about 1,000bps for one-year protection to 850bps, said Grimeh.
Prices for credit default protection on Argentina have generally been on an upswing this month. One year protection in early March cost about 550bps. Lopez Murphy announced spending cuts earlier this month, but when severe political opposition developed, protection prices rose to about 850bps.
