Miguel Kiguel knows what it’s like to be in the bond market frying pan. As vice minister of economics under president Carlos Menem, he was in the kitchen when the temperature was soaring. “At that time, when it was really rough, I admit I would have welcomed the Venezuelan bond purchases, but now times are not rough,” he tells Emerging Markets. “Argentina doesn’t need Venezuela.” Argentina’s hermetic economic executives seem to beg to disagree.
President Hugo Chavez and his financial officials have bought approximately $4.2 billion in Argentine bonds, including the $750 million tranche agreed to in late February, bringing the total to nearly half that of the country’s repayment to the IMF. That may not prove that Argentina is suffering from “Caracas co-dependency”, but, according to several Wall Street market analysts, it’s a factor in making Argentine bond market predictions a bit like batting on a sticky wicket. “Argentina’s bond market is in a very bizarre situation,” says Lehman Brothers analyst Guillermo Mondino.
The yield curve, according to Mondino, is evidence of massive distortions, with a flat to inverted curve whose short end is heavily warped by the sales to Venezuela. The transactions, market participants claim, lack transparency and have given rise to suspicions about where the paper trail leads. One bond trader, who insisted on anonymity, explained that the operations have undermined the Venezuelan effort to control capital flows and are basically a means by which the Andean nation, desperate to get dollars outside of the official market, is able to do so.
Suspicions also exist that Argentine officials are able to siphon off some of the transaction fees for their own or government purposes. If Venezuela’s helping hand weren’t enough to stir uncertainty into the market mix, Argentine officials added their own flavours when, in February, Indec, the government statistics gathering agency responsible for official estimates of GDP growth, inflation, unemployment and other economic data records, became the subject of a suspicious government-led reshuffle. Shortly after, Graciela Bevacqua, director of the Consumer Price Index and a long-serving technician, was removed, and over 200 economists signed a statement of protest at what they believe is an attack on the credibility of vital government statistics.
This might have been a tempest in a boiling teapot but for the significance of the price index and inflation figures on large categories of bonds tendered in the foreign debt restructuring, whose payment is tied to economic growth and inflation. The bonds were initially met with disquiet in international financial circles, which overlooked their significance and did not even assign them pricing targets. Since the debt swap, however, they have become market favourites, with valuation increases to match the economic and price upswings.
Last year the growth-adjusted bonds almost tripled in price. Miguel Kiguel thinks that the damage done by the inept intervention in Indec will persist even though the bonds recovered within days of the botched operation. “The bonds will never be the same, and more risk-cautious investors reduced or reassigned their exposure,” he says. Investors looking for the higher yields and willing to accept greater risk have taken their place. “They know they’ll get cheated a little – two or three points – but they are still attractive in this environment.”
Daniel Marx, another veteran of Argentina’s economic temperature swings, predicts that the bond markets will digest the Indec scandal if it stays within bounds. “There is demand, there is liquidity and the fundamentals are more sound than in years,” he pointed out. By and large, market analysts agree. “We learned, especially in the debt restructuring, that investors are forward looking,” Kiguel concludes. —J.E.