Argentina Again on the Brink of a Financial Crisis

Argentina just suffered the 2nd-biggest crash for any stock market since 1950. Here’s the short version. Argentina is on the brink of financial crisis. The trigger is the surprising size of the primary election loss of President Mauricio Macri. He lost the primary to socialists Alberto Fernandez and his running mate the former president Cristina Fernandez de Kirschner. The S&P Merval Index fell 48% Monday. That the second largest single day drop for any stock market since 1950. The Argentine peso fell 15% against the US dollar Monday, and extended losses on Tuesday.

Nervous investors…

Investors are worried Argentina will default on its debt… again. The election loss was expected. The margin of defeat was not. In the primary over the weekend, Macri received only 32% of the vote while Fernandez won 47% of the vote. The 15-point lead was much larger than investors had expected, Bloomberg reported.

The size of the loss sent Argentine markets reeling. Investors fear that Macri will not win a second term in October. If that does not happen  the socialists will undo the progress Macri has made regaining investor trust.

The conservative leader ran on a campaign of austerity for the nation. He secured a record $56 billion bailout from the International Monetary Fund in 2018. If Macri loses, Fernandez may attempt to renegotiate Argentina’s debts with the IMF.

The debt

Argentina has billions of dollars of foreign-currency debt due over the next year, according to Bloomberg. There is $15.9 billion in debt payments is due in 2019. There is another $18.6 billion in bond principal, loans and interest payments.

Argentina’s 100 year bonds sank to a new low. The 100-year government bond was issued roughly 2 years ago for $90 with a rate of 7.125%, according to Bank of America Merrill Lynch.

Investors are now fleeing the country’s assets. This is leading industry watchers to question if default is on the horizon. The country has struggled with fiscal policy for years. It has defaulted before. It defaulted once in 2001 and again in 2014, under then-president Fernandez de Kirchner.

On Monday, credit-default swaps indicated traders were expecting a 75% chance Argentina will suspend debt payments in the next five years. That is up from a 49% chance in on Friday, Bloomberg reported. Government bonds tumbled 25% on average. Some prices fell to as low as 55 cents on the dollar, according to Bloomberg.

Conclusion

Macri still hopes to reverse the result in October. In a press conference Monday, he said that his economic team is working to address voter concerns about the economy. However the market selloff shows that there isn’t widespread confidence in his opposition, Bloomberg reported.