Cristina Fernández, Argentina’s president (pictured), maintains her government has not “clamped” the dollar, despite imposing a rash of restrictions on greenback purchases in recent months.

Try telling that to the northern province of Chaco. It says it was forced to settle a dollar-denominated bond in pesos because it could not get hold of the dollars to meet the $260,000 payment. Argentine bonds fell 1.3 per cent on Tuesday, the first trading day since Chaco’s weekend announcement (Monday was a holiday in Argentina).

Technically, that could be classed as a selective default – it would be in the case of sovereign debt, Moody’s says – and, as such, sets a worrying precedent in a country whose name remains inextricably linked with the biggest sovereign default in history. Is this, investors could be forgiven for wondering, the start of a pesification of dollar debt in Argentina a decade after its default on nearly $100bn?

That is a worry given that many provinces such as Buenos Aires are strapped for cash and several have issued or are considering issuing new debt, like Cordoba’s issue in July.

Not so fast, say Barclays analysts Alejandro Grisanti and Sebastian Vargas in a note to clients:

We think that the event could push the province into, technically, “selective default.” Eventually, corporations and provinces with local law, hard currency issues that have conditions similar to the Chaco bond would follow suit. [However, the] number of corporate and provincial bond issues that fall in this category is very limited and the amounts involved are, in macro economic terms, negligible in terms of the savings of dollar reserves.

The province of Chaco is run by Jorge Capitanich, an ally of the president’s, which makes the situation harder to understand. As Grisanti and Vargas wondered:

Why did the authorities risk pushing Chaco into “selective default” if dollar reserves savings were low? Why did the authorities refrain from granting an exception to those issuers/debtors affected by July’s regulatory changes [on official exchange rate operations]. And on the other side, why didn’t the province swap these bonds into a peso indexed bond, for instance, to avoid a disruptive credit event? These questions remain unanswered and give rise to justified investor preoccupation. However, it does not seem to us that this should be interpreted as an intentional step of the authorities towards a larger scope pesification of hard currency debt. It does seem to show, however, that the administration is not taking into account the effect on markets when making decisions, even if the consequences of its actions mean an increase in the perception of risk of investors and increased financial costs for the provinces, corporations and federal debt.

Muddling through is, according to Diego Ferro at Greylock Capital, the hallmark of the Fernandez administration. But he told beyondbrics: “Even though it sounds counterintuitive, Argentine debt remains a very good investment alternative, especially the GDP warrants, because government policies focus on making sure the economy grows and they pay the debt [at the national level].”

So, embarrassing though Chaco’s situation is – and worrisome though it may be because of knock-on effects to other provinces or corporate debt – it’s probably not a problem for Argentina’s overall status. As Grisanti and Vargas said:

Our expectation is not a pesification of provincial or corporate external law bonds and we would not recommend selling on the back of this news. In addition, we think that provincials have already priced a significant default probability. We would be buyers of [Argentine bonds] Bodens and Bonars on weakness due to this particular news, as our perception of credit risk has not changed over the weekend.

A selective default is business as usual then. That might be the most worrying thing of all.

Related reading:
Argentine leader defies her critics, FT
Parallels between apartheid and Argentina, FT
Yo ho ho! Argentine ship seized, beyondbrics
Argentina: double vision, beyondbrics

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