Argentine Debt Swap to Open Financing for Provinces: Week Ahead

Argentina’s planned restructuring this month of $20 billion in defaulted debt will open the way for the country’s 23 provinces to sell bonds as they struggle to cover rising financing needs, Standard & Poor’s said.

The exchange will enable the national government to tap international debt markets for the first time since 2001, making it easier and cheaper for provinces to issue bonds locally and abroad, said S&P analyst Sebastian Briozzo. Speculation the government is nearing completion of the swap drove down Argentina’s borrowing costs by the most in six months in March, with the extra yield investors demand to own the country’s debt instead of U.S. Treasuries sinking 1.60 percentage points.

Provincial financing needs will jump to 26 billion pesos ($6.7 billion) in 2010 from 18.5 billion pesos last year, said Veronica Sosa, an analyst at Buenos Aires research company Economia y Regiones. The local governments’ deficit will swell to 13 billion pesos this year, equal to 0.8 percent of gross domestic product, from 9 billion pesos in 2009, she said. The finances have deteriorated to such an extent that Buenos Aires is paying for some goods and services with promissory notes.

“Giving bonds to suppliers is one of the first things that provinces do when they have liquidity problems,” Briozzo said in a March 30 telephone interview in Buenos Aires. “The situation will continue to deteriorate, but at the same time you’re not talking about deficits that are impossible to finance if the market opens up.”

Argentina will present its final offer to defaulted debt holders on April 14, Economy Minister Amado Boudou said last week.

Bond Yields

Buenos Aires, which accounts for more than a third of the nation’s economy, plans to sell at least $500 million of bonds overseas once the nation’s restructuring is completed, said Felisa Stangatti, a spokeswoman at the provincial Economy Ministry in La Plata. The province’s 2010 budget authorizes the sale of as much as $1.1 billion in local and overseas bonds.

“Yields are going to drop after the swap,” she said in a March 19 interview.

Yields on Buenos Aires’s benchmark dollar bonds also have declined on the prospect the country will restructure its defaulted debt. The yield on the province’s $475 million of 9.375 percent bonds due in 2018 tumbled 3.8 percentage points in March to 13.91 percent, according to Bloomberg data.

Financing Needs

Argentine dollar bonds yielded 6.4 percentage points over Treasuries on March 30, the smallest gap since Jan. 4, according to JPMorgan Chase & Co. The spread was 6.46 points on April 1.

Besides Buenos Aires, the provinces of Mendoza, Neuquen, Cordoba and Santa Fe are among the few regional governments with the management capacity and economic scale to issue bonds abroad, Briozzo said.

Cordoba plans to sell as much as $350 million of bonds overseas this year, according to Alejandro Henke, executive director of Banco de Cordoba, which is owned by the province.

Wages will climb an average of 20 percent this year and account for about 55 percent of provinces’ budgets, according to Economia y Regiones.

Provincial deficits, financed through bond sales and the use of promissory notes and scrip, contributed to Argentina’s record $95 billion default in 2001. Eleven regional governments were printing their own currencies that year.

Promissory Notes

In January and February, Buenos Aires province paid for 850 million pesos of goods and services with 12-month notes, Stangatti said. Another 600 million pesos of bills will be settled the same way by the end of the year, she said.

As many as five provinces may follow Buenos Aires in making payments with notes or other kinds of debt, Economia y Regiones’ Sosa said in a March 16 phone interview.

Rio Negro, in the southern region of Patagonia, may pay suppliers with peso-denominated promissory notes due in 2026 as its budget gap widens to 240 million pesos this year, or 2.7 percent of its GDP, from 150 million pesos in 2009, the province’s Treasury Secretary Ricardo Gutierrez said in a March 18 telephone interview.

Gutierrez declined to say how much of the notes, which will pay interest equivalent to the central bank’s interbank rate, may be issued. They won’t be used to pay salaries, he said.

Tax Sharing

At the other end of the country, Corrientes may be forced to use notes because the central government hasn’t transferred 90 million pesos due under a national tax-sharing regime, Governor Ricardo Colombi said in a statement posted on his province’s Web site on March 10.

Opposition Senator Ruben Giustiniani, who is sponsoring a bill to increase the provinces’ share of a tax on financial transactions, said last month that the portion of national tax revenue the federal government keeps for its own uses has risen to 75 percent from 50 percent five years ago.

Fernandez opposes the proposal, saying on March 15 that it would cost the federal government 10 billion pesos a year.

“If they remove federal funds from one place, they will have to explain which funds the government will have to cut,” Fernandez, 57, said in a speech in Ushuaia, a city on the southern tip of Argentina. “Public works? Universities? Pensions?”

Markets Last Week

Last week, the yield on Argentina’s benchmark 8.28 percent dollar bonds due in 2033 was little changed at 11.44 percent, according to JPMorgan. The peso weakened 0.3 percent to 3.8788 per dollar. The Merval stock index slid 2.7 percent to 2,373.71.

The following is a list of events in Argentina this week:

Event                                        Date
Car Sales (March)                          April 7
Tax Revenue (March)                        April 5
(tentative)
Basket of Basic Goods (Feb)                April 8

Obama, Hu Talks May Let China Avoid Currency Manipulator Brand

President Barack Obama urged China to help balance global growth as strategists said President Hu Jintao’s decision to visit Washington this month increases the likelihood his nation will escape being branded a currency manipulator by the U.S.

Ties between the two countries may be mending after a year marked by disagreements over the yuan’s value, U.S. arms sales to Taiwan and Google Inc.’s decision to pull out of China. In an hour-long call yesterday, Obama sought Hu’s support for Group of 20 pledges to sustain the global economic recovery and for cooperation to help stop Iran from developing nuclear weapons.

Obama “emphasized the importance of the United States and China along with other major economies implementing the G-20 commitments designed to produce balanced and sustainable growth,” the White House said late yesterday in a statement.

Hu’s presence at this month’s nuclear summit improves the chances China won’t be labelled a manipulator when the U.S. Treasury releases its biannual report on exchange rates, said China International Capital Corp., a Beijing-based investment bank that’s part-owned by Morgan Stanley.

U.S. Treasury Secretary Timothy F. Geithner is under congressional pressure to make such a ruling after China kept the value of the yuan unchanged against the dollar for almost two years. Critics say that gives Chinese exporters an unfair advantage.

The Treasury is scheduled to release its report April 15. The New York Times reported today that it may now delay publication. Treasury spokeswoman Natalie Wyeth declined to comment.

Rhetoric Shift

“In the past few weeks, rhetoric has turned sour from both sides, but this development is one of the initial signs” relations are thawing, Hao Hong, Beijing-based global equity strategist at CICC, said in an e-mailed response to queries.

Yuan forwards posted their biggest weekly gain in almost three months on mounting speculation China will loosen its grip on the currency after data showed an economic recovery is gathering pace. Twelve-month non-deliverable forwards advanced 0.2 percent to 6.6491 per dollar as of 5:30 p.m. in Hong Kong, reflecting bets the currency will strengthen 2.7 percent from the spot rate of 6.8256, according to Bloomberg data.

New York University professor Nouriel Roubini said last week the U.S. and China are on a “collision course” over the Chinese currency and investors are underestimating the disruptions for global financial markets. Avoiding the manipulator tag may give China further scope to let the yuan gain to ease inflation pressures in its economy.

China’s Growth

“The latest development should make it more likely for Beijing to start moving away from the renminbi’s current de facto peg within the next few months, if not weeks,” Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong, wrote in a report yesterday. “Since China is growing much faster than most of its trading partners, keeping the de facto peg for too long will only invite more protectionism.”

The Treasury hasn’t labelled any country a currency manipulator since 1994. Five U.S. senators, including Charles Schumer, a New York Democrat, and South Carolina Republican Lindsey Graham, last month introduced legislation to make it easier for the U.S. to declare foreign-exchange misalignments and take corrective action.

Any delay in the report would not be rare given Democratic and Republican Treasury departments historically have released it at their convenience. In January 1999, President Bill Clinton’s Treasury even published a compendium of those that had been due in 1997 and 1998 and President George W. Bush’s administration also repeatedly missed the deadline.

Asset Bubbles

China’s central bank said today that asset bubbles are emerging in parts of the world and in certain industries that may burst unless supported by real economic recovery. Chinese growth in the fourth quarter reached 10.7 percent.

Rapid asset-price increases in major markets since 2009 have been pushed by “ultra-loose” monetary policies by governments around the world and “don’t mean real economies have recovered or will recover strongly,” the People’s Bank of China said in a report posted on its Web site today.

China pegged the yuan at about 8.3 per dollar from 1995 until July 2005, when the government shifted policy and allowed some fluctuation by managing its exchange rate against an undisclosed basket of currencies. After a 21 percent gain in the currency that hurt its exporters, China in July 2008 began restraining the yuan’s value.

If China doesn’t change tack it may face broader pressure to do so after French President Nicolas Sarkozy and U.K. Prime Minister Gordon Brown this week joined Obama in saying the G-20 should take currencies into account in efforts to deliver balanced global growth. G-20 finance ministers and central bankers are also scheduled to meet in Washington this month before a June summit of leaders in Toronto.

Euro May Fall to 13-Month Low on Dead Cross: Technical Analysis

The euro may drop to a 13-month low of $1.2457 should it complete a so-called dead-cross formation, Tokai Tokyo Securities Co. said, citing trading patterns.

A chart of the 16-nation currency shows its 20- and 90-week moving averages are falling toward the 200-week indicator, suggesting a dead cross pattern will be created, said Yoh Nihei, Tokyo-based trading group manager at Tokai Tokyo. A dead cross appears when a short-term average drops below a longer-term one and signals a security is poised to extend losses.

“The euro may dip below $1.30 and test lower prices,” Nihei said in an interview yesterday. An ichimoku chart also indicates “the euro is still in a downtrend,” he said.

The euro traded at $1.3581 as of 8:08 a.m. in Tokyo after declining from last year’s high of $1.5144 in November. The currency slid 5.7 percent against the dollar last quarter, the biggest three-month drop since September 2008.

As the euro weakens, it is likely to encounter levels of support at $1.3268, $1.3091 and $1.2457, Nihei said. Support refers to an area where buy orders may be clustered.

The first support level represents the euro’s lows from March 25 and 26, which was the weakest since May. The second and third levels represent 76.4 percent and 100 percent Fibonacci retracements of the currency’s advance from $1.2457 on March 4, 2009, to $1.5144 on Nov. 25, Nihei said.

Fibonacci analysis is based on a theory that prices rise or fall by certain percentages after reaching a high or low. A break above resistance, or below support, indicates a currency may move to the next level. An ichimoku chart predicts future trends by analyzing the midpoints of historic highs and lows.

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index.

Canada’s Dollar Gains on Stocks, Crude Oil, Parity ‘Imminent’

The Canadian dollar advanced to within one cent of parity with its U.S. counterpart as signs of global economic recovery boosted stocks, commodities and currencies tied to growth.

The loonie, as Canada’s currency is nicknamed, touched C$1.0068 yesterday, its strongest level in almost two weeks. Canada’s dollar strengthened against 11 of its 16 major counterparts over the previous four days as a report on March 31 showed the nation’s economy grew in January at the fastest pace in three years.

“Commodity prices reflect stronger global growth and dulls demand for the U.S. dollar,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group Inc. in Greenwich, Connecticut. “Parity is imminent. It’s very, very difficult to argue against the global economic rebound.”

The loonie gained 1.7 percent to C$1.0095 versus the greenback this week from C$1.0266 on March 26, its biggest gain since the five days ended March 5. One Canadian dollar buys 99.15 U.S. cents. Canadian markets are closed today for the Good Friday holiday.

The Standard & Poor’s 500 Index rose for a fifth straight week, closing yesterday at its highest level since September 2008. Crude oil for May delivery rose 6.5 percent on the New York Mercantile Exchange. Crude oil is Canada’s biggest export.

The Canadian dollar tends to track movements in stocks and commodities. The loonie’s 120-day correlation with crude is 0.61 and 0.67 with the S&P 500. A reading of 1 would indicate they move in lockstep.

Manufacturing Data

Crude oil yesterday gained as much as 1.7 percent to a 17- month high of $85.22 a barrel after economic data from the world’s three largest economies reinforced confidence in the global economic rebound. U.S. manufacturing expanded last month at the fastest pace since July 2004, China’s manufacturing grew for a 13th month and a Bank of Japan survey showed confidence among the nation’s largest manufacturers rose for a fourth straight quarter.

“The tone of data releases were all better-than- expected,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. “Equities and commodities are posting gains. Unsurprisingly, the Canadian dollar as a risk-correlated currency is doing well.”

The Canadian dollar reached C$1.0062 on March 19, the strongest level since July 23, 2008, on speculation the nation’s accelerating economic recovery will spur the Bank of Canada to raise interest rates before the U.S. Federal Reserve.

Gross domestic product increased 0.6 percent in January, the fifth straight gain and the biggest since December 2006, Statistics Canada said this week. Economists surveyed by Bloomberg News had predicted the economy would expand 0.5 percent in the first month of 2010, according to the median of 20 estimates.

Positive Data

“There’s just so much positive economic data coming out of Canada that there hasn’t been anything to shake that sentiment,” said Sacha Tihanyi, a currency strategist in Toronto at Bank of Nova Scotia, Canada’s third-largest bank.

Bank of Canada Governor Mark Carney signaled on March 24 the central bank may raise interest rates as soon as June as inflation and growth outpace forecasts.

“I don’t see any reason why they couldn’t pull the trigger ahead of us,” said Daniel Janis, a money manager in Boston at MFC Global Investment Management, referring to the Bank of Canada and the U.S. Fed in an interview this week. “Within the next six months, there’s going to be an inflection point on rates.”

Government bonds were little changed on the week. The yield on the 10-year security traded at 3.56 percent. The 3.75 percent security maturing in June 2019 rose one cent to C$101.51.