Argentine Risk Compression Likely to Continue

The fall of the price of CDS for Argentina’s sovereign debt is likely to continue as global headlines favor additional compression. With the CDS for the country’s 5-year trading around 650bp, the risk premium has seen a rise since the beginning of the year, when it had fallen as low as 532bp after trading as high as 4216bp in November 2008. Still, investors and analysts say the price could have further to fall. “The likelihood that Argentina would be defaulting in the short to medium term is very very low,” says Daniel Marx, executive director of Quantum Finanzas, an Argentina-based advisory firm specializing in corporate finance and portfolio management. “There is this trend of Argentina converging a bit more to the rest of the merging market, particularly the Latin American countries.” David Rolley, senior portfolio manager for global fixed income at Loomis Sayles, which has $150bn AUM, says that much of the risk compression has been driven by global events, such as rising food prices due to droughts in Russia and China, which could favor Argentina as a major food exporter. Diego Ferro, partner with New York-based Greylock Capital Management, says he sees around 100bp-150bp of upside for Argentina’s CDS if the soft commodity bull market, for products like soy and wheat, continues. “Argentina was mispriced before,” Ferro says, referring to the previous highs reached by the CDS. “It’s still mispriced, just not as dramatically. We still see a little upside.” As the country has been locked out of the international DCM markets since defaulting on its debt in 2001, its debt-to-GDP has declined as GDP has grown in the last decade. But the sovereign still faces attachment risk from holdouts to its bond swap offering, according to Ferro. Several holdouts continue to push for full restitution on the defaulted bonds. That could prevent the country from returning to the international markets anytime soon. “The attachment risks that Argentina faces if it attempts to tap the in