Argentina on the Rebound

On March 29, Argentina?s Congress approved a package of emergency measures known as the Competitiveness Law, granting the government special powers to cope with the country?s economic crisis. Markets hope ? but are not fully convinced ? that these measures can help Argentina avoid a payments crisis on its $123.7 billion foreign debt. The day after Congress voted the measures through, Argentina?s benchmark FRB bond fell 0.8% to 84.10, pushing its yield up to 14.8%. Concern is growing over the impact of Argentina?s crisis on neighboring Brazil (see Done Deal, page 52). Issuers throughout the region are on the sidelines, waiting to see the outcome in Argentina before returning to the market.
Moody?s Investors Service cut Argentina?s ratings to B2 from B1 on March 28 and held the sovereign on review for a further downgrade. Fitch lowered Argentina?s sovereign rating to B+ from BB-. Fitch also kept Argentina on credit watch with a negative outlook, following Standard & Poor?s lead. S&P had downgraded Argentina to B+ from BB- on March 26. It also put Argentina on a negative credit watch.
S&P now rates Argentina below Brazil and holds it at the same level as Bolivia and the Dominican Republic. Moody?s rates Argentina one notch below Brazil, Bolivia and the Dominican Republic and at the same level as Honduras, Nicaragua, Paraguay and Venezuela.  S& P predicted that Argentina would miss first-quarter targets agreed with the International Monetary Fund as part of last December?s $39.7 billion rescue package. The rating agency warned that ?although ongoing IMF and official creditor support is likely in the near term, such support would be increasingly at risk if targets continue to be missed.? However, markets rallied after Congress granted the Argentine government emergency powers for one year to deal with the economic crisis. The dismal mood in Buenos Aires shifted completely once Congress approved a limited package of powers for Domingo Cavallo, the new economy minister. He is now authorized to:
? Restructure the state by merging or abolishing ministries and reorganizing government agencies. He cannot fire public sector workers or cut wages. He may not privatize Banco de la Nación Argentina, the country?s largest bank.
? Reduce taxes, duties and fees. He is not allowed to increase any tax rates. Cavallo may eliminate exemptions (or approve new exemptions) from current taxes.
? Reduce restrictions and regulations on businesses; deregulate the capital markets and ease controls on the insurance industry.

? Approve a higher capital gains tax on share and bond transactions.

Cavallo has introduced a 0.25% tax on financial transactions, which he is authorized to increase up to 0.6%. He cracked down on tax evasion by banning cash payments in excess of $1,000. Payments larger than this must be made either by check or credit card.  This, plus a rise in import tariffs should be enough to cover the government?s $500 million monthly budget deficit. The government hopes this will eliminate the government?s financial crisis, restore consumer confidence and cut the operating costs of Argentine companies.

Colombia Reopens Issue
Colombia reopened its 11.375%, 2008 euro-denominated bond first issued in January with a ?200 million issue on March 16 in a deal run by BNP Paribas and Deutsche Bank. BBVA was joint lead manager, which distributed the paper to local institutional investors through its Banco Ganadero subsidiary. About two-third of the bonds were placed with European investors and the remainder with Colombian pension funds. The paper was priced at 664 basis points over the 5.25% January 2008 Bund. The sovereign, plus joint leads J.P. Morgan and Goldman Sachs are marketing a ten-year, $1.5 billion maximum World Bank-guaranteed bond. They hope to launch the bond in April.

Uruguay Back in Japan and Chile
Uruguay issued a five-year ¥30 billion Samurai bond for the first time since 1997. The issue yields 143 basis points over yen-Libor and carries a 2.2% coupon. Uruguay is one of just four Latin American investment grade sovereigns and, like Brazil?s ¥80 billion issue, the bond sold well among retail investors. Uruguay needs to raise $950 million this year and originally planned to offer a 10-year Samurai, but was forced to retreat for lack of interest. Merrill Lynch and Nomura Securities managed the deal.

Uruguay revisited the Chilean market with its second Chilean peso-denominated bond. The sovereign raised Ps 88.2 billion ($150 million). In November 2000, Uruguay issued $142.5 million in Chilean pesos, becoming the first sovereign to issue in a Latin American currency other than its own. Chile and Uruguay are both investment grade credits. El Salvador and Mexico are the region?s two other investment-grade sovereigns. J.P. Morgan managed the Chilean peso deal. Chase, prior to its acquisition of J.P. Morgan, led the November issue.

Brazil Raises ¥80 Billion
Brazil followed Uruguay into the Samurai market on March 16, raising ¥80 billion with a six-year issue. The sovereign originally planned to raise ¥60 billion. The bond, led by Nomura Securities and Kokusai Securities, pays a 4.75% coupon, at the top of the pricing range.
The bond was priced at a spread of 402 basis points over yen-Libor, which swapped into dollars at around 475-485 basis points over Treasuries.  Spreads were around 490 basis points for comparable Brazilian paper. The bond was pitched heavily to retail investors, who are again hungry for yield as domestic rates plummeted.