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Fears Ease of a Default by Argentina
April 2013

Argentina's credit-default swaps have made a comeback on expectations that the country will find a way to pay its existing bondholders despite complications posed by a high-stakes court case.

The cost of five-year protection on Argentine debt fell to 2,737 basis points Thursday morning from nearly 3,417 basis points on Monday, a significant decline after days of successive increases amid concerns that the South American country would be forced by court rulings into a technical default.

"The market has started to price in the probability of some good news," said Siobhan Morden, head of Latin American strategy at Jefferies.

She added that the retreat began after Argentina's announcement early Wednesday that it would borrow $2.33 billion from its central bank's foreign-currency reserves to pay its creditors. The measure raised hopes among market participants that Argentina may be working on a backup plan for repaying its existing bondholders, Ms. Morden said.

Argentina's credit-default swaps had risen to successive four-year highs on Monday and Tuesday, after the government late Friday filed a proposal to pay holdout creditors, who haven't accepted earlier debt restructuring deals and who have taken Argentina to court in the U.S. The proposal was widely viewed as a lowball offer that would not likely find favor with either the court or those holders of its defaulted debt.

That raised fears that if Argentina couldn't reach a deal to pay the holdout creditors, it wouldn't be able to make payments on its other bonds under a U.S. District Court ruling requiring Argentina to give equal treatment to all creditors.

But the sharp market reversal Wednesday and early Thursday suggests that such fears have dissipated somewhat.

The U.S. appeals court has given the holdout creditors—who rejected two previous debt exchanges in the years since the country defaulted on almost $100 billion in 2001—until April 22 to file a response to Friday's proposal. That might have come as a relief to some investors as it bought Argentina at least three more weeks in which devise a way to stay current on its other bonds.

Still, even with the latest retreat in the cost of insuring Argentina's debt, both Argentina's bonds and the credit-default swaps remain priced at levels implying significant risks of default over the next five years.

"Investors are still very cautious on Argentina," said Ms. Morden of Jefferies. She added that Argentine bonds see very little trading volume and so are susceptible to distortion from a couple of trades.
http://www.mendozasun.com/business-a-finance/national/2133-fears-ease-of-a-default-by-argentina