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Pink Tide

12 August 2019 by jbchevrel

The 5y CDS of Argentina (sovereign - ARGENT) widened to multi-year high after the moderate contender for next October election Macri was unexpectedly defeated by Alberto Fernández, whose running team mate is former populist president Cristina Kirchner. The run to the or Casa Rosada has just two months to go. The results were quite clear-cut. Indeed, Fernández (AF) received c48% of the votes, vs c33% for current President Mauricio Macri (MM). And as third came Roberto Lavagna, former economy minister of Néstor Kirchner, with c9% of the votes... So it looks like the probability of AF beating MM, even maybe without a second round, has come higher. As I am writing, the 5y CDS has widened c20% upfront, now paying 38% based on a 500-coupon contract. This is virtually a doubling move, as we had closed Friday just below 18%, after a ‘reasonably’ bullish session. Across other asset classes, ARS lost -19% vs USD, adding to concerns over debt sustainability, and the local stocks (MERVAL index) have lost -34% of its value. This follows a gain of +8% last Friday, on the back of polls showing growing support for MM. The potential dollarization is a key risk in the short term, that adds to the risk of lacking needed structural reforms to support debt sustainability in the more medium term. Indeed, across local time deposits and saving deposits, some c$22B of ARS could go dollarized, which by the way is higher than the c$15B of reserves available. A few months from here, there is now a high likelihood of ARGENT going back out of financial markets, its probability of default at a 5-year horizon having soared to c70% and c40% for the one-year horizon. While the primary doesn’t necessarily 100% reflect what will happen in October vote, market participants are, for now, focused on what had happened under the 8-year long reign of Kirchner that had ended in 2015.