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Lull vs Recovery

16 August 2019 by jbchevrel

Argentina risk stabilized in the second half of this week, in the CDS market with the 5y k500 CDS now ~44% so ~-2% tighter on the day and ~-10% tighter from the peak. The curve steepened back also with 1s5s now ~17% and 3s5s now ~5%. Liquidity has now notably improved. The recovery there was a combination of things. Reasons include 1/ Macri's guidance regarding his good conversation with Fernandez 2/ speech by Alvarez Agis (part of Fernandez’s economic team) was market friendly, explaining why they are not going to default (this time…..) 3/ BCRA announced a new regulation (local banks now can have up to 5% of their capital in spot, the idea is to avoid from locals buying spot and selling futures or NDF to take advantage of the carry because Leliq rate is 75% while 1M is 150% 4/ Macri announced (Aug 14th) new economic policies (including freezing CPI-Indexed credits for 4 months, tax breaks, bonuses, higher minimum wages). Now, it remains to be seen whether those affect effective conditions between now and the vote on October 27th but the market reacted positively to it 5/ July CPI came better than expected at 2.2%. Although the new measures/releases/guidance might continue to support sentiment in the very short term, it seems that we would need a shift in investor sentiment regarding the chances that orthodox policies evaporate after the vote to see a re-pricing at the scale of that which followed last weekend’s primary election (Grapple blog as of Aug 12th). Along with that, Fitch just cut the sovereign to CCC from B.