By James Attwood and Drew Benson
Oct. 22 (Bloomberg) -- Argentina's bonds and stocks plunged for a second day as a planned government takeover of $29 billion of pension funds stoked concern the South American country is headed for its second default this decade.
President Cristina Fernandez de Kirchner's bid to seize the private funds is undermining investor confidence that was already faltering as prices on the country's commodity exports tumbled and a five-year-old economic expansion began to sputter. The last time the government sought to tap workers' savings to help finance debt payments was in 2001, just before it halted payments on $95 billion of bonds.
``It's the final of many nails in the coffin from an institutional investor perspective,'' Bill Rudman, who helps manage $3 billion of emerging-market equity at WestLB Mellon Asset Management in London. Argentina is ``disappearing into irrelevance,'' he said.
The yield on the government's 8.28 percent bonds due in 2033 surged 3.2 percentage points to 27.91 percent at 10:10 a.m. in New York, according to JPMorgan Chase & Co. The bonds yielded 12.16 percent a month ago. The price dropped 4.11 cents to 25 cents on the dollar, leaving it down 11.91 cents in the past two days. The benchmark Merval stock index plunged 7.2 percent, extending its decline this week to 20 percent.
The private retirement system, set up in 1994 to help bolster capital markets, owns about 5 percent of companies listed on the Buenos Aires stock exchange and 27 percent of shares available for public trading, data compiled by pension funds show.
The government's proposal to take control of 10 funds, including units of London-based HSBC Holdings Plc and Bilbao, Spain-based Banco Bilbao Vizcaya Argentaria SA, still needs congressional approval. BBVA fell 6.5 percent in Madrid.
Repsol Drops
Repsol YPF SA, Spain's biggest oil producer, slid 13 percent in Madrid, the steepest intraday decline since 1997. Repsol owns YPF SA, the largest oil company in Argentina, and said last month it would announce in November a date for the delayed sale of a 20 percent stake in YPF on the local stock market.
Fernandez, 55, said yesterday her decision is ``in a context where the biggest countries'' are taking steps to protect their banks because of the global financial crisis.
``Instead, we're taking them for our retirees and workers,'' she said during a rally in Buenos Aires.
Argentina's borrowing needs will swell to as much as $14 billion next year from $7 billion in 2008, RBC Capital Markets, a Toronto-based unit of Canada's largest bank, said yesterday.
South America's second-largest economy has been shut out of international capital markets since its 2001 default. Holders of about $20 billion of defaulted bonds rejected the government's 2005 payout of 30 cents on the dollar. Fernandez said last month she's considering offering those holdouts a new deal, part of an effort to regain access to foreign financing.
Argentina's Bonds
The cost of protecting Argentina's bonds against default soared today. Five-year credit-default swaps based on Argentina's debt jumped 3.67 percentage points to 35.83 percent, according to Bloomberg data.
Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality.
The proposed takeover ``makes the chance of default in the short-term less likely by inflicting immense damage to the long- term credibility of the government and the financial system with its own people,'' said Paul McNamara, who helps manage $1.2 billion of emerging-market assets at Augustus Asset Managers Ltd. in London.
`Enormous Error'
The peso was little changed today, rising 0.1 percent to 3.2150 per dollar, as traders said the central bank intervened in the foreign exchange market to shore up the currency.
Amado Boudou, the head of Argentina's social security administration, said yesterday the government will keep the same investment mix for the funds, with 60 percent in bonds and 10 percent in stocks. He called the privately run system an ``enormous error.''
About 55 percent of the 94.4 billion pesos ($29.3 billion) held by the private pension funds is invested in government debt, according to the pension regulator's Web site. A takeover would allow the Fernandez administration to write off the sovereign bonds held by the funds, said Javier Salvucci, an analyst with Buenos Aires-based Silver Cloud Advisors.
`Short-Term Fix'
``It's a short-term fix that may cause more fiscal and macro pain in the long haul, which has been typical of the last two administrations,'' said Will Landers, who manages $5 billion in Latin American equities at BlackRock Inc.
Since the pension system began in 1994, trading volume on the Buenos Aires stock exchange has quadrupled. The funds were net buyers of domestic equities for a third straight month in September, investing about $144 million, according to Deutsche Bank AG. They have about $4.1 billion in domestic stocks, strategist Guilherme Paiva wrote in an Oct. 15 note.
The government's plan is ``one additional factor to count against Argentine assets,'' said Vinicius Silva, an emerging market strategist at New York-based Morgan Stanley, which recommends that emerging-market equity investors have a ``zero' weighting in the country.
Economic Slowdown
Nestor Kirchner, Fernandez's husband and predecessor as president, began tightening restrictions on private pension funds last year, requiring them to keep more investments in the country to sustain economic growth. The rules forced the funds to ``repatriate'' about $3 billion in mostly Brazilian assets, Sebastian Palla, chairman of the country's pension fund association, said in February.
Foreign emerging-market funds sold about $250 million in Argentine stocks through August this year in the biggest outflow since 2000, according to fund flow tracker EPFR Global in Cambridge, Massachusetts. The Merval is down 55 percent this year compared with a 42 percent decline for the Bovespa in neighboring Brazil.
The slide reflect concern that a 40 percent drop in commodity prices since July will throttle growth in South America's second-biggest economy. Argentina gets more than half its export revenue from wheat, soybeans, corn and other commodities.
Growth will slow to 5 percent this year and 2.5 percent in 2009, RBC Capital Markets said. The economy expanded 8.8 percent on average over the past five years as Kirchner and Fernandez used surging tax receipts to boost government spending on everything from civil servant pay rises to energy subsidies.
`Much, Much Worse'
Seven years ago, as the government tried in vain to stave off a debt default, it pressured the pension funds to participate in bond swaps that pushed forward repayment dates. That December, strapped for cash to pay salaries, it ordered the funds to transfer $3.2 billion in bank deposits to state-owned Banco de la Nacion.
The latest move is ``much, much worse,'' said McNamara at Augustus.
``It's not just shoving a little bit of debt in at the edge, it's taking over the whole system,'' McNamara said. ``It does even more damage to the concept of encouraging people to invest in the domestic financial industry.''
To contact the reporters on this story: James Attwood in Santiago at jattwood3@bloomberg.netDrew Benson in Buenos Aires at Abenson9@bloomberg.net
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