Emerging debt-Argentine debt dumped, overall market unscathed

NEW YORK, June 17 Tue Jun 17, 2008 5:20pm EDT

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NEW YORK, June 17 (Reuters) - Investors unnerved by the increasing rancor between the Argentine government and the nation's farmers fled its assets on Tuesday while leaving much of the rest of Latin America's emerging markets untouched.

New supply of bonds from Indonesia and Jamaica gave evidence of appetite for putting cash to work, although pricing was not considered onerous.

Prices for Argentine bonds, credit default swaps, and stocks were weaker while central intervention helped prop up the currency.

Argentina's benchmark Discount bonds fell 2.25 points in price to bid 77.375 ARGGLB33=RR, while the yield spread for its portion of the JPMorgan Emerging Markets Bond Index Plus 11EMJ.JPMEMBIPLUS widened by 18 basis points to 573 basis points.

Total returns for Argentina fell 1.80 on the index versus a small gain for the overall sovereign dollar-denominated debt market. The overall EMBI+ yield spread widened by just two basis points to 247 basis points in quiet trade.

After nearly four months, Argentina's government has yet to reach an agreement with farmers over a new soy tax plan, sending the country into a pattern of alternating strikes and talks.

Thousands of Argentines banged pots and pans in the streets to protest her handling of the growing crisis.

"This is a significant confrontation that is not coming to an end. Sentiment has deteriorated across asset classes. Direct investment, and investment in securities is deteriorating, clearly," said Pablo Goldberg, global head of emerging market hard currency research in New York.

Argentina is Latin America's third largest economy, which has produced average economic growth rates of 8.0 percent over the last five years in part due to high Asian and European demand for its soybeans, which are trading at record high prices.

"Clearly, Argentina is missing an important opportunity." Goldberg said.

INVESTOR MESSAGE

Investors are not missing the message and are giving one of their own by buying credit protection.

"These farm strikes are getting worse. Latin America away from Argentina is very quiet," said one trader at a U.S. bank in New York.

Argentina's five-year credit default swaps widened sharply on Tuesday amid the growing investor concern, moving 30 basis points to 650 basis points, traders said. That implies a cost of $650,000 per year to insure $10 million worth of Argentine debt for a five year period.

One illustration of the growing worry about Argentina can be viewed against the backdrop of Venezuela, another emerging market that has had a volatile trading pattern.

In early April, an investor would have paid $92,000 less to insure $10 million worth of Argentine bonds versus Venezuela. Now, they would have to pay $106,000 more to insure their Argentine position versus a similar amount held in Venezuela.

Separately, oil-rich Venezuela's new Finance Minister Ali Rodriguez said on Tuesday he would make no big changes to economic policies of his predecessor, who tightened monetary supply but could not slow inflation.

A senior government source told Reuters the government would still go ahead with a public debt buyback plan that was leaked to the media in May.

ISSUANCE

Indonesia tapped the credit markets with an additional $2.2 billion in sales of existing Eurobonds maturing in 2014, 2018, and 2038. The deal was launched at prices of 100.25, 97.25, and 95.50, respectively.

"Indonesia came cheap to the curve," said Merrill's Goldberg.

Jamaica's $350 million 11-year Eurobond was launched at 8.375 percent, the higher end of the yield guidance range whose bottom was 8.25 percent. The bond has a 10-year average life with three equal amortization payments made in 2017, 2018 and 2019.

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