August 30, 2019 / 12:02 PM / 3 months ago

UPDATE 4-Argentine credit rating cut triggers automatic pension fund sales, asset prices fall

(Adds central bank foreign exchange market intervention, quote from emerging markets strategist)

By Marc Jones and Hugh Bronstein

LONDON/BUENOS AIRES, Aug 30 (Reuters) - Argentina’s battered bonds were driven still lower on Friday after a credit rating cut from Standard & Poor’s triggered automatic selling mechanisms at big German pension funds.

Risk spreads blew out to levels not seen since 2005 while the local peso currency extended its year-to-date swoon to 36%, forcing renewed central bank market intervention and intensifying worries about the government’s ability to honor its dollar-denominated debt.

S&P Global slashed Argentina’s rating to CCC-, the deepest area of junk debt, saying a government plan announced on Wednesday to “unilaterally” extend the maturities of many bonds had triggered a brief default.

The cut took the average rating between the big three rating firms - S&P, Moody’s and Fitch - down to CCC. For many big German institutions that level is classed as too risky to hold under Versicherungsaufsichtsgesetz or VAG rules.

The rules require funds to sell within six months.

Argentina’s 2033 euro-denominated bonds slumped 4.7 cents and a 2027 version dropped nearly 2 cents . The peso traded 2.48% weaker at 59.37 to the U.S. dollar, extending losses so far this year to 36.49%.

“A CCC rating is actually more meaningful than a default (rating),” Aberdeen Standard’s head of emerging market sovereign debt Edwin Gutierrez said.

“German pension funds can’t hold CCC so that is actually the bigger trigger for selling,” he said, adding that its rules weren’t as strict on default-stricken bonds.

Argentina’s “Century Bond” maturing in 2117 traded at a record low below 39 cents on the dollar, showing the kind of write-down markets are now bracing for.

Friday’s selling extended the rout in Argentina’s markets since business-friendly President Mauricio Macri was thumped by populist-leaning Peronist Alberto Fernandez in primary elections this month. The general election, with Fernandez now the clear front-runner, is in late October.

Argentina’s more widely held international dollar bonds fell further too. The July 2028 dropped 1.4 cents while the 2022 issue dropped 2.5 cents.

Argentine spreads measuring risk of default versus safe-haven U.S. Treasury paper blew out 212 basis points to 2,483 on Friday, their highest since 2005, according to JP Morgan’s Emerging Markets Bond Index Plus index.

The central bank said on Friday it would start buying short-term debt from local mutual funds affected by the government’s plan to extend its bond maturities. Funds were adjusting their operations to be able to function “normally”, according to a release issued by Argentina securities regulator on Thursday.

BURNING THROUGH RESERVES

The central bank sold $169 million in reserves on Friday at an average 59.1301 pesos per dollar in its first currency market intervention of the day, traders said.

It spent $367 million in interventions on Wednesday and $223 million on Thursday in its effort to defend the peso. The bank’s dollar reserves are down around $10 billion in August from $68.7 billion at the start of the month, according to official data.

Investors in Argentina fear a return of the left to power could herald a new era of heavy government intervention in Latin America’s third-largest economy.

They also fear the plan to extend maturities will do little more than buy time and fail to prevent a more serious financial crisis further down the line.

“What triggered this week’s mess was that local investors lost confidence in the government,” said Roger Horn, executive director and senior emerging market strategist at SMBC Nikko Securities America in New York.

“People are selling what they can because they want to decrease exposure to Argentina. They’ve already taken losses, they don’t see a way forward that is going to restore them, so they’re cutting exposure,” Horn said.

“It’s a classic capitulation.”

Reporting by Marc Jones in London; Hugh Bronstein, Walter Bianchi, Gabriel Burin and Hernan Nessi in Buenos Aires; Rodrigo Campos in New York; Editing by David Gregorio and Tom Brown

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