Itaú BBA - Stepping out of Argentina – Sovereign Debt Trade Idea

Latam FI Strategy Monthly

< Back

Stepping out of Argentina – Sovereign Debt Trade Idea

May 7, 2018

We are stepping out of our position long Argentina’s CDS against the Latam average

Monday’s price action shows how Argentina remains vulnerable to changes in global financial conditions, despite the substantial rate hikes and the guidance of a faster fiscal adjustment. The main problems are a wide current account deficit, low international reserves (at 5% of GDP once excluding the central bank’s foreign currency liabilities) and a high share of public external debt. Specifically, net public debt (that is federal government debt excluding borrowing from the financial public sector) is 32% of GDP, and 90% of it is in foreign currency. This leaves the public debt dynamics quite vulnerable to FX depreciation.

Furthermore, while we think the new fiscal targets are feasible, they are certainly ambitious. Higher inflation and a weaker currency will likely provide support to tax collection and the government still has control on around 50% of the primary budget. However, even if the fiscal consolidation is implemented, it could have adverse consequences for Macri’s popularity, casting doubts on the outcome of next year’s presidential elections, which can generate renewed noise in the markets.

After ending last week at 317bps, Argentina’s 5-year CDS increased again to 343bps. Our position long Argentina’s CDS against the Latam average currently posts a 96bps loss (see table below). We are stepping out of it, given the challenges we believe the country will continue to face, amid tighter global financial conditions.



< Back