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ECONOMY | 19-08-2019 08:11

Fresh turmoil on cards after Dujovne resignation, debt downgrades

Negative headlines may unleash a fresh bout of market turmoil after a brief respite at the end of last week. Argentina’s global bonds will be the first to react, while the nation’s currency and stock markets remain closed on Monday due to a local holiday.

Life just got a whole lot tougher for Argentina’s Mauricio Macri a week after his shock primary-election defeat sent markets into a tailspin.

The embattled president is suddenly grappling with the resignation of his economy minister and a double downgrade to the nation’s debt. Meanwhile, his opponent Alberto Fernández, now favourite to win the presidency on October 27, is calling on Macri to renegotiate the terms of a record $56 billion credit line with the International Monetary Fund.

The slew of negative headlines may unleash a fresh bout of market turmoil after a brief respite at the end of last week. Argentina’s global bonds will be the first to react, while the nation’s currency and stock markets remain closed on Monday due to a local holiday.

“This will inject more uncertainty,” said Nader Naeimi, the head of dynamic markets at AMP Capital Investors Ltd. in Sydney. “It puts a huge question mark over the creditworthiness of the country and is likely to further pressure the peso and Argentine bonds. We are staying out.”

Economy Minister Nicolás Dujovne, who led bailout negotiations between Argentina and the IMF last year, stepped down on Saturday, saying in a letter to Macri that the country needs “significant renewal in the economic area.” Hernán Lacunza, economic minister for Buenos Aires Province, will replace him.

Dujovne’s resignation came a day after Argentina’s credit profile was cut deeper into junk territory by Fitch Ratings and S&P Global Ratings. Both cited the possibility of a sovereign debt default.

IMF and default

The IMF bail-out had been instrumental in Macri’s strategy to stabilise the peso and ensure the country’s solvency. Yet, in an interview with La Nación published Sunday, Fernández said the deal needs to be reviewed because Argentina isn’t meeting the targets it agreed upon. He added that it’s “impossible” to repay the IMF on time, and that the only solution is to reschedule payments, according to the newspaper.

In a separate interview with Clarín, Fernández had a mixed message about the possibility of default. While saying the sensible thing is for Argentina to keep paying its obligations, he added that the country already finds itself in default conditions, as signaled by bond prices.

The implied chance that Argentina will miss a debt payment, as measured by credit default swaps, soared last week. The Merval stock index lost 45 percent in dollar terms in the five days through Friday, bond prices tumbled about 30 percent and the peso weakened 18%.

“While Argentina has been trading at distressed price levels already, we expect further downside on this news as it highlights an increased likelihood of a credit event,” Citigroup Inc. strategists including Dirk Willer wrote in a report.

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