Argentine Stocks Fall 8.7% on Debt Moratorium Talk

After weathering Brazil’s devaluation earlier this year, Latin America confronted another brewing crisis in Argentina on Monday when stocks fell 8.7% after a presidential candidate issued a call for a debt-repayment moratorium.

Although economists say chances of a Russia-style debt default are remote in Argentina, the comments by candidate Eduardo Duhalde added to the jitteriness of the nation’s markets, already rattled by a deepening recession, rising unemployment and looming political turmoil.

The campaign to elect a successor to President Carlos Menem in October has been fueled by populist rhetoric, and the comments by Duhalde, now governor of Buenos Aires state, were seen in part as political posturing. Argentina’s public- and private-sector foreign debt totals about $130 billion.

Still, Duhalde’s promise that he would seek Pope John Paul II’s support for a one-year debt-repayment moratorium for emerging-market nations, including Argentina, may be a sign of a “big crack in the orthodoxy” of adherence to free-market reforms, said Gary Hufbauer, senior fellow at the Institute for International Economics in Washington. “For any of the presidential candidates to seriously propose anything like this is quite a departure from the ‘hard currency, pay our debts, no moratorium’ approach that Argentina has been taking up to now,” Hufbauer said.

The worsening situation raised speculation that the International Monetary Fund would intervene as a preemptive move by offering a contingent credit line that the IMF has established to head off emerging-market crises.

“The money would help tide the country over through the election and allay investors’ concerns,” said Michael Gavin, who is research director at Warburg Dillon Read in Stamford, Conn., and a former chief Latin America economist at the Inter-American Development Bank. “The markets need assurance about not what the outgoing government will do but what the incoming government might do.”

The news shoved Argentina’s main Merval stock index down 8.7% to 453.86, a three-month low. Most of Latin America’s other stock markets followed the Merval lower in a demonstration of the region’s sensitivity to its problems. Brazil’s and Mexico’s leading market indexes lost 2%, and Chile’s slipped 1.1%. Markets in Colombia, Peru and Venezuela also fell.

Argentina’s economy has been reeling ever since the devaluation of Brazil’s currency in January. Virtually overnight, the devaluation made Argentine products less affordable in neighboring Brazil, which consumes 30% of all Argentina’s exports, and in countries where the two nations compete for business.

Fears have been building since the devaluation that Argentina would inevitably be forced to follow suit and to devalue by abandoning its currency’s “convertibility,” or its direct peg to the U.S. dollar. Under the policy, Argentina issues pesos, its national currency, equal to the number of U.S. dollars it holds in reserve.

The policy, in force since 1991, has been a keystone of Argentina’s economic recovery this decade, but has made its products less competitive on the world market since Brazil’s devaluation. Exports overall are down 12% this year, and auto exports are down 59%.

Even before Brazil’s devaluation, Argentina’s farmers had been hammered by steady price declines on world markets for the country’s prime agricultural exports, such as wheat, cattle and soybeans. Agriculture accounts for more than half of all Argentine exports.

The Argentine currency’s link to the dollar also makes it unusually susceptible to interest rate increases in the U.S., such as the Federal Reserve’s most recent quarter-point raise, said David Malpass, chief international economist at Bear Stearns & Co. in New York. “The pressure is mounting in Argentina,” he said.

Declining trade and rising interest rates have put Argentina in a tightening vise of costlier debt and widening fiscal and trade deficits. Chances of much-needed labor and fiscal reforms that would help ease the pressure are slim in this highly charged election year. Argentina’s economy is expected to contract by 2.5% this year, according to economists.

Asked to account for Argentina’s sinking stock and bond prices, Siobhan Manning, Latin American debt strategist at PaineWebber in New York, said investors are “contemplating the worst-case scenarios.”

“Argentina is still a stronger credit than Brazil, but an environment where there is a lot of uncertainty and populist campaign rhetoric to attract voters is not a situation to build investor confidence,” Manning said.

Even the hint that Argentina could declare a debt-repayment moratorium or abandon the dollar peg is “another monster shot at Latin American markets which doesn’t do anyone any good,” said Warburg’s Gavin. “If there is a country that has stood for liberal, market-oriented policymaking, it’s Argentina. They have played by the rules and are perceived as one of the top performers in policy reform in emerging markets.”

Talk of a moratorium has surfaced before in the highly charged presidential campaign. Another candidate issued a similar proposal before retracting it.

Monday’s decline in Argentina’s Merval stock index was the largest since Brazil’s currency began falling Jan. 13. Bond markets, fearful of a moratorium or devaluation, have punished Argentina’s sovereign bonds. Argentina’s 10-year bonds now sell at yields of 14.1%.

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Angst in Argentina

Recession and political uncertainty have sent investors running for cover. Monthly closes and latest for the Merval stock index:

Jan. 1997: 692.51

Monday: 453.86

Source: Bloomberg News