Argentina Default Rumors Panic Latin American Market Investors

The ugly specter of a debt default by Argentina returned with a vengeance Friday, as rumors of an imminent economic meltdown led panicked stock and bond traders to exit Latin American markets en masse.

Argentina’s Economy Minister Domingo Cavallo attacked the swirling rumors of default as “irresponsible,” but traders still appeared to be betting that the nation’s troubled economy would soon collapse under the government’s $128-billion debt load.

One measure of investors’ fear--the spread between the yield on Argentine government bonds and safe-haven U.S. Treasuries--widened 1.06 percentage points to 10.51 points by Friday afternoon.

The benchmark Merval stock index dived 6.3% in heavy turnover, though at 420.16 it remained above its late-March low.

Brazil’s main stock index plunged 5.1% and the Mexican market sank 1.3%.

“The psychology of fear has forced a lot of traders to get out on the concerns that there may be a default. Not very many people really believe it, but there is some panic,” said Juan Plett, an equities trader for Mackintosh brokerage.

Former President Carlos Menem, the opposition Peronist leader who ran Argentina from 1989 to 1999, added fuel to the fire Friday by advising people to buy U.S. dollars. He said Cavallo’s plans to revalue the peso by pegging it to an average of the dollar and the euro would mean a devaluation.

For 10 years the peso has been pegged to the dollar alone.

“I think this maneuver would devalue our currency, and that is why I would advise Argentines who have a peso in their pocket to convert it to dollars as soon as possible,” said Menem, a proponent of junking the peso and adopting the dollar as official tender.

“The long knives are out,” a hedge fund manager said.

Traders were hard-pressed to come up with a concrete reason for the panicked activity, although many said the market was simply rattled by several months of uncertainty.

But Friday’s turmoil was another blow to Cavallo, appointed last month to boost the economy after a 33-month slump.

The swirling rumors mimicked those heard in March, when Argentine bonds and stocks plunged on fears the stagnant economy would not produce enough revenue for the government to meet its hefty debt requirements.

Markets became jumpy again earlier this week after Cavallo proposed the new currency-pegging plan.

Even though the plan would not go into effect until the dollar and the euro reach parity--not expected to happen for months or even years--some economists fear it could shatter already weak consumer confidence.

In addition, the government has billions in debt coming due in the next few months and has pressured local banks and pension funds for financing as international investors demand rates the country isn’t willing to pay.

Meeting with investors in London on Friday, Cavallo said there was no risk of a debt default and once again attacked rumor-mongers. “We will never consider that alternative [default],” he said.

Some economists said that default was a long way off.

“Default is not just around the corner. Argentina has the local resources and those from its [IMF-led, $40-billion] financial package to take care of its commitments,” said Martin Redrado, economist for Fundacion Capital consultants.