Argentina’s Debt Auction Is Canceled; Markets Sag

Argentine bonds and stocks tumbled again Monday after the government balked at paying soaring interest rates and canceled a planned debt auction--adding to investor concerns that the country won’t meet payments on its $128-billion debt.

The annualized yield on the government’s most actively traded bond leaped to 22.1%, highest since September 1998. That yield suggests that global investors consider Argentina riskier than Russia.

The nation’s main stock index slid 2% to 411.53. But other Latin American markets were mixed. Brazil’s main index gained 1.4%, while Mexico’s fell 1.1%.

Argentina suspended a sale of up to $750 million in bills and bonds scheduled for today, after talks with banks broke down over the weekend. The government, which needs local banks and pension funds to cover about half its financing needs of $22 billion this year, had put pressure on banks to lend at below-market rates.

The failure to reach an agreement with the banks heightened concern that the cash-strapped nation may not meet its debt payments amid a three-year recession and a soaring budget deficit.

Argentine Economy Minister Domingo Cavallo sought to reassure investors he would be able to hold the budget deficit in check and meet debt payments. “By Tuesday or Wednesday, we will have everything under control,” Cavallo said. “Those who bet against Argentina are going to lose.”

Analysts said Argentina’s financial problems may force the government to restructure some of its debt or seek additional emergency aid from multilateral lenders such as the International Monetary Fund. Late last year, the IMF helped arrange $40 billion in credit to ward off default concerns.

Cavallo said he expects within days to reach an agreement with the IMF on tax increases and spending cuts to rein in the budget deficit and meet IMF targets.

Speaking in Quebec on Sunday, President Bush left open the possibility of U.S. aid for Argentina, where he said an economic recovery is “in our nation’s interest.”

Argentine markets have swooned as investors have lost confidence in Cavallo’s month-old economic program and amid negative reaction to his plan to revalue the Argentine peso by pegging it to an average of the U.S. dollar and euro. The peso now is pegged to the dollar alone.

International investors have balked at lending to Argentina because of concern that a three-year recession and overvalued currency make it harder for the country to meet payments on its public debt.