Markets appear inclined to see the Turkish situation as no different from other episodes of weakness seen in recent years, and as something that will probably not have a contagion effect on other emerging markets. I struggle to hold this line, and find it difficult to believe that this is just an isolated case and that things will soon return to normal.
It is my view that EM risks are now significantly higher than before, and that we should be concerned about other countries in the EM space that are struggling from major devaluations of their local currencies and remain highly dependent on foreign investments.
This is why we should take a closer look at Argentina, where several government bond issuances this week fell flat on their faces, increasing refinancing risks even in light of the International Monetary Fund's recent bailout loan.
At the moment, Argentina is mainly dependent on short-term debt; for this reason, it is now trying to phase out short maturities and to commit investors to longer-dated government bonds. This week, 530bn pesos of LEBACS matured and the government wanted to give investors the opportunity to roll over their positions in the short term with an auction of 230bn pesos in LEBACs (35-day at 45.04% and 98-day at 42.75%), while the remainder should have gone to longer maturities (LETES).
Both auctions, however, flopped. On Tuesday, the government was able to place only 202bn of the 230bn pesos offered in LEBACS. On Wednesday, the LETES auction (105 days at 42.23% and seven months at 39.8%) led to the placement of only about 23bn pesos rather than the 40bn Buenos Aires had hoped to place.
As investors fled to USD, the central bank pushed up its minimum reserve requirement on big banks by 3% yesterday in an effort to support its currency.
Refinancing of short-term maturities is clearly becoming a problem, and the central bank’s plan to eliminate LEBACS by the end of this year clearly poses a great risk at a very delicate time, with EM sentiment significantly depressed.
Until EM sentiment rebounds, LEBACS could be the only source of financing Argentina is able to obtain.
As you can see from the graph below, the total outstanding amount of LEBACs has decreased sharply this week, but this doesn’t fall in line with the central bank's plan to gradually phase out these maturities. Investors have lost their appetite for Argentinian bonds, and thus are unwilling to be pushed towards longer-dated Argentinian debt.
While Argentina’s USD-denominated bonds have been more resilient than their ARS counterparts, they are also down considerably since the beginning of this year. The 10-year, USD-denominated Argentine international government bond issued this January with a yield of 6% is now down 20 points since issuance and offers 350 basis points more in yield.
The centenary Argentinian bond maturing in 2117 has shrugged off 15 points since issuance and we can expect more volatility as things develop, although the shorter part of the curve will be the most vulnerable.
With the Argentinian pesos down 37% since the beginning of the year, pressure is clearly building up. At this point, the real question is how long investors can find comfort in the IMF’s $50bn bailout?