For the bravest, most risk-tolerant investors out there – shops like Franklin Templeton and Pimco – the Argentine trade the past few years was to dive into the local market and scoop up peso-denominated bonds. Paying out interest rates of up to 75%, it was a cash-generating machine.
But now, amid a collapse that has put the country on the verge of default once again, it is these bonds that have taken the worst of it. Not only have they plunged in value just like the country’s dollar notes, but they have also been hammered by a 25% drop in the peso and gotten ensnared by capital controls the government imposed this week. That move, which came in a desperate bid to stabilise the peso, effectively blocked investors from taking money out of the country through traditional foreign-exchange markets.
Which leaves many bond firms nursing losses and searching for alternative ways out. One method has immediately jumped to the fore, the same one used for years to skirt controls during the previous rule of the leftist version of Peronism that now appears poised to retake the presidency next month. It’s called the blue-chip swap and it’s predicated on the purchase – with pesos – of certain types of shares or bonds in the local market and the subsequent sale of those securities abroad for dollars. It’s not cheap, though: The effective peso exchange rate is currently about 8% weaker than the going price in the foreign-exchange market.
“Old veterans who used to trade local-currency bonds from beforehand know the score,” said Edwin Gutierrez, London-based head of emerging-market sovereign debt at Aberdeen Asset Management, who said he used the parallel rate during the capital controls implemented by Cristina Fernandez de Kirchner’s government. “It’s a return to the bad old days.”
Beforehand means before President Mauricio Macri, a free-market reformer determined to return the slumping, state-controlled Argentine economy to normalcy, swept into office in 2015. One pledge was to overturn capital controls, and he achieved it in his first week in office. He assembled a star cabinet with Wall Street veterans to settle lawsuits with creditors and return Argentina to foreign bond markets.
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