Argentine Bond Prices Rise on Relief over Upcoming Debt Revamp

Argentine bond prices rose on Monday in the first session since President-elect Alberto Fernandez named debt restructuring expert Martin Guzman as economy minister, the central figure in a cabinet that will start serving after Tuesday's inauguration.

Over the counter bond prices popped an average 2.1% higher and country risk spreads tightened, showing the market took Fernandez's cabinet picks in stride.

Guzman, 37, will be responsible for sparking growth, taming inflation and steering restructuring talks with creditors and the International Monetary Fund over about $100 billion in debt.

Creditors had feared that Peronist Fernandez might take a tough stance in upcoming restructuring talks. But Guzman, who sees the problem as one of liquidity rather than solvency, has advocated for a debt revamp based on a suspension of payments that would preserve eventual repayment of principal.

Such an approach would avoid a "haircut," or outright cut in the return of creditors' principal investment.

"There had been uncertainty about the debt restructuring proposal. Guzman does not want to implement a haircut on the principal. So this clears some of the fear that had been priced into bonds," said Gabriel Zelpo, director of economic consultancy Seido.

Sovereign risk spreads tightened 123 basis points to 2,194 over safe-haven U.S. Treasuries on JP Morgan's Emerging Markets Bond Index Plus, having blown out from the 480 basis points where the index stood when outgoing President Mauricio Macri, a proponent of free markets, took office in late 2015.

FILE - An entrance to the Central Bank of the Argentine Republic is pictured in Buenos Aires, Argentina, Oct. 28, 2019.

Inflation has risen under Macri, and the peso has lost 83.75% of its value while Latin America's No. 3 economy has stalled. Consumer prices are up more than 50% so far this year after a 47.6% rise in 2018. The peso was stable on Monday at just under 60 to the dollar.

Guzman, an academic and protégé of Nobel Prize-winning economist Joseph Stiglitz, is an expert in bond restructurings.

He opposed Macri's austerity drive, which included public utility subsidy cuts that jacked up power and heating bills paid by Argentine families and businesses.

Those utility bill increases fueled the inflation that dogged Macri's four years in power, killed his once-high popularity and undermined his re-election campaign.

Markets had been on edge since Fernandez thumped Macri in the August primary election. The lopsided victory signaled a shift away from Macri's strict pro-business policy stance. The inauguration will take place around midday on Tuesday.