World Economy

Argentina Preparing Return to Euro Market

President Mauricio Macri says his  country needs to find alternative funding sources.President Mauricio Macri says his  country needs to find alternative funding sources.

Argentina is poised to issue its first euro-denominated bonds in 15 years as the sovereign continues its rehabilitation in the capital markets.

The country is expected to come with a relatively small dual-tranche trade that could reach around $1.5 billion, Reuters reported.

It will be Argentina’s third cross-border offering this year as it tackles hefty funding needs, having already raised $19.25 billion from its first year in the international debt market since 2001.

Investors like the government’s turnaround story. But with substantial requirements ahead, the administration of President Mauricio Macri needs to find alternative funding sources if it wants to ease supply pressures in its core US dollar market.

“It has become clearer that the pace of fiscal adjustment is going to be more gradual than originally expected and they will continue to need funding next year,” said Alejo Czerwonko, an emerging markets economist at UBS Wealth Management.

Finance Minister Alfonso Prat-Gay was quoted this week as saying that the country would not issue more than $10 billion -$15 billion in international debt next year.

“If they are going to come back next year for another $10 billion -$15 billion, they’ll want to start funding in different places,” said a New York-based syndicate manager.

While accounts have been receptive buyers of Argentine dollar debt amid a global hunt for yield, patience in the dollar market may wear thin should the government abuse its welcome there.

   New Investors

Several on the buy-side were quick to grumble when the sovereign returned to the dollar markets in July despite promises to cap this year’s supply at the $16.5 billion it issued in April to pay holdout creditors and cure its default.

In an effort to widen its funding options, the government has been working to deepen its own local market. Talk of a possible renminbi-denominated Panda bond has also been making the rounds.

The euro bond market, however, seems like the most natural choice for a sovereign in search of new investors.

Not only is it one of the few markets that provides sufficient scale for the size Argentina needs, but the country should also receive a warm welcome in a market where even EM credits are trading at razor-thin yields.

The swap back to dollars would be extremely costly for a country that is still rated just B3/B-/B, but Argentina is expected to keep the proceeds in euros.

“The cost to swap Argentina risk would be prohibitive, but they have enough trade flows (with Europe) to justify keeping euros,” said the syndicate manager.