Bondholders in richest Argentine region question Milei’s resolve

Bondholders in Buenos Aires Province are speculating that even Argentina’s chainsaw wielding President Javier Milei isn’t ruthless enough to let the nation’s richest region go bankrupt.

The spread on bonds due 2037 to similarly-dated US Treasuries fell below 2,000 basis points this month for the first time in two years, down roughly 30 percent from October of last year. The drop mirrors a similar move for Argentine sovereign bonds, whose spread over US Treasuries has fallen about 1,300 basis points over the same period, according to JPMorgan data. 

It’s a gamble by investors, who have shunned the bonds of some Argentina provinces after Milei slashed money transfers local administrations get on top of tax revenue from the central government. 

In the case of Buenos Aires Province, those funds represented 12 percent of the province’s total revenue in 2023, according to TPCG Valores, a larger share than other regions. And yet the bonds rallied, as many say the region that accounts for almost 40 percent of the nation’s population is too big to fail.

“If the largest provinces default, it creates a lot of instability making his reform agenda harder,” said Jared Lou, an emerging markets money manager with William Blair in New York. 

The 2037 notes rose to as high as 45.6 cents on the dollar on May 20 from a low of 36.7 cents on January 9, before falling back to 43.2 cents on Monday amid renewed concern over the outlook for Milei’s economic reforms. Those worries pushed the president on Monday to fire his Cabinet chief, Nicolas Posse, as the administration tries to push its so-called ‘omnibus’ bill through the Senate.

In trouble

Buenos Aires saw its revenue fall by one trillion pesos (US$1.1 billion, at the official exchange rate) in the first four months of 2024 from the year-earlier period. The drop is thanks in part to cuts in central government transfers and a deep recession that’s damped tax income, according to the state’s economy ministry.

The slump is expected to dramatically expand a deficit that reached 627 billion pesos in the fourth quarter of 2023, and comes as the province prepares to make a US$349-million debt payment on hard currency bonds in September. It has another US$761 million due through 2025, according to data compiled by Bloomberg.

Discretionary transfers to provinces are likely to be part of negotiations between the administration and local governors in order to get Milei’s omnibus bill — which plans to raise taxes and cut spending — to pass Congress. The idea is that with less money flowing in from the central government, Milei can sway provinces to implement their own austerity.

“I don’t think there will be a deal in which there’s no reduction at all in transfers to provinces,” said Carlos de Sousa, emerging market debt portfolio manager with Vontobel Asset Management in Zurich. “There’s a clear idea that the burden of the adjustment must be shared between the federal and provincial government.”

National bet

Traders have snapped up Buenos Aires’ debt this year amid a broader rally in Argentina’s sovereign bonds. Since Milei won the Presidency in November, those dollar notes have posted some of the best returns in emerging markets, handing investors roughly 67 percent gains, data compiled by Bloomberg show.

That rally on the coattails of the sovereign debt has even led some analysts to say the gains in Buenos Aires Province debt have gone too far. 

“Investors are not differentiating these credits the way they should,” said Ramiro Blazquez, strategist with BancTrust & Co. Some are anticipating a more market-friendly government in the province, but elections are still three years away. “That means more damage can be done.”

The province is run by Axel Kicillof, one of the leaders of Argentina’s Peronist opposition who has protested Milei’s austerity blitz. Should a political showdown between the two escalate, it may dent the gains. 

Still, investors expect the province to make good on its next bond payment due in September. A spokesperson from the Buenos Aires Province Economy Ministry said officials plan to use a combination of funds to meet financing needs over the next couple of months including local debt sales and credit agreements with multi- and bilateral lenders.

And with the rally in emerging markets losing steam, some see Buenos Aires Province notes as a cheaper alternative that could provide upside should Milei continue to make strides in turning Argentina’s economy around. Its bonds yield some 17.9 percent, according to pricing data compiled by Bloomberg. 

“Given the absurdly high yields that PBA bonds offer, if the country’s economic numbers continue to look good and the risk appetite in EM continues to increase, I expect these bonds will go on a tear soon,” said Hans Humes, chief executive of Greylock Capital Management.