A significant indicator of Argentina’s sovereign risk has decreased to its lowest point in seven years, as the policy adjustments implemented by President Javier Milei’s administration have positioned the country nearer to re-entering international debt markets. The additional yield that investors require to hold Argentina’s sovereign debt compared to US Treasuries of equivalent maturity decreased to below 559 basis points on Friday, as reported. The spread currently stands at its lowest level since July 2018, having nearly halved since the midterm elections in Argentina in late October, when Milei’s party exceeded expectations and more than doubled its representation in Congress. The decisive triumph, following a tumultuous two months during which the US Treasury intervened to stabilize domestic markets, has sparked optimism for the latter half of Milei’s term. Investors are wagering that the augmented backing will enable the libertarian leader to implement a fresh round of deregulation, reform labor and tax legislation, and reduce expenditures, thereby concluding years of currency turmoil and debt defaults.
A new array of policy adjustments is contributing to the prevailing optimism. The government announced on December 15 that it would be easing currency-trading restrictions and intends to acquire up to US$17 billion in reserves over the course of 2026. The actions addressed several of the primary apprehensions held by investors regarding Argentina, which was viewed as lagging in its efforts to restore its meager foreign-reserve stockpile. “This should help compress spreads and meaningfully increase the probability of a return to international debt markets in 2026,” stated Thierry Larose. “By permitting a moderate real depreciation and associating foreign exchange purchases with money demand, the BCRA mitigates the risk of peso overvaluation.” Despite the narrowing of spreads, the Argentine peso has appreciated slightly to 1,478 per US dollar on Monday, up from 1,491 prior to the midterm elections. The currency has appreciated in value following the cessation of US Treasury interventions in the local market. The decline in spreads has consequently prompted a surge in corporate and provincial bond issuances, as Argentine issuers seek to leverage robust demand. In the wake of Milei’s electoral triumph, significant corporations commenced the pricing of bonds, subsequently joined by the province of Santa Fe and Buenos Aires City, along with a sovereign issuance under local law scheduled for December.
However, despite a significant decline in spreads following the election, they have largely remained above 600 basis points over the last three weeks. This prompted investors to contend that additional catalysts are necessary to further reduce country risk, aiming for the 500-basis-point threshold that Argentine officials consider suitable for an international bond issuance. Analysts observed that spreads might decline further should the government bolster its political stability, obtain endorsement for essential reforms in Congress, and transition towards a more adaptable foreign exchange regime. Anticipation is mounting that Milei’s administration will implement a foreign-law dollar bond – a precedent since the 2020 restructuring. The government recently issued local-law dollar debt, viewed as a preliminary step towards resuming overseas borrowing. It faces approximately US$4.5 billion in payments on outstanding bonds due in January, with a comparable amount due in July.
Nonetheless, Economy Minister Luis Caputo recently indicated that the government does not intend to issue bonds internationally in January. Additionally, officials made a significant move last week towards establishing a repurchase agreement, or repo, with international banks to facilitate the debt payments due in January. “The decline in country risk is key – it could allow Argentina to regain access to international markets and roll over upcoming debt maturities,” stated Fernando Marengo. Investors are likely to maintain a cautious stance. Under the administration of former president Mauricio Macri, Argentina effectively maintained its country risk below 600 basis points, achieving a low of approximately 350 basis points in 2017. Macri’s reform initiative, however, came to an abrupt halt as backing for his administration dwindled, compromising his austerity commitments and ultimately compelling him to pursue an unprecedented bailout from the International Monetary Fund. The intense market volatility observed in the months preceding the pivotal midterm election highlighted the rapid shifts in sentiment regarding Argentina. Several investors assert that the peso remains overvalued, and Milei’s battle against inflation – a key factor in his popularity during the initial half of his presidency – may face increased challenges due to more lenient currency controls. “The window is not a large one,” stated David Austerweil. “This represents the optimal juncture for them to adjust the exchange rate flexibly.”