Argentine government bonds are beginning to reflect the likelihood of a political shift in 2027, even if the elections that will decide President Javier Milei’s reelection are not until 2028. According to a report Morgan Stanley sent to its clients – Argentine bonds “now price a 41-52% probability of a bear case outcome after the 2027 elections, up from 11-20% three months ago.” The bank’s analysts explained that this estimate results is based on the combined probability of the three most likely scenarios – “Policy Continuity,” “Muddle Through” and “Default” – for the first payment due to private bondholders after the 2027 elections.
The maturity date of US$3.8 billion in government bonds is January 9, 2028, which is one month following the inauguration of the new president. July 9, 2027 is when the prior installment is supposed to be paid. A “Muddle Through” scenario, in which debt payments stay current despite extreme financial duress, is assigned two-thirds of the negative scenarios by Morgan Stanley. If the January maturity goes unpaid due to a default, the remaining one-third goes toward that. On the other hand, the best-case scenario is predicated on the maintenance of current policies and the availability of funding. Nevertheless, the report argued that the fact that most bonds are already pricing in a nearly a 50% probability of a bearish outcome less than a year out before the elections “is not warranted and looks like an overshoot driven by positioning unwind, even if data and domestic sentiment have been weaker than anticipated.”
The country’s risk premium has risen sharply over the past few months, which is a direct result of the huge sell-off in Argentine bonds. J.P. Morgan’s index considers sovereign borrowers’ exposure to risk when they seek funding from private credit markets around the world. The country risk for Argentina has been progressively increasing since hitting an eight-year low of 400 basis points in July. It has now reached its highest level in a year, at 900 basis points. Prior to Milei’s triumph in the midterm legislative elections, market confidence had been restored. J.P. Morgan’s Argentina index was 852 basis points on Wednesday. The index is still up about 50% for the year, however that is an improvement when compared to recent days.
Markets can demand a larger premium on Argentine bonds even without expecting a change of government or a default, according to the most recent client report. “It is enough for investors to perceive greater uncertainty about the continuity of the policies they consider necessary to sustain the debt,” the firm explained. It stressed that maintaining credibility over time matters because “sustainability requires fiscal and external results to remain consistent over several years.” This is the reason why Argentina’s credit ratings have been improving in the past several months, according to the consultancy firm. “Credit rating agencies assessed the fiscal consolidation already achieved, while the market also weighs the ability to refinance debt under adverse conditions and the possibility of future changes in policy direction,” it said.
