Despite Default Fears, Argentina ETF Soars
Shares of the Global X FTSE Argentina 20 ETF (NYSE: ARGT) are soaring by nearly 3.6 percent today despite fears the country is inching closer to another debt default. Following a late October ruling by a U.S. court that said Argentina could not discriminate against so-called holdout bondholders, the government of South America's third-largest economy is left with unappealing options.
The "holdout" creditors are those that did not participate in Argentine debt restructurings in 2005 and 2010 following the country's 2001 default, according to The Economist. The holdout group includes U.S.-based hedge fund Elliott Associates.
Viewing the holdouts as taking advantage of Argentina's precarious financial state, the government risks losing political capital by acquiescing to holdouts' demands. If the government does not pay the holdouts, it runs the risk of opening the door to new claims by restructured debt holders, according to The Economist.
Should Argentina opt to not transfer funds to New York for its next bond payment due December 2, the country would be in selective default. The other option, changing the terms on restructured debt and transferring funds outside the jurisdiction of the U.S., would force a technical default, The Economist reported.
None of these scenarios are particularly appealing for the embattled Global X FTSE Argentina ETF. ARGT has lost nearly 28 percent year-to-date. The bulk of those losses can be attributed to to the perception of elevated political risk by foreign investors and Argentine government's harsh anti-free market rhetoric.
With the 2001 default and the nationalization of YPF (NYSE: YPF) earlier this year still fresh in investors' minds, Argentina can ill afford to renege on its debt obligations again. Few ETFs offer any noteworthy exposure to Argentine bonds, so despite ARGT's diminutive stature, the fund could be a favored tool for some traders looking to short Argentina.
Today's bounce in the ETF appears to be the work of technicals as the $7.75 area is represents a double bottom zone for the fund. Volume is also light at less than 600 shares, indicating there is little veracity in this rally.
What is clear is that traders view another Argentine default as a real possibility. Based on credit-default swaps, the implied probability that Argentina will renege on its debt over the next 12 months has now surged to 63 percent, Bloomberg reported on Friday.
Argentine sovereign debt was spotted yielding nearly 100 basis points more than Greek equivalents last week. The two embattled countries share another dubious trait in common: The very real possibility of losing their respective market classifications.
Index providers MSCI (NYSE: MSCI) and FTSE Group have placed Greece on their respective lists for possible downgrades to emerging markets status.
In late October, Standard & Poor's pared the Argentina's credit rating one notch to B- from B, a move that at the time was viewed as possibly hastening the loss of the country's frontier market status.
MSCI said in June it had Argentina on review for possible downgrade while FTSE Group made a similar announcement in September.
"Argentina is listed for possible demotion from Frontier due to continuing stringent capital controls imposed on international investors and the perceived lack of an independent regulatory authority to protect the rights of shareholders," FTSE said in a statement. "Argentina was demoted from Secondary Emerging to Frontier in 2010."
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