October 22, 2008 / 9:02 PM / in 12 years

UPDATE 1-Argentina markets plunge on pension fund takeover bill

(Adds closing prices, CDS values)

By Manuela Badawy

NEW YORK, Oct 22 (Reuters) - Investors dumped Argentina’s assets on Wednesday as a plan to nationalize the country’s private pension system erased the little confidence left on the government’s macroeconomic policies.

Argentina’s stock market plummeted to close 10 percent lower and government debt spreads, or the premium that investors demand for holding riskier securities than U.S. Treasuries, widened more than 1,900 basis points as investors sold-off government bonds.

President Cristina Fernandez signed a bill on Tuesday to transfer private pension fund savings to state control. Congress, which has a majority of Fernandez allies, will debate the bill next week.

The country’s assets plunge was further fueled by deepening fears of a global recession that could likely be long and severe.

Argentina’s benchmark MerVal .MERV index dipped below the 1,000 for the first time since September 2004 and reached 877.86 points, its lowest since June 2004. The index closed down 10.11 percent at 940.82 points.

The country’s spreads widened all the way to 2006 basis points over U.S. Treasuries, to quasi-default levels, according to JP Morgan’s Emerging Markets Bond Index Plus (EMBI+) 11EMJ .JPMEMBIPLUS. It ended the day at 1,962 basis points, losing 17.36 percent of returns on the day.

Five-year Argentina credit default swaps — insurance-like contracts that offer protection against debt default or restructuring — were priced with a 50 percent upfront cost.

This means investors would have to pay $5 million upfront to protect $10 million worth of Argentine bonds plus an extra $500,000 a year.

Argentina’s Par bond due in 2038 ARGGLB38=RR fell 1.50 percentage points to bid/offer at 15.50/16.75 and to yield 18.233 percent.

Analysts said that the government’s initiative, if successful, could be supportive for Argentine debt in the near term as it will narrow 2009’s financing gap.

But the elimination of the largest local institutional investors has eroded confidence, and “lingering uncertainties on the Argentine economy in the medium term will all limit demand for bonds,” Alejandro Cuadrado, analyst for Merrill Lynch said in a note.

He added that the loss of the pension funds will decrease liquidity and trading volume for equity markets, increasing volatility in the market.

The pension funds are the biggest investors in the local bond and stock markets, and volume was light on Wednesday because a day earlier a judge banned the 10 pension funds from trading on the Buenos Aires Stock Exchange for seven days.

Locally traded Argentine bonds fell 10 percent on average deepening Tuesday’s losses.

Interbank trade, where the central bank intervenes to manage the value of the peso, eased to 3.2225/3.2250 per U.S. dollar ARS=RASL.

Some analysts viewed the government’s nationalization move as a sign of desperation to obtain more money for debt payments next year.

“The government actions seem to be directed at grabbing pension fund moneys in order to secure funding for a difficult fiscal situation and debt amortization schedule for next year,” Enrique Alvarez, head of Latin America debt strategy at IDEAglobal, said in a note.

Among the companies that run the funds are international banks and insurance groups BBVA (BBVA.MC), HSBC Holdings (HSBA.L), MetLife Inc (MET.N), and ING Groep NV ING.AS (ING.N) which were banned from trading in local markets before Congress’ decision on the bill. (Additional reporting by Walter Bianchi, Helen Popper and Fiona Ortiz in Argentina; Editing by Diane Craft)

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