Analysts fear Argentina is sliding into a financial abyss after the government announced a plan to nationalize the country’s private pension system last month.
The government says the move is necessary to shore up people’s pensions, which are losing value on the back of a falling stock market. But analysts argue that it is nothing more than a ploy to ensure that the country can roll over its debt due over the next year.
The decision sparked panic among investors. The country’s stock markets tumbled by 10% after president Cristina Fernández de Kirchner signed a bill on October 21, still to be ratified by Congress. Five-year credit default swaps based on the sovereign’s external debt widened to hit an eye-popping 3,800bp over at one point. At the end of June, Argentina’s CDS was trading at 656bp.
The government announcement led to a wider sell-off of emerging markets assets too, with the Embi+ index trading at 766bp – its lowest level in five years.
| Argentina hits crisis levels |
| Five-year CDS spreads |
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| Source: Markit |
While analysts reckon the move will help shore up the government’s finances in the short term, the long-term consequences could be grave for the country’s financial system and economy.