For the better part of two years, Argentina has been a byword for bad government finances. And investors have bet that it was the country most likely to default on its debt. More than Venezuela, Ukraine, and other wobbly sovereigns, markets figured that Buenos Aires would lose its long-running battle with hedge funds over bonds issued before its previous default, in 2001, and be forced to renege on debt it has issued since.
But this month, facing a June 30 deadline to pay up or go broke, Argentina hinted it was willing to negotiate with these “vulture funds,” as it calls them. As a result, its probability of default has plummeted in the past few days. This is according to trading in credit default swaps (CDS), a form of insurance against bond defaults—the higher the spread, the more likely the markets think it is that a borrower will default:
But as the fear over Argentina subsides, a new danger has emerged. Puerto Rico, the indebted, impoverished commonwealth of the US, is teetering. The island’s probability of default has surged as it struggles to find the funds necessary to pay its bills. A sickly economy and mass emigration have drained government coffers.
Puerto Rico’s governor unveiled measures today to restructure public companies’ debts. The new rules won’t apply to the island’s general government obligations, but that hasn’t stopped traders from betting that these bonds are now on much shakier ground. Puerto Rico’s five-year CDS spread is now within a whisker of Argentina’s, according to data from Markit, a financial services information provider.
“The current fiscal situation poses serious risks to the island’s economic future,” said William Dudley, president of the New York Federal Reserve, in a speech in San Juan yesterday. “The next three to six months are going to be very, very important,” he added.
For the first time in a long time, we may be about see a new name sit atop the rankings of the least reliable government borrowers. It is not an honor that Argentina will be sorry to lose.