UPDATE 2-Argentine new bonds fall sharply as investor jitters rise

(Adds comments from Morgan Stanley note)

BUENOS AIRES, Sept 21 (Reuters) – Argentine newly issued international bonds are once more on the slide as investors price in rising risks over the country’s economic recovery and much-needed reforms following tightened capital controls last week.

The new bonds, issued at the start of the month after a largely successful $65 billion restructuring, have all dropped since, ranging between 35-45 cents on the dollar on Monday, with some of the Eurobonds falling sharply for the day.

Yields on the bonds have spread to around 13.5% from around 11% when they were first issued, traders said.

The weakness underscores investor concern over the South American grains producer despite its revamping of foreign and local debts, with focus recently on moves to tighten currency controls and restrict already limited access to dollars.

The central bank limited personal and corporate access to foreign currency last week in a bid to stem a dangerous decline in reserves.

Morgan Stanley said net reserves were at “critical levels” and while controls could slow the drain of reserves in the near term, they created a “further deterioration in the business environment, reducing the chances of a sustained recovery.”

The bank added that a quick deal with the International Monetary Fund for a new program, commitments to consolidate the fiscal position and to ease capital controls could boost investor sentiment and bond prices – though this was unlikely.

“(It’s) the worst start to a restructured bond in 20 years, with only Greece eventually ending lower,” the investment bank said.

“Yet it has been difficult to catch falling Argentine bonds in the past, so we take a more cautious approach. The positive catalysts are lacking, with a high chance that policies turn less market-friendly in the near term,” it added.

A J.P. Morgan risk index, which fell after Argentina’s recent restructuring, rose 88 basis points on Monday to 1,347. The Merval stock index declined.

Argentina’s economy is expected to contract by more than 12% this year due to the impact of the coronavirus pandemic, and analysts polled by Reuters predict a 20% slump in the second quarter of 2020, for which data is due on Tuesday.

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