UPDATE 3-Choice of running mate by Argentina’s Scioli scares investors, bonds fall

(Adds market moves, vice presidential candidate set, paragraphs 3, 5-6)

By Hugh Bronstein

(Reuters) – Argentine bonds weakened on Wednesday after presidential front-runner Daniel Scioli chose a loyalist of the current government as his running mate for the October election, a choice that may signal a continuation of policies that have deterred investment.

Markets had hoped that Buenos Aires Governor Scioli would use his choice of a running mate to distance himself from the interventionist policies of outgoing President Cristina Fernandez.

Instead, he said late on Tuesday that he had chosen Fernandez loyalist and legal advisor Carlos Zannini to run as his vice presidential candidate. Zannini said on Wednesday he had accepted the offer. He said Scioli’s ticket represented “the continuity of a path”.

Fernandez, who is constitutionally barred from seeking a third consecutive term, has established a web of currency and trade controls that have frightened off investors who would otherwise be interested in Argentina’s promising shale oil and gas fields, as well as it already powerful grains sector.

Argentine over-the-counter discount bonds closed 3.1 percent lower on Wednesday, market sources said.

Argentina’s hard currency credits were by far the worst performers on Wednesday, according to the JPMorgan Emerging Markets Bond Index Plus (EMBI+). The yield spread of Argentine dollar-denominated bonds versus comparable U.S. Treasuries widened by 25 basis points. The index as a whole tightened 2 basis points.

Scioli is from Fernandez’s Victory Front party, but is considered more in favor of open markets. Scioli has billed himself as the candidate of “gradual change” against the backdrop of a stagnant economy with double-digit inflation and limited access to global credit markets.

Eurasia Group analyst Daniel Kerner said Zannini was imposed on Scioli by Fernandez, “given that Scioli needed her full support and endorsement to win the elections.”

“We expected her to name someone that would allow her to constrain Scioli, but this was beyond our expectations,” Kerner said. “Zannini is one of her most important and influential advisors.”

Whether Scioli as president could or would even want to marginalize Zannini and the Fernandez camp once in power remained an open question.

Fernandez is faulted by Wall Street for inaccurate inflation reporting and her failure to put the country’s 2002 sovereign bond default to rest by reaching a deal with holders who rejected the steep cut in repayment terms offered by the country’s 2005 and 2010 debt restructurings.

Argentina defaulted again last year after a judge ordered it to halt payment on restructured bonds until a deal was struck with a group of “holdout” investors who had resorted to the U.S. federal courts in their push for full repayment.

Barclays downgraded Argentine bonds to neutral on Wednesday. It previously had an overweight recommendation, in part thanks to optimism about a possible settlement with holdout investors in 2016.

“But it seems that her political strength has proven high enough to direct, to some extent, the potential next presidency. This leads us to change our stance to neutral,” Barclays said in a note to clients. (Additional reporting by Sarah Marsh, Walter Bianchi and Nicolas Misculin in Buenos Aires, Daniel Bases in New York; Editing by Walker Simon and Grant McCool)


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