On thin volume, shares of the Global X FTSE Argentina 20 ETF (ARGT) were off just about $0.01 on Monday. That is no small feat given that Argentina, South America's third-largest economy, is inching closer to its second sovereign debt default in the past 11 years.
A week ago, ARGT rallied even after The Economist reported Argentina was likely to default on its debt. At the time of that report, the issue appeared to be not if the country would default again, but simply whether it would engage in a selective or technical default. Not transferring funds to pay so-called holdout bondholders by December 2 would result in selective default.
The other option, changing the terms on restructured debt and transferring funds outside the jurisdiction of the U.S., would force a technical default, The Economist reported.
At this point, another Argentine default appears to be a matter of when, not if. Surging credit default swaps on the country's debt say as much. Over the past three years, credit default swaps used to protect against default on Argentine debt traded between 500 and 1,500 basis points, implying a low probability of default, according to Risk Reversal.
The high end of that range was seen earlier this year following the country's nationalization of energy firm YPF S.A. (YPF). In April, credit default swaps on Argentine debt surged to over 1,000 basis points as yields on those bonds soared. The impact on ARGT was predictable as the ETF faltered.
As Risk Reversal notes, swaps to protect five-year Argentine bonds against default traded as high as 4,000 basis points today before falling back to 3,000 basis points. Even with that intraday retrenchment, some traders are saying the chances of another Argentine default has essentially doubled in a matter of weeks.
To its credit, ARGT is proving sturdy today. However, as the risk of another Argentina default grows, it is unlikely the ETF will be able to ignore that news. Already at risk of losing its frontier market status, ARGT is trading just pennies above its all-time lows. A run to that ominous price level would almost certainly be hastened by an official default.
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