Argentina's stocks and post-swap bonds closed lower on Friday as investors worried about the government's decision to use reserves to pay off its entire IMF debt in a single stroke this month.
After the market's close on Thursday, President Nestor Kirchner announced that Argentina will pay off $9.8 billion in debt owed to the International Monetary Fund, a strategy he said would have a "neutral monetary effect."
Argentine stocks also closed lower as bank sector shares were punished, with the MerVal index of the 12 leading stocks down 1.96 percent at 1,524.50.
The MerVal has lost 1.94 percent so far in December but is up 10.8 percent from the start of this year.
Banks are seen hurt by their heavy exposure to government bonds, which also lost ground on Friday.
"The fall in the stock market was logical since the news is more political than financial. People understand the payment to be a way of dodging the IMF's audits and not really about saving money," said Ruben Pascuali, trader with Mayoral Bursatil.
Investors' top picks in the coming days are likely to be manufacturers, exporters and services, he said. Financial conglomerate Group Financiero Galicia fell 2.74 percent to 2.13 pesos while BBVA Banco Frances slid 2.51 percent to 7.38 pesos and Macro Bansud declined 1.94 percent to 5.05 pesos.
Trade volume in the stock market was 141 million pesos ($46.4 million).
Argentine bonds issued in the country's mammoth sovereign debt restructuring fell an average 2.5 percent following the news, which came just days after Brazil made a similar announcement.
Par bonds in pesos were down 2.04 percent at 46.30/47.60 pesos, while discount peso bonds fell 1.67 percent to 116.50/117.50 pesos. Par bonds in dollars fell 2.26 percent to $31.75/$32.50 and the discount dollar bonds shed 2.68 percent to $81.25/$81.75. So far this year, the bonds have risen 15 percent on average. Argentina's foreign reserves totalled $26.9 billion by December 15.
The peso currency reacted by falling 2.11 percent to its lowest level in 15 months in early trade. It later recovered to settle at 3.0325/3.0375 per dollar, down 0.74 percent from Thursday.
"Obviously the market is now trying to readjust and the initial slide was due to speculative trading among banks," said one trader.
Fernando Izzo, trader with ABC Mercado de Cambios said, "surely the floor value of the peso will now be around 3 pesos."
Many Argentines, fearing a depreciation of the peso as a result of the announcement, went to the bank first thing Friday to transfer peso savings into safe-haven dollar accounts, banking officials said.