Argentina: sale of the century?
Robert Sierra - 28 June 2017
Wanted: investors willing to fund a century bond of a Latin American emerging sovereign in the sum of US$2.75bn that has defaulted 6 times since 1950 and has an impressive track record of shafting domestic and foreign lenders. Cash coupon of 7.125 per cent. Result: Subscribed by more than 3.5 times! Has the world gone completely yield-crazy?
Have investors learned nothing from the experience of past Argentine defaults? Have global financial markets abandoned risk and due diligence assessments? Last week, just one year after emerging from default, the country joined Mexico, Ireland and the UK in issuing a 100-year bond, selling US$2.75bn of sovereign bonds on a redemption yield of 7.9 per cent. Markets are already pricing an 80 per cent risk of default. From 1816 to 1950, Argentina had been a relatively low-frequency defaulter but since then there were six further defaults, most recently in 2014. In those defaults, investors have not been treated kindly: as recently as 2001, most Argentine bondholders received only around 30 cents on the dollar for their bond claims.
The stark facts are bad enough. The economic and social realities were something else. The debt build-up of the seventies that led to the default of the early 1980s were years of extreme economic hardship and dictatorships which culminated in the return of democracy in 1983. Growing up in the rural north west of Argentina, in the province of Tucumán, I remember the uncertain political climate of the time, the decline of the sugar cane industry, a major employer, and the dying days of the Dirty War. As the largest employer in the region, the public sector provided shelter for a large chunk of the population which cushioned the economic impact, to a degree, but not the political persecutions.
What are the grounds for optimism that could possibly justify participation in this bond? Mauricio Macri’s election in 2015 signalled a change in direction, away from the corrupt and populist Kirchner administration towards a more accountable government. He promised to strengthen institutions, introduce pro-business policies, cut deals with foreign creditors and realign foreign policy away from Venezuela and Iran and closer to the US. Faced with inflation of 30 per cent and a fiscal deficit of over 5 per cent, Macri set to work by dismantling exchange controls, devaluing the peso and raising interest rates to prevent inflation from getting out of control. The outcome was a short recession, but protests followed and have continued sporadically. With legislative elections due in October the risk is that Macri fails to gain more seats – he already lacks a majority. However, Argentines are aware that he inherited a mess and many recognise that he is the nation’s best chance in a generation to break out of its vicious circle of populism and decline.
From an investor’s point of view, if Argentina fulfils its promise to reduce the budget deficit, meeting its fiscal targets, there is a good chance that Argentine bond prices could rally significantly over the next couple of years. With modest economic growth returning in the past three quarters, perhaps the worst of the country’s problems are behind it. Moreover, other countries in the region are not looking too bright: Brazil is mired in corruption scandals, Mexico is under threat from US protectionism, Chile faces a potential ratings downgrade and Venezuela is a basket case. On a 2-year, rather than a 100-year horizon, the Argentine bond could perform well. However, with a yield close to 8 per cent, it would still more than 10 years to recover the initial capital commitment. To buy this bond, you would have to be savvy or desperate.
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