Argentine Sovereign Default: again, and again, and again, and again ... (nine times)

by Rodrigo Olivares-Caminal and @GuidoDemarco

One of the most important sections of the issuance documents of the Argentine 2016 Macri Bonds, the prospectus, reads "[a]n investment in the bonds involves an important degree of risk”. It even goes further and states that “[b]efore deciding to purchase the bonds, you should read carefully all of the information … [related to] …. risk factors”. In other words, “… dear customers, soon to be (undesired) creditors, beware—the warning is included for a reason”. Similar wording appears on other previous bonds.

The Risk Factor provision is the “I hate to say, I told you so” section of any offering document. The aim of this provision is to disclose as many risks related to the issuer as possible, in order to avoid a claim for misrepresentation by investors. However, this section has become somewhat irrelevant because the debtor pretty much tells you “don’t you dare to invest … the chances of me repaying you are close to nil for whichever (endogenous or exogenous) reason I can think of”.

The description of risks will vary depending on the issuer and the securities being offered, but these will generally include a list of political, social and economic events that may adversely affect the issuer’s ability to service its debt obligations, both domestic and at the macro-level.

In the case of Argentina, the list of risks (warnings) include, among others:

• adverse external economic factors (e.g. USA-China trade war with the subsequent cut of interest rates by the Federal Reserve and, the cherry on top, the Covid-19 pandemic causing the biggest downturn in the global economy),
• inconsistent fiscal and monetary policies (unimaginable in Argentina where each government comes with its own handbook which states—almost inevitably—that what the previous one has done is wrong, e.g. when Macri took office he—rightly so—lifted capital and exchange control regulations but by the end of his mandate he had to re-introduce them due to the economic uncertainty),
• dependence on external financing (another rare occurrence in Argentina, the economy is so stable that Argentina belongs to a selected group of countries that have issued a 100-year bond or in 2016—the year same year that Argentina cured its default, it issued USD16.5bn in debt, it sounds like a joke but it is real),
• changes in governmental economic or tax policies (in the 2019 presidential elections, the two main political parties pushed for different—not to say diametrically opposite—political platforms for the country, needless to say, the surprise result rendering Macri a lost, created an economic upheaval),
• high levels of inflation (Macri committed to lower it to 15% after his first year in office, that would have been 2016 and now inflation stands at 53.5%),
• abrupt changes in currency values (Argentina’s Peso ranks second after the Venezuelan Bolivar in the ranking of most devalued currencies in the world in 2020, good joint effort to the Macri-Fernandez administrations),
• price controls (yes, through the so called ‘precios cuidados’ which in English it sounds even sweet ‘looked-after prices’ or ‘price caring’ program which is a programme of ‘controlled’ prices of key consumables),
• exchange rates and capital controls (yes, of course, an all-time Argentine classic),
• political and social tensions (it is part of Argentina’s DNA); and,
• fluctuations in central bank reserves (well, this one does not apply because the term fluctuation intrinsically requires that the reserves go up and down but in Argentina it tends to only go down, the Central Bank reported USD 76bn. on April 2019 but these dropped to USD 43bn. in May 2020).

Big coincidence? As if the prospectus was predicting the future. The result is well known. Argentina is suffering a new sovereign debt crisis and conducting a new debt restructuring, again. Its ninth.

Really? Yes. After its independence in 1816 it took some time to Argentina to organize itself and to adopt its Constitution in 1853. Shortly thereafter foreign investments started to flow. Between 1860 and 1914 Argentina experienced an exponential growth, financed by foreign capital which was mainly focused on infrastructure projects (primarily, the railways). One of the founding fathers of the country, Nicolas Avellaneda, who presided the country between 1874-1880 stated that “[w]e shall honor our debt over the thirst and hunger of the Argentine people”. 

This notwithstanding, subsequently, there were three main boom-bust cycles that required debt readjustments:

1. 1862-1875 period, which ended with the Long Depression of 1873. This crisis resulted in a severe financial crisis, monetary depreciation and eventually a fiscal adjustment.
2. 1881-1890 period, this period started after Argentina managed the stabilization of its balance of payments and the sanction of a monetary law based on a gold standard. However, this cycle was interrupted in 1890 by another crisis that made the Baring Brothers tremble due to its exposure to Argentina. A rough estimation puts the total foreign investments in 1891 at approximately nine times larger than in 1875. In 1892, the Ministry of Treasury, Emilio Hansen addressed the National Congress and stated that “it is not justifiable the public criteria that seeks the causes of the disaster within the acts of the Administration. The fault was not having known how to avoid the obfuscation of the time (...) nor is it fair that the Republic be exclusively blamed abroad for the ruin that its failure has caused there. In the evolution of this great economic phenomenon, foreign capitals have been very active collaborators, called out by the incentive of easy profits.” Any relation with the discourse of the current administration is a mere coincidence, probably blaming others runs in Argentine’s DNA.
3. 1903-1914 period, the third cycle started in 1903 and was focused mainly in the expansion of agricultural production. Such period ended in 1913-14 due to the Great War (no own fault on that one).

The common pattern of these cycles was the external indebtedness over the repayment capacity mainly due to the long-term nature of the investments that were not always capable of generating sufficient return in the short-term to service the debt. In fact, a significant amount of the financing received in the later cycles was destined to pay the debt contracted in previous cycles. By this time already the constant financing was a pre-requisite for not falling in default. Usually, new debt did not mean new funds, but rather transfer of funds among creditors. Pretty much same as today, however, back then some lasting improvements were made (a proper railway system, ports, etc.). Does this ring any bell? Remember the 2016 prospectus talking about the risk factors? Well, according to such document, the proceeds of the offering were to be applied by Argentina to settle claims of holders of un-tendered debt (outstanding debt that was in default because they did not accept the 2005 or 2010 exchange offers) and, the balance, for general purposes of the Government. Same outcome, 120 years later. Note that there were no lasting improvements here.

This, not to mention other crises such as the Rodrigazo in 1975, the hyperinflation of the late 80’s and obviously, the 2001 crisis.

Is the market short sighted? Short minded? As long as new opportunities arise and the returns are there, the market will continue investing. This however, will come at a price. In 2016, in a world with negative interest rates and an Argentina issuing debt at a blended c. 7.65% it is a no-brainer. In the end, this is a big game of musical chairs. When the music stops, someone will hold some unpaid bonds. There will always be losers and winners.

However, the question remains. Are investors really done with Argentina? The answer is probably no, but it will be a thorny process, failures and achievements, returns and losses, lawsuits and accusations. Irrespective of whether Argentina and its bondholders reach an agreement, the damage already took place. The underlying issue that Argentine governments are not addressing is the increase in its financing costs. Each of these debt liability management exercises widens the interest gap that Argentina has to pay. Particularly this becomes relevant when compared to other Latin American countries who can borrow at less than half of Argentina, it is a dearly price to pay.