As late as the early 20th century, angry investors sent warships to block the harbors of countries who had defaulted on their sovereign bond payments. That particular tactic is now behind us, but Argentina’s 2002 sovereign debt default has created a contentious game of chicken that continues even today. The decade-long saga is rife with legal twists and turns, and once again investors and rating agencies are bracing themselves for a possible Argentine default. An Appeals Court ruling on November 28th delayed the day of reckoning, but come March 2013, Argentina could choose a path of technical default. I believe Argentina has both the ability and willingness to repay its debt, and I will therefore be monitoring conditions closely over the next few months for attractive opportunities in Argentine debt.
The Battle Continues – But Its Effects Won’t Be Felt Globally
In the debt restructuring following the 2002 default, approximately 7% of the original bondholders remained “holdouts” – investors like hedge funds NML Capital Ltd. and Aurelius Capital Management who have not agreed to restructuring. Recent legal judgments have instructed Argentina to pay back –in full – these holdout investors, before the sovereign can pay any more coupons on the restructured debt (which it has been doing for years).
But who will be the first to swerve in this game of chicken? Argentine President Cristina Kirchner has claimed that paying 100% to these holdouts would violate Argentine law, which states that no holders of the defaulted bonds can be offered better terms than those accepted by 93% of investors in 2005 and 2010. The holdouts refuse to accept anything less than 100% repayment. The legal rulings are making it increasingly difficult for Argentina to find a way to continue to service debt without ceding to the holdouts.
We believe that the most likely conclusion to the drama will be a technical default that should not have widespread implications for the emerging market debt market. Emerging market countries have evolved far beyond the point where they can be considered one homogenous unit. Additionally, since the 2002 default, Argentina has been effectively shut out of the international debt market and currently makes up a mere 1.15% of the J.P. Morgan Emerging Markets Bond Index Global.1 Argentina has stated numerous times that it wants to repay its creditors, and it has the cash to do so. The amount of money needed for holdouts is a mere $1.33 billion compared to Argentina’s current $45+ billion in international reserves. 2
Fears of Default Could Create Opportunity
We believe this heated standoff will eventually subside, though Argentina faces serious economic pressures. Kirchner’s popularity is at a low. Domestic unions, a key support group, staged a general strike on November 20th protesting low wages and insufficient retirement pensions. The International Monetary Fund recently issued a strong warning that the National Institute of Statistics and Census of Argentina should take greater care in calculating its inflation figures, which tend to vary greatly from third party calculations.
We currently have no exposure to Argentina’s sovereign debt. However, we see global growth recovering in the coming quarters, which, in the past, has been a positive driver for Argentina’s outlook. If Argentine assets continue to cheapen due to the fear of a technical default (spreads of Argentine debt over U.S. Treasuries were near 1,200 basis points on November 26th)3, we believe that investors could be adequately compensated for investing in some particular bonds. Over the next few months, I will be keeping a close eye on the conditions in Argentina to identify potential opportunities to increase our exposure.
- J.P. Morgan research as of 10/31/12
- Bloomberg as of 12/03/12
- Bloomberg as of 12/03/12
Past performance does not guarantee future results.
Fixed income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall, and a fund’s share prices can fall. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and political and economic uncertainties. Emerging and developing market investments may be especially volatile.