Argentina finally resumes negotiations with holdout creditors after over a decade of deadlock.
By today, the 13th day of 2016, as much as half of new year’s resolutions will have already been broken. Abandoners can either choose to disremember defeat and strive even harder for the remaining 353 days, now lacking the incentive of perfect adherence, or procrastinate for yet another year. Enduring 13 days with nothing to show for it may be difficult enough, but investors in a trio of related assets have had to ride out over 13 years only to see them remain or return to where they began; snapshots of these three lapsing investments in 2003 would be almost identical to where they stand today.
The first receding asset is US oil which yesterday dipped below $30 per barrel for the first time since 2003. Today WTI Oil is back up over 2% but medium and longer term forecasts remain at a discord. For related reasons, as well as many other woes, shares in Brazil’s Petrobras have also returned to the lows of 13 years ago - having reached 20 times the current price in the run up to the Global Financial Crisis. Resolute holders of its shares have been rewarded with nothing but further misery of late as prices continue to veer downwards. The third asset in apparent stasis is the ~7% of Argentine outstanding debt in the hands of tenacious holdout creditors. However these holdouts are probably feeling a long awaited sense of relief and optimism today as fresh negotiations begin between them and the budding Argentine government of President Mauricio Macri.
Argentina defaulted on USD 93 billion of debt in 2001 following a sharp recession. This was the same year that Jim O'Neill first coined the BRIC acronym to highlight the potential of Brazil, Russia, India and China. But for Argentina the following year saw the depegged peso lose three quarters of its value pushing inflation up to 40% and real GDP down by 11%. Such were the woes of the country that when an eventual restructuring offer was reached in 2005 around 76% of creditors accepted the conditions. A further 5 years of setbacks wore down most of the remaining holdouts to settle in 2010 leaving just 7% of the original debt in the hands of dogged investors and vulture funds who snapped up the paper at beleaguered prices and now stand to make a handsome profit.
It’s not really the wellbeing of these profiteers that markets are most concerned about but the chance for Argentina to finally break the impasse and be accepted back into international markets. Because of its drawn out exile Argentina has a much smaller debt burden than its neighbours alongside a relatively healthy economy and demographic. It is important for Argentina to be seen to be doing all that it can to restore investors in order to restore its own image. Mr Macri made clear such aspirations in a recent press conference stating, “It’s very important that we resolve the problems of the past. We want to stop being a country that’s branded as not honoring its pledges and we want to resolve all outstanding issues.” Alongside such goodwill the new more market orientated government have managed to retain domestic support whilst clearly presenting the tough road ahead and have wasted no time in passing healthy reforms such as lifting capital controls and removing noxious farming taxes and tariffs.
This year may prove to be the antithesis of that previous era for the two nations of Argentina and Brazil. Argentina still has many hurdles to overcome but have already shown both willingness and ability to succeed. The negotiations beginning today will be the clearest sign of reform if successful and the strained global markets are eager to find reasons for Argentina’s absolution - and of course new sources for higher yields. If successful the rise of favour (and credit rating) of Argentina could be as fast as its fall from grace a decade and a half ago. Brazil and its creditors, on the other hand, should consider the lessons learnt from the prolonged Argentine debacle and at the very least be practicing their patience. Currently we invest in neither but with the direction each is heading one cannot tell which will be the first to again offer attractively valued investment grade credit.