The Daily Update - Argentina - 200 Years of Defaults and 2 Years Hoping for Something Different

In a rerun of a familiar saga, Argentina’s default probability jumped back above 75% (5 years) following a primary election upset that blindsided most of the market. Former man of the moment, Argentina’s President Mauricio Macri, was defeated by Alberto Fernández and his running mate former President Cristina Fernandez de Kirchner in yesterday’s vote – by 32% to 47% – causing a large volume of sell-offs in the country’s debt and instantly doubling credit default swap prices. Stocks and the peso fell correspondingly as all sides digested the possibility of the return of Peronist policies if the October vote favour Fernández and Kirchner. The Argentine peso has gone from under 4 to mid-40s versus the dollar over the past 10 years with inflation currently around the mid-50%s; since yesterday it has spiked as high as 62 and now stands at 53 to the dollar – 14x less buying power than a decade ago. Now recall that 80% of its debt is in foreign currency and one sees how explosive Argentina’s problems are.

In the ~200 years since its independence in 1816, Argentina has defaulted no less than 7 times on its international debt (and 5 times on its domestic debt). The first was in 1827 and the most recent was in 2014 which inevitably transpired after the 2001 default when holdouts from the 2005 and 2010 restructurings won their case to be paid before the restructured bonds – so when Argentina made a payment to the restructured bonds on 30th July 2014 it was blocked.

November 2015, enter elected President Mauricio Macri, who swiftly attempted reforms and negotiations with the holdouts coming to an agreement in February 2016, with the final settlements occurring within his first year in office. 2017 thus became Argentina’s year, with the likes of MSCI and JP Morgan reintroducing Argentina to their benchmark indexes from January. By June 2017 -wasting no time after 15 years largely blocked out of international debt markets - Macri was eager to tap market optimism and managed to issue a 100-year bond with a coupon of 7.125% priced at $90.00 (for which we made calls to short). If the nation returns to previous political and economic traditions holders using historical averages can expect around 6 defaults before this bond matures. The bond hasn’t traded above its issue price since, averaging around $74 in its lifetime directly tracing the optimism over Macri (and little else), and after yesterday’s landslide upset is trading below $57 with a spread of more than 1,000 over.

Contrastingly, yesterday Fitch upgraded Russia to BBB with a stable outlook, citing “robust fiscal and external balance sheets” and a “strengthening policy mix” that can help address the ongoing sanction risks. Moody’s and S&P maintain the country at the Baa3/BBB- investment-grade level, now one notch below Fitch, but this positive trajectory by one NRSRO challenges those concerned that current sanctions make a case for a potential downgrade.

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