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Emerging Markets in Focus: Argentina Bond Default

Argentina Default Background

ERIC FINE: First I will offer some context on Argentina and why they're defaulting. This is a very unusual default. Normally countries default because they can’t or won't pay, i.e., willingness or ability is low. In this case it's unusual because Argentina can pay and wants to pay. However, there's a court ruling that is preventing them from payments on one bond series flowing outside of Argentina because there are holdouts attached to those payments. It's very technical. It’s an unusual situation because your claim is ultimately going to be on par. Argentina is not saying they can't afford to pay and they're not saying they're unwilling to pay. Number two: the Argentine government is arguing that they can't negotiate with holdouts and resolve this issue until the end of this year because of the original restructuring of the bonds. Argentina did a restructure after they defaulted and new bondholders said, "We'll take these new bonds and we'll get rid of our claims on the old bonds but if you give us these new bonds we want a clause in there that says you can't give holdouts a better deal than us until the end of this year." Meanwhile the Argentines are saying, "We can't negotiate until the end of this year."

Now that's negative but it's not normal in terms of this being an endless process or Argentina not wanting to pay. Argentina wants to pay and their claim is under the bond clause that they're going to negotiate at the end of this year because of that clause. Thus this is a very unusual default but Argentina is defaulting because holdouts have successfully argued in U.S. courts that they have a claim on money flowing out of Argentina on certain series of bonds and this one series of bonds is what's in default.

I should hasten to add that there are a large number of bonds in Argentina that are not subject at all to this ruling and are performing. The default is very specific to one particular bond series and it's also very unique as to why Argentina is defaulting.


FINE: What's our outlook for Argentina? Our starting point is comparing countries' fundamentals to what premium you're getting. Are you getting paid for that risk? Looking at fundamentals alone and putting the important technical default issues to the side, Argentina is cheap. It's paying spreads that are too high for its fundamentals. Additionally there are elections next year. All potential alternatives, i.e., all potential successors to the current president, want this issue resolved. There's a very different attitude on economic policy next year. Lastly, when and if the issue is resolved, you're talking about $5-15 billion in financing pretty easily being made available to Argentina. That transforms the bonds and the economy from being one where financing is a risk to one where financing is a lot less of a risk. That takes the bonds into a very different universe of credit spreads. Six months from now we think we're supposed to have exposure to Argentina. It's supposed to be smart exposure, including mostly performing bonds and avoiding the volatility of the next six months. Over the next six months, however, we think it's an excellent trade and we want core exposure. We're managing a portion of the exposure consistently with the sometimes dramatic sell-offs or rallies you can see in some of the country’s bonds, on which we're taking a tactical attitude.

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