They had it coming.
The chase for yield in a central-bank manipulated low-interest-rate environment is very costly, as brain-dead buyers of Argentina’s dollar-denominated and euro-denominated bonds found out. These junk bonds were issued with great Wall-Street hype in 2016 and 2017, including inexplicably a 100-year bond, backed by a country that has defaulted on its foreign-currency bonds five times in my lifetime, and that defaults on its peso bonds on a daily basis via inflation running between 30% and 50% recently. “And yet, yield-desperate investors don’t seem to care,” I wrote in astonishment in 2017 when brain-dead investors bought that 100-year bond. So here we go again.
On Sunday, voters in Argentina expressed their frustration with market-oriented but ineffective reforms by President Mauricio Macri and with the IMF bailout of the brain-dead investors holding Argentina’s dollar and euro bonds. The IMF has lent Argentina $39 billion so far under its June 2018 “Stand-By Arrangement,” so Argentina wouldn’t already default on its newly issued dollar and euro bonds. That bailout package came with some conditions, which were unpopular. And so Argentines voted against Macri and his reforms, and the results are in:
In the primary election on Sunday, the opposition ticket of Alberto Fernandez and running mate Cristina Fernandez de Kirchner, Argentina’s ex-leader, obtained 47.7% of the vote. Macri and his running mate, Miguel Angel Pichetto, obtained 32.1% of the vote. Unless Macri can perform a miracle, these results indicate that Argentines are ready to replace Macri and his policies with the Fernandez-Fernandez policies during the presidential election on October 27.
Less than 20 years ago, the peso was still at parity with the USD, via a peg. At the moment, the peso is worth less than 2 cents. The willful destruction of the peso is standard operating procedure, spanning various governments. The plunges are as deep as they are regular.
The chart of weekly moves going back to January 2018 shows how common plunges of the peso against the dollar are. And there is essentially no recovery after those plunges, only some dead-cat bounces and periods of relative calm before, invariably, the next plunge:
In Argentina, many things, from goods to long-term contracts and rents, are priced in US dollars, and converted to pesos at the time of payment at the current rate because Argentines don’t trust their own currency. This makes it hard to use the peso for pricing and transactions, which is one of the primary functions of a currency. The lack of a relatively trust-worthy currency handicaps the functioning of the economy.
In this melee, Argentina’s newly issued dollar-bonds and euro-bonds have plunged, as another outright default is now showing up on the horizon as a real possibility. This default could be triggered by a future government refusing to comply with IMF conditions, which could induce the IMF to pull out of its bailout deal. And without the IMF’s bailout money, these bondholders would be subject to big haircuts.
Investors are beginning to anticipate those haircuts. The price of a 10-year note maturing in 2028, dropped from 77 cents on the dollar on Friday, when investors were already smelling a rat, to 59 cents on the dollar Monday morning. And the 100-year bond, that inexplicably found brain-dead buyers in 2017 when it was issued, performed a similar feat. Chart of the 100-year bond via Bloomberg’s Lisa Abramowicz:
Why anyone is still lending Argentina any money at all whatsoever, after its history of just crapping on its creditors with clockwork regularity, has been a mystery for a long time.
Argentina, as a sovereign country, can do with its currency however it pleases. There is no bankruptcy procedure for countries. And Argentina cannot print itself out of trouble with its foreign-currency debt. But it can default again, refusing to pay interest on those bonds, and refusing to redeem them over the next few years when the first batch comes due. And it should default.
Brain-dead investors have brought that on themselves. They ignored the one fundamental rule with regards to Argentina: Don’t ever lend that government any money, no matter who is in charge. Argentines don’t trust their government and their peso, and they keep their money in dollars and in real estate in Miami, or whatever, rather than in the government’s peso debt. Argentines know! And yield-chasing brain-dead foreign investors who don’t get that, well, Argentina’s government should just offer them another high-and-tight haircut with a charming smile.
Suddenly – I mean the signs had been everywhere for a long time and “suddenly” doesn’t really apply – the whole house of cards came tumbling down. Read… Is the Everything Bubble Ripe Yet?
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate “beer money.” I appreciate it immensely. Click on the beer mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
