Is the 100-year Argentine bond good news or bad news?

by on June 21, 2017 at 3:02 am in Current Affairs, Economics | Permalink

Mr Costa explained that long-duration bonds are the best way for real money investors to place bets on Argentina, given that they are unable to leverage themselves like a more nimble hedge fund. “If you are an investor with a constructive view on Argentina, what you want is duration,” he said.

Argentina sold $2.75bn of the debt with a coupon of 7.125 per cent, equating to an annual yield of 7.9 per cent, according to a statement from the Argentine finance ministry late on Monday. The bond attracted $9.75bn in orders from investors.

But don’t focus on the 100 years:

Given the bond was sold at a yield of almost 8 per cent an investor would recoup their initial investment in around 12 years.

Yields could fall by at least 150 basis points, moving more in line with other major economies in the region such as Brazil — implying capital gains on such bonds in the double digits. “Those are pretty good returns. At a rate of 8 per cent or higher, it’s a buy,” Mr Costa said.

The bad news is what you must endure to have a crack at the 8 percent:

Argentina has defaulted on its sovereign debt eight times since independence in 1816, spectacularly so in 2001 on $100bn of bonds — at the time the world’s largest default — and most recently in 2014 after clashing with Elliott Management, an aggressive hedge fund.

But Mr Macri’s government “cured” the latest default in 2016, and times have changed, said Joe Harper, a partner at Explorador Capital Management, an investment fund focused on Latin America. “The policy pendulum in Argentina has shifted to the centre, and the country’s next 100 years will be very different than the last century.”

Here is the full FT story, by Benedict Mander and Robin Wigglesworth.

1 carlospln June 21, 2017 at 3:08 am

“This time its different”

2 dearieme June 21, 2017 at 6:57 am

“times have changed” has fewer syllables.

3 Anon7 June 21, 2017 at 3:33 am

The wax in the ears of Argentinians that is blocking out the siren call of Evita will melt much sooner than 100 years.

4 Cooper June 21, 2017 at 2:08 pm

If you’re getting regular coupon payments of 8%, you don’t need to hold off default for the full 100 years in order to profit nicely off these bonds. Relative to US treasuries, you only need 20 years of steady payments from Argentina to come out ahead.

$1,000 US Treasury bond, 3% coupon, full return of principle = $900 profit after 30 years

$1,000 Argentine bond, 8% coupon, zero return of principle = $1400 profit after 30 years.

5 Thiago Ribeiro June 21, 2017 at 4:42 am

“The policy pendulum in Argentina has shifted to the centre, and the country’s next 100 years will be very different than the last century.”
I still remember when Menen, the reasonable Peronist, was taken by gullible Americans such as Lawrence Summers as definitive proof that Argentinians are better then Brazilians. Then the teacher’s pets broke their country. But I am sure this time is different.

6 Viking1 June 21, 2017 at 10:10 am

If you’re a Petrobras shareholder, you would at least conclude your government failed you, if not defaulted.

7 Thiago Ribeiro June 21, 2017 at 10:39 am

Shares are not debt, they are property. The shareholders are welcome to sell their shares if they want. It is true that the corrupt administration was less than they deserved (although the kind of libertarian who hates FDIC and not starving old people probably could say they failed to do due diligence). They are entitled to sue the culprits. Byt he way, Brazilain authorities are punishing the criminals in the most strict ways.

8 Mark Brophy June 21, 2017 at 12:38 pm

Argentina is a terrible country but it is still richer than Brazil.

9 Thiago Ribeiro June 21, 2017 at 2:10 pm

It is a farce. Brazil has one of the biggest economies Mankind has ever seen, meanwhile the Aregentian refime has to defraud is creditors. Every time they tried to conquer Brazil, they were soundly beaten. We are invincible.

10 Mark Thorson June 21, 2017 at 2:23 pm

On the Misery Index, Argentina is #2 after Venezuela.

http://www.zerohedge.com/news/2017-01-16/world’s-most-–-and-least-–-miserable-countries-2016

Guess who is #3.

11 JWatts June 21, 2017 at 4:53 pm

I’m going to guess Brazil.

Yep, no surprise there. I’m sure the Brazilian authorities will punish the Economist Intelligence Unit “in the most strict ways”.

12 Thiago Ribeiro June 21, 2017 at 5:22 pm

It is sad to say how much some Americans hate Brazil while fawn all over American boys-killers like Saudi Arabia, Red China and Japan.

13 Thiago Ribeiro June 21, 2017 at 5:58 pm

At least America knows how to punisj the sneaky Japanese, by raping ther schoolgirls.

14 Thiago Ribeiro June 21, 2017 at 6:01 pm

The awful imposter has returned. Do not force me to take drastix action! The Brazilian spirit is invincible like a lion.

15 Thiago Ribeiro June 21, 2017 at 5:25 pm

According to the I dex, maybe America should be more like Vietnam… Brazil has experience a mild recession in the last two years, but President Temer has turned the country around and it showed strong employment numbers the last two number. It is predicted GDP will have started to recover by the year’s end. Not that you are interested on the well-being of the Brazilian people.

16 Miguel Madeira June 21, 2017 at 5:13 am

“and most recently in 2014”

It is correct to call “default” to what happened at 2014? If I understand, Argentina “defaulted” in the same debt that has already defaulted in 2001 – it is only considered a new default because the owner of the debt insisted in trying to recover the value

17 Some Guy June 21, 2017 at 9:25 am

Yes, it was a default. Argentina refused to pay outstanding debt it owed.

18 Rock Lobster June 21, 2017 at 10:20 am

Semantics. It was a different animal and you ought to know that.

If I’m fully separated from my wife and I get a new girlfriend before the divorce is officially finalized, have I committed adultery?

19 Pshrnk June 21, 2017 at 10:50 am

“If I’m fully separated from my wife and I get a new girlfriend before the divorce is officially finalized, have I committed adultery? ”

YES

20 Rock Lobster June 21, 2017 at 11:58 am

And yet if you went around calling the guy an adulterer without putting some nuance or qualification into that statement, you’d be dishonest. Funny how that works.

21 rayward June 21, 2017 at 6:24 am

It’s no news. Unlike default on corporate debt, which can be negotiated as a one-off, default on sovereign debt cannot because the sovereign can’t be forced to relinquish its cash flow; thus, default on sovereign debt tends to be a continuing renegotiation rather than a once-and-for all negotiation with all claims settled. So whether it’s a 20-year bond or a 100-year bond makes little difference. Of course, that explains why corporations usually attempt to pay off their debt as quickly as possible, while sovereigns don’t. I’m reminded of the approximately $3 trillion US government debt owed to the social security trust fund. Does anyone actually expect that debt to be repaid? Where would the US government obtain the cash to repay the debt? That’s right, by incurring more debt, swapping one debt instrument (an IOU) for another (a bond). Indeed, the debt owed to the social security trust fund has no fixed maturity date, so it might as well be a 100-year bond. This all makes sovereign debt seem rather ominous. Yet the greatest financial crisis in the past 100 years was triggered by corporate debt not sovereign debt.

22 Boonton June 21, 2017 at 9:54 am

This implies to me that debt is like blood. You need it for a modern economy to function. Would you try to solve a high blood pressure problem by draining all the blood from a patient?

The debt held by the social security fund is an accounting fiction but accounting fictions are there because they are useful.

23 Thiago Ribeiro June 21, 2017 at 10:17 am

“The debt held by the social security fund is an accounting fiction but accounting fictions are there because they are useful.”
Yep, useful for the vulture funds.

24 Boonton June 21, 2017 at 9:38 pm

I doubt you know what those words mean or how they apply here.

25 Thiago Ribeiro June 22, 2017 at 5:11 am

The vulture funds bought Argentinian debts to bleed Argentina dry.

26 Mike W June 21, 2017 at 7:05 am

“Indeed, the debt owed to the social security trust fund has no fixed maturity date…”

Actually, it does.

https://www.ssa.gov/OACT/ProgData/specialissues.html

27 rayward June 21, 2017 at 3:02 pm

It’s a curious thing that some of the funds are in bonds (1 to 15 years) while some are in certificates of indebtedness (IOUs), although it doesn’t indicate the amounts. I say curious because the debtor is the creditor and can change the terms for any reason or no reason. Senator McConnell has stated many times that if it were up to him we would never repay the amounts “borrowed” from the trust fund. When I heard him say that years ago on one of the Sunday talk fests, I was shocked, not because he said it, but because nobody seemed to care that he said it. The Trustees report (linked at the bottom of your link) describes how many years into the future it will take for the approximately $3 trillion in “trust fund” to be exhausted. Of course, that makes no sense. The government either will or will not fund social security benefits; it has nothing to do with what’s in a non-existent “trust fund” or amounts collected from the payroll tax. After all, Pres. Bush enacted a Medicare drug benefit without appropriating a dime to pay for it.

28 Mike W June 21, 2017 at 4:29 pm

“The government either will or will not fund social security benefits; it has nothing to do with what’s in a non-existent “trust fund”…”

Which is what McConnell likely meant when he said “we would never repay the amounts “borrowed” from the trust fund.”

I’m shocked that you were shocked.

29 Vivian Darkbloom June 21, 2017 at 5:09 pm

“After all, Pres. Bush enacted a Medicare drug benefit without appropriating a dime to pay for it.”

Also not true. Ever hear of the Anti-Deficiency Act? The funds for Medicare D were and are appropriated through the SMI Fund within Medicare.

What you may actually want to say is that no additional new taxes were imposed to pay for Medicare D (although some funds were diverted from programs designed to reimburse the costs of reimbursing states for the health care of illegal aliens). The fact that there were no specific new *revenues* dedicated to Medicare D does not mean that there were no funds *appropriated*. It may surprise you to know that the majority of mandatory expenditures (aka “entitlements”) today are not funded through dedicated revenues but through general revenues which includes, obviously, borrowing.

30 Some Guy June 21, 2017 at 9:25 am

Is this debt dollar denominated?

31 Yancey Ward June 21, 2017 at 10:00 am

Yes.

32 JWatts June 21, 2017 at 10:43 am

“But don’t focus on the 100 years:
Given the bond was sold at a yield of almost 8 per cent an investor would recoup their initial investment in around 12 years.”

12 years shouldn’t be considered the investment frame either. You can buy US bond rates at around 3%, with a low chance of default. So, the effective risk premium (assuming these are dollar denominated) is 5%.

That pushes the window to 20 years ignoring compound interest. What’s the likelihood that Argentina will avoid any type of default over the next 20 years?

33 Mark Brophy June 21, 2017 at 12:48 pm

The dollar lost 99% of its value during the last 100 years and will probably lose 99% in less than 100 years this time so Argentina will never be required to repay the debt. Investors should’ve insisted that the bonds be repaid in gold.

34 J June 21, 2017 at 2:04 pm

Russia is paying back Tsarist Gold Bonds, even Japan may one day pay back the 4th Manchukuo Industrial Loan, bonds for 100 gold yen. Why not Argentina? What if the dollar lost 99% of its worth in the last hundred years? Is there a law that it should be so in the future? May be, by 2117, the dollar will be a hundred times stronger. Miracles do happen. Argentina is so rich that it cannot default. Anyway, one hundred years passes very fast. Buy buy buy.

35 Cooper June 21, 2017 at 2:23 pm

The dollar only lost 99% of its value if you assume that everyone holds all their wealth as physical cash. In reality, people invest their cash in money market funds, short term treasury bills, etc.

If you had invested in 6-12 month CDs, your purchasing power over the last century would have increased, not decreased.

36 Mike W June 21, 2017 at 4:31 pm

You’re ignoring the most powerful force in the universe?

37 JWatts June 21, 2017 at 4:56 pm

“You’re ignoring the most powerful force in the universe?”

Since you can’t continuously re-invest the dividends in the same 100 year bond, it’s irrelevant to the point.

38 Mike W June 21, 2017 at 5:56 pm

Wasn’t “the point” the payback on the bond investment? The interest paid may not be reinvested in the original bond but it would be reinvested in something. Therefore “ignoring compound interest” would overstate the payback period.

39 Vivian Darkbloom June 21, 2017 at 12:30 pm

The yield at pricing was 8.07 percent.

40 Ann Ominous June 21, 2017 at 5:43 pm

Will Argentina exist in 100 years?
Will dollars exist in 100 years?
Will the Argentine government 100 years from now honor the debt?
Will dollars experience a hyper-inflation episode in the next 100 years?
Will we all be so wealthy in 100 years that the $2.75 billion looks like pocket change, despite the lack of inflation?

41 Boonton June 21, 2017 at 9:44 pm

Are you a vampire? Do you have a need to park your money somewhere, sleep 99 years then wake up and cash it in?

42 James June 21, 2017 at 11:42 pm

Absolute LOL at anyone predicting anything 50 years out, let alone 100.

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44 Brickbats and Adiabats June 23, 2017 at 10:49 am

Reminds me of the old British consols which lasted over 200 years, I believe, until they were retired in 2014 by being purchased at market rates. Functionally this is no different from those kinds of “perpetual bonds” and will save the trouble of a rollover. Yawn.

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