Welcoming Argentina back
I spent a large chunk of this afternoon at a fascinating discussion about Argentina, keyed off a paper from veteran Latam economist Arturo Porzecanski, entitled “Should Argentina be Welcomed Back?”
Arturo does a good job of explaining why Argentine debt looks attractive right now: the surging exports and international reserves, the rising incomes, the falling unemployment rate, the shrinking debt ratios. This chart, for instance, includes debt on which Argentina is still in arrears, to bondholders and the Paris Club:
He then explains in great detail why none of this really matters. Argentina might have the ability to pay its debts, but it doesn’t have the willingness to do so. It has been lying about domestic inflation for years, and refuses even to tell the IMF what its financial situation is. Arturo’s own personal estimate is that it’s running at roughly 30% a year — a far cry from the official numbers, which are in single digits. As Arturo notes, ” in the IMF’s leading publication, the World Economic Outlook, Argentina is the only country in the world whose inflation and GDP statistics are accompanied by a footnote explaining that the numbers cited have been challenged by private analysts”. He continues:
High-inflation countries are usually characterized by imprudent fiscal and monetary policies, feature unsustainable exchange rates, and tend to engender social and political unrest – sooner or later.
So far, the leftist government has managed to avoid that unrest — largely, says Arturo, by paying off the unions. But government spending is now out of control: it quadrupled, in nominal terms, between 2002 and 2009, and there’s literally no accounting for where it has all gone — because of the number of aggressive holdout creditors looking to attach Argentine assets, a lot of money transfers are very secret, and often in cash.
And the government is so blasé about paying its debts that it’s in arrears not only to old bondholders but also to fellow sovereigns in the Paris Club, as well as refusing to pay current and future judgments against it from the World Bank’s ICSID — judgments which carry the status of treaty obligations. If and when the Paris Club debt is ever resolved, says Arturo, that could well harm anybody buying the long-rumored new Argentine bond, since the Paris Club is likely to require that unrestructured private-sector creditors also do some kind of restructuring themselves, under its principle of comparability of treatment.
Arturo concludes that “the government’s attitude toward official and private creditors, as well as toward court judgments and arbitral awards, remains one of contempt”, and that as a result it should not “be welcomed back by the international capital markets”.
The problem with this is that it’s a fundamentally moralistic argument: Argentina, with its corruption and contempt for international institutions like FATF, doesn’t deserve to be a part of the international capital markets. But of course markets have few moral scruples, and indeed all of these problems with Argentina’s institutions only serve to increase the upside for people buying the country’s debt, should the Argentines get their collective act together under some future government.
“For us, the medium to long-term prospects for Argentina are extraordinarily good,” said Greylock’s Hans Humes in response to Porzecanski. Argentina’s corporate sector has somehow managed to survive and even thrive despite a complete lack of credit; just imagine what they could do once an Argentine yield curve emerges and they can start borrowing money again. Already, Argentine companies are going public, with most of the shares sold internationally: there’s clearly both demand for capital and global investors willing to supply it.
What’s more, I’m not convinced that the Paris Club would force Argentina to restructure a brand-new bond just out of fealty to a principle which has always had a certain amount of flexibility built in to it.
That said, I’m also not convinced that Argentina really needs to issue a global bond. The legal fees would be stratospheric, given the attempts that holdout creditors will certainly make to attach the proceeds. And Argentina already has lots of access to international investors who are more than happy to invest in its local bonds. Yes, many of Argentina’s corporates would love the sovereign to have an international yield curve in dollars, and they could probably issue longer-dated dollar debt internationally than they can domestically. But these things are all marginal, they’re not necessary.
The fact is that the distinction between foreign and local debt is rapidly becoming one that very few people care about any more, and Argentina had demonstrated that it’s perfectly willing to wait as long as it takes — which means as long as it takes to come to some kind of settlement with its holdout creditors — before braving the international capital markets. If the country’s bankers and lawyers can persuade the government that they have a workable solution before then, the country will probably go for it. But there’s no urgency. And I, for one, am not holding my breath.
Observers like Arturo might not like it if Argentina returns, but there are always slightly smelly debtors out there, and Argentina certainly isn’t as smelly as Venezuela. The fact is that the timing of Argentina’s return will be determined by boring legal concerns, not by highfaluting questions about how robust its institutions are.