15 October 2018

What a difference a year makes

In June 2017 Luis Caputo, the then Argentine finance minister, pulled off a remarkable coup.

He managed to convince investors to lend Argentina $2.75bn for 100 years – what become known as the century bond. This was so remarkable because Argentina has defaulted on its debt (i.e. not paid back their lenders) eight times in the 200 years since independence. Argentina last defaulted in 2001, when they defaulted on $100bn of debt. At the time this was the largest default in history. In lending Argentina the $2.75bn, global investors showed their belief that the country had turned a corner and that their money would be safe for the next century. Luis Caputo stated:

“Such an issuance is possible thanks to our recovery of the world’s credibility and confidence in Argentina and in the future of our economy”.

So why is this relevant? This is relevant because just over a year later Argentina is in financial turmoil and the century bond has fallen in value significantly as investors have swung from greed to fear. But let’s not just pick on Argentina, asset values (be that foreign exchange, stocks or bonds) have fallen in multiple emerging markets this year, from China to Venezuela, to Turkey and Russia. One or two hiccups can be explained, but when emerging nations are feeling the pain across the world we have to listen.

Economists tend to point to high levels of debt, rising US interest rates and reducing dollar liquidity (investors and corporates taking dollars out of emerging markets and spending them in the US) as the cause of this year’s hurt.

In contrast, US markets are roaring along this year, largely ignoring what is going on overseas. Mr Trump promised higher US growth and for now that is exactly what he has delivered. Looking ahead the question is how long these levels of growth can be maintained while the world around struggles and America’s trading partners are feeling the pinch. It feels like something has to give. Anyone fancy an Argentinian century bond at a fraction of what it went for last year?

Written by Fred Mahon.

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