FT: Argentina’s fight with creditors fails to spoil investor appetite

18/6/2014

By Elaine Moore and Vivianne Rodrigues

Argentina stands on the brink of default, engaged in one of the ugliest fights ever witnessed between a country and its creditors.

Yet this week’s ruling in the case dubbed the sovereign debt trial of the century has done little to spoil investor appetite for risky government debt.

“Investors were already well aware of what is going on in Argentina,” says Simon Lue-Fong, head of emerging market debt at Pictet Asset Management, which holds Argentine debt but has reduced its position in recent weeks. “So contagion has been limited. At least for now.”

Days after the the US Supreme Court declined to hear Argentina’s case against its hedge fund creditors, a number of countries boasting less than clean scorecards on debt repayment returned to capital markets and were greeted with open arms.

Ecuador, which called its creditors “monsters” when it defaulted in 2008, issued 10-year bonds at a yield of 7.95 per cent. Cyprus, which was forced to accept a €10bn bailout last year, sold five-year debt at 4.85 per cent – slightly less than the rate paid by fellow bailout country Greece when it returned to debt markets two months ago. Between them, the two countries sold $3bn in debt this week.

Debt issued by emerging market governments has been on a tear this year, outperforming most fixed income asset classes.

Total returns on emerging market debt climbed to 7.84 per cent as of Monday, according to JP Morgan Chase, and the sector remains the darling of many asset managers. Swiss & Global Asset Management and Coutts both released statements this week identifying EM bonds as particularly attractive.

But the outcome of Argentina’s battle with its creditors will affect more than just the hedge funds with whom the country’s president, Cristina Fernández, is locking horns.

The country’s government bonds make up 1.78 per cent of the JP Morgan emerging market bond index, which means a broad range of investors stand to be affected.

The next payment on Argentina’s restructured bonds is due on June 30. Following the US Supreme Court’s ruling this payment cannot be made unless the country also pays “hold-out” creditors who did not accept the terms of a 2005 debt restructuring, something it says it will not do.

The Centre for International Governance Innovation, a think-tank, says that blow-ups of the magnitude of Argentina’s default, and ensuing legal dispute, have been few and far between. Argentine bonds tumbled after the Supreme Court ruling, with their spreads over US Treasuries jumping almost 100 basis points. The cost of protecting the debt against default soared and reached its highest level since February, above the 700 basis points mark.

Yet, across emerging markets more widely, there has been little spillover.

“Argentina headlines are always catchy,” says Peter Marber, head of emerging markets investing at Loomis, Sayles & Co. “But the reality is that regardless of Argentina, dozens of countries and many more corporate bond issuers have had access to international capital markets in the past couple of years. This dispute won’t change the fact that there has been a broad-based improvement in fundamentals throughout emerging markets.”

Banks say they are watching the situation in Argentina closely, noting the situation is fluid.

Shares in Argentine companies rose on hopes of negotiation after it was announced that the country would meet creditors in New York next week. However, they fell back on Thursday when the country’s cabinet chief reportedly denied the mission.

“Nothing of this is good for Argentina. But we may be getting close to the endgame of this long dispute,” says Win Thin, head of global emerging markets currency strategy at Brown Brothers. “If and when Argentina finally clears all this and returns to markets, I have no doubt there will be investors lining up for their new bonds.”

Instead, the knock-on effects are likely to be felt in the world of policy, rather than finance, says Domenico Lombardi at the CIGI.

“Argentina’s contentious relationship with international investors is unique and other emerging market economies have stronger fundamentals so they are less prone to a wave of contagion,” he says.

“Argentina has already been downgraded by credit rating agencies but this has not triggered similar downgrades for other economies.”

The winter in EM debt that began last year over fears that the US Federal Reserve was on the brink of tapering its emergency bond-buying programme, is not about to return because of Argentina, says Soumyanshu Bhattacharya, emerging markets debt client portfolio manager at JP Morgan. Certainly not while interest rates remain at or near historical lows in the US and Europe.

“Look at Venezuala, look at Ukraine. If there was contagion that’s where you’d see it and it isn’t there. Investors certainly haven’t lost their nerve over the Argentina situation.”

Charles Blitzer, a former IMF official, says the implications of the case were never going to be as serious as some commentators had suggested.

“There have always been hold-outs in defaults, and those hold-outs more often than not get a better deal in the long run. Markets have been well aware of this fact and it has never undermined achieving a successful restructuring with high participation, and will not in the future. This case has more entertainment value than anything else.”

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