Argentina, for so long judged by so many to be on the verge of a devaluation, has taken its boldest move yet to prove the doubters wrong by issuing an international bond denominated in pesos: its first investment-grade issue.
In December, without much fanfare, it launched its first Europeso note a Ps250 million ($250 million) two-year issue carrying a coupon of 8.75%, payable six-monthly. The issue was led and, as far as is known, bought up in its entirety by Goldman Sachs International.
Argentina’s decision to begin issuing Europeso notes something it plans to do more of in 1997 is partly “just to show we can do it,” says finance under-secretary Miguel Kiguel. Until recently, few buyers would have been willing to take on Argentine currency risk, let alone at such a tight spread over dollar issues with similar maturities.
“It’s very positive for Argentina to have done this,” says Joyce Chang, emerging markets debt strategist at Merrill Lynch. As recently as August, she says, clients’ questions on Argentina were about whether the sacking of Domingo Cavallo from the economy ministry in July would bring down the banking system or lead to a massive capital outflow. Now everyone is much more relaxed and concerned with smaller questions such as the likely pace of economic recovery, she says.
“I think that the fear today of a devaluation is probably lower than at any time since at least before the Mexican crisis,” says a Goldman Sachs executive.
“As time goes on, people see less and less chance of a change in economic policy,” says Jerome Booth, head of research at ANZ Bank in London. “I’ve gradually become more comfortable with Argentine country risk.”
Scepticism about Argentina’s fixed exchange rate stems from its adoption in 1991 of a currency board system known locally as convertibility with the aim of eliminating hyperinflation. The idea was that, by fixing the peso at parity with the dollar and prohibiting the printing of pesos unless backed by foreign currency reserves, faith would gradually be restored in the local currency.
The strategy, which effectively removed all discretionary power from Argentina’s monetary authorities, has worked wonders in the war against inflation, which has been slashed from an annualized 5,000% to zero in only a few years. But doubts persisted about the sustainability of the fixed exchange rate and intensified after Mexico’s devaluation of December 1994.
Many international investors assumed Argentina would not have the stomach to face the inevitable recession that would follow the Mexican shock. Instead, they said, it was bound to choose the traditional path of devaluation.
Argentina did not devalue. It chose instead to repair its current-account position through a deep recession, which hit both imports and exports. That was considered Argentina’s test of fire. Issuing internationally in pesos is another milestone on the long road to credibility.
Kiguel says that Europeso issues, as well as demonstrating confidence in Argentina, “could expand the spectrum of investors”. Peso debt carries a BBB investment grade rating, since agencies assume that the probability of default in pesos is lower than for foreign-currency denominated debt. Argentina will this year try to issue other peso-denominated Eurobonds, with the hope of stretching out the yield curve to 10 years, Kiguel says.
“In a situation of enormous amounts of [international] capital seeking higher returns, having a little piece of an issue like this fills out a fund’s portfolio quite nicely,” says the Goldman Sachs executive. “The fact that it is investment grade should open a few doors, but you have to be a little careful. A lot of fund managers need higher than just plain BBB investment grade, so there’s still a lot of money not available.”
Merrill Lynch’s Chang takes the argument further. “The investment grade rating shouldn’t have too much of an impact in widening the investor spectrum because of the segmentation of the market,” she says. “The higher local currency rating isn’t something that has been incorporated into the market … Those that tend to buy local-currency issues don’t have rating constraints and tend to be more aggressive anyway.”
If such investors want to buy peso risk, she says, they can simply take part in the local monthly auctions of short-term letes, usually 90-day paper. Since last month, they also have the option of two-year T-bonds, known as bontes, which will be regularly auctioned in 1997.
Chang also doubts that the depth of the market in Argentine Europesos will be sufficient to entice international investors. “Liquidity is the real question. If there’s anything that constrains international peso issues it’s the fear of getting stuck with paper that’s difficult to trade,” she says.
There is also some concern that, with such a thin market, it would not take much bad news significantly to widen spreads of peso-denominated debt on the secondary market. Given the volatility of Argentina, this could trigger endless speculation about whether a devaluation was imminent. Kiguel admits that such a scenario does provoke concern.
Some international analysts believe issuing Europeso notes will not reassure markets about the long-term viability of the fixed exchange rate but will rather send the reverse signal. “It should be sending that [devaluation] message,” says a sovereign risk analyst with a US bank. “It diversifies their debt structure. If they eventually have to come off convertibility it’s going to suit them to have debts in pesos and not in hard currency.
“Argentina is in the sticky situation where they’ve said repeatedly that convertibility is forever. But fixed exchange rate systems are inflexible and cause horrible recessions like that of 1995, an experience they won’t want to repeat,” the risk analyst says.
“They should be planning how they’re going to get out of this, and part of that is by preparing the market for an eventual change. It’s the same thing as when they prepared the world for the end of Cavallo. Markets were once horror-struck at such a prospect, but they gradually got used to the idea. And when it finally happened Argentina weathered the storm very well.David Pilling
