It is exactly five years since Argentina defaulted on $81.8 billion of debt and devalued its currency. At the time, it was difficult to see how the Latin nation could extricate itself from financial crisis.
How things have changed. Not only has Argentina restructured its debt with its private bondholders, it has paid the IMF the almost $10 billion it owed the multi- lateral and is now seeking to tackle the $6.3 billion of defaulted debt it owes the Paris Club of official creditors.
The turnaround in its fortunes is remarkable. Today, Argentina is booming, as is most evident in the financial markets. The sovereign was the best-performing country in the emerging markets asset class in 2006, yielding 48% between January and mid-December, compared with a return of 10.6% for JPMorgan’s Embi+ index. Almost all Argentine securities rallied last year, including its par and discount bonds and especially its GDP warrants. These securities were created following the sovereign’s debt restructuring in June 2005. They returned a startling 150% in the first 11 months of last year.
Although Argentine asset prices performed well throughout the year, they really pushed on in the fourth quarter. The par bonds sparked the initial rally, quickly followed by the discount bonds. This then created arbitrage opportunities in other Argentine securities.
The rally, therefore, was partly driven by momentum. But the main reason for the surge in prices is the Argentine economy’s buoyant performance. GDP was up 2.6 percentage points from the second quarter to the third quarter of 2006 to reach a growth rate of 8.7%. The chances are that when the fourth-quarter figures are known the economy will show 9% growth for 2006, the average annual rate for the past three years. For the most part, Argentina’s policymakers have pursued sensible policies, strengthening the country’s fiscal position, building its international reserves and creating the conditions for consumer confidence to grow.
The concern, though, is whether Argentina’s economy is overheating. Already the World Bank has warned of the possibility of a hard landing if a controlled slowdown does not materialize soon. To complicate matters, the presidential election will take place in October, which means that there will be a limited timeframe for any meaningful policies to be implemented.
But critical decisions still need to be made to put Argentina’s economy on a sustainable footing, especially regarding energy provision. The country suffers from energy shortages, which are a result of the government’s refusal to allow utilities to raise rates, even though the economy is faring so well. In December the World Bank suspended a $500 million project for energy infrastructure investment in the country because of the government’s unpredictable energy-price policy. Standard & Poor’s, which upgraded the sovereign’s foreign currency rating twice last year to B+, says it probably won’t make any more positive changes for the next 12 to 18 months because of the energy issue.
Inside Argentina’s financial crisis
Guillermo Nielsen exclusive for Euromoney.
Euromoney March 2006
