For the ultimate proof many investors are trapped in a world of bad decisions, look away from Europe, just for a moment, and turn your gaze across the Atlantic. No, not to the US but to Argentina – so named because early settlers believed it had huge reserves of silver. The country has some – just not enough to put it in any world top 10 – and it has continued to offer false hope to investors ever since.
The latest in a long line of causes for investor optimism is Mauricio Macri, who took over as president from Cristina Fernandez de Kirchner at the end of last year. Though viewed by international investors as a much more business-friendly and reforming premier than his predecessor, he nevertheless faces a tough job turning round the country after almost a decade of her, let us say, ‘populist’ administration.
For one thing Argentina has to convince the world its economic numbers are reliable when, for some years now due – due to the real figures beginning to upset Fernandez de Kirchner – they have been anything but. And, for another thing, the country is having to pay back huge amounts of money to the hedge funds who, again for some years now, have been the only entities willing to invest in it.
Indeed, things had grown so bad, the government was having to be careful where its ships and aeroplanes travelled for fear a hedgy creditor would seize one to use as collateral. All this too against a pretty bleak economic backdrop with a recession expected later this year and CPI inflation at 35% – always assuming, of course, you trust the numbers …
Knowing all of that, how might you expect the country’s most recent foray into global bond markets to have fared? Not, presumably, that Argentina was able to raise $16.5bn (£11.1bn) in April through a sale of 10-year government bonds that ended up being almost five times oversubscribed. Yet those are not even the most interesting of the associated numbers.
That honour, we would argue, goes to the yield investors can expect if they hold the bonds to maturity – 7%. Taken in isolation, that is more than enough to catch the attention of the world’s income-seekers – and certainly in comparison to, say, the negative yield on offer from Japanese government debt. But then again, Argentina’s record of paying back its debts is somewhat shakier than Japan’s.
For the record, Argentina has been in default on its external debt for no fewer than 21 of the last 36 years and – at least for the time being – there is only one country with a worse record of defaulting over time. Put it this way, if there was such a thing as a Defaulting World Cup, Argentina would be contesting every final with Greece.
Offered by a country with such a chequered financial history, then, 7% hardly constitutes a great value opportunity and the fact the April debt sale was covered many times over is a stark indication of the challenge facing fixed income investors in their search for yield at a time of low and, in some instances, negative interest rates.