Certain aspects of the Argentina comeback deal will look crazy to an outsider: a single B, serial defaulter raised $16.5bn of money with a $68bn orderbook, despite inflation projections as high as 35% and an imminent recession.
2016 began catastrophically for EM bond markets, and with consistent outflows, doomsayers were quick to proclaim crisis in the asset class. With $68bn of demand, the first message Argentina’s bond sends is to dismiss any of these concerns, serving as a reminder of just how much money is out there for EM borrowers.
Given how much the asset class has grown, this isn’t going to change.
As an example: there was $85bn of Latin American cross-border bond issuance in 2015, the same amount that investors received from Latin American issuers making coupon, amortisation and maturity payments. A similar amount is going to be recycled into investor pockets this year.
This technical support is the reason a $68bn book is not impossible in a market that, despite a solid couple of months, remains essentially shaky.
But Argentina’s real success derives from its ability to give EM investors that thing they most love: a story of resurgence that they can get behind.
This should perhaps ring alarm bells. Brazil, the great Lat Am resurgence story of the last decade, has ended in turmoil just across the border. The great Mexico reform story that emerged in 2012/2013, while hardly in crisis, has certainly lost some of its lustre with the slump in oil.
Yet there is reason to believe that Argentina is different. Firstly, unlike Brazil, the improvement in how investors perceive the country has not been about external factors such as commodities. It is thanks exclusively to the actions of the government: they floated the currency, cut energy subsidies, and negotiated with holdouts. Now they have hired an extremely experienced economic team and done an exemplary job of marketing themselves.
The Mexican momentum, now waning, was also ignited by strong policy making. But unlike in Macri’s case, Mexican president Enrique Peña Nieto’s reforms have taken time. Investors were betting on promised improvements that have yet to materialise.
Argentina, on the other hand, has had shock therapy. It’s less than six months since Macri won the election, and he has already delivered aspects of policy that investors liked.
Finally, Argentina’s story is unprecedented in modern times. When have you heard of such a large economy being locked out of the market for 15 years and then forced into a second default, not because it did not have the money to pay, but because a US court wouldn’t let it pay?
The shift from market pariah to a normalised economy has been so rapid that the much-sought resurgence could be faster than ever.
All the above means that investors are likely to give Macri the benefit of the doubt for some time yet. They want this to be the EM trade of the year, and their belief will be self-fulfilling.