by Professor Richard Roberts, Kings College London
Happy birthday Argentina, which this year marks the 200th anniversary of its declaration of independence.
And what better way to celebrate than its recent spectacular return to the international bond market with a $16.5bn offering — the biggest ever emerging market debt sale — that attracted bids of $69bn, the largest ever order book. It is an auspicious opening to hopefully a new era in Argentina’s economic management and engagement with the international bond market.
Argentina made its debut as an international borrower in 1824 with a £1m (about $1bn in today’s money) issue in London.
Skillfully managed by Barings, a leading investment bank, the offer was heavily oversubscribed. The yield was 7.06% — similar, coincidentally, to the expected price of the medium term tranche of the 2016 issue. This was a 75% premium to the prevailing risk-free benchmark, pretty tight pricing for a new and little known borrower at the far end of the world.
Unfortunately, Argentina defaulted in 1827 and bondholders had to wait 30 years before payments resumed. It was the first of Argentina’s eight defaults on its international debt.
Overall, Argentina was in default or rescheduling on its external loans in 33% of the years from 1816 to 2008. Its record by this metric, among the countries of Latin America, the world’s most debt-defaulted continent, is around the median of the array, which spans from Honduras on 64% and Ecuador on 58% at the shiftless end, to relatively responsible Bolivia’s 22% and Brazil’s 25%.
The integration of Argentina into the global economy proceeded rapidly in the latter decades of the 19th century. By 1913, it had the 10th highest GDP per capita in the world.
The resumption of external borrowing from the 1870s powered economic development. The funds were used productively to build railways, opening up the rich agricultural hinterland, ports, banks, and the transformation of Buenos Aires into ‘the Paris of the south’.
European investors were eager to back this emerging market dynamo in an era — then as now — of deflation and low yields at home. The 1880s saw a frenzy of uncoordinated borrowing by the federal government, provinces and municipalities, aided and abetted by European banks vying intensely for mandates, that totalled £78m (c. $11bn in today’s money).
In textbook fashion, the final years of the boom saw funds diverted into real estate speculation.
By 1890 the accumulated public debt mountain had become unserviceable; the government defaulted and the market for Argentine paper evaporated. This left Barings holding millions of pounds worth of unmarketable Buenos Aires Waterworks bonds, and the firm had to turn to the Bank of England for liquidity support — the famous Barings Crisis.
Payments to bondholders resumed in 1904 and Argentina was able to return to the market in 1907. The 1920s saw further large scale external borrowing, now in New York. The Great Depression in the early 1930s led to defaults across Latin America — but not Argentina, which weathered the downturn.
The coming to power in 1943 of populist Juan Perón marked the onset of a new era for Argentina’s prosperity and public finances, that featured six debt defaults over the next seven decades. Economically catastrophic nationalist administrations defaulted in 1951 and again in 1956. Like other Latin American countries, Argentina borrowed heavily from international banks in the 1970s and like them, duly defaulted in 1982.
As the economy went from dire to even worse, 1989 saw a further default on external and internal debt.
But the 1990s saw a remarkable economic about turn with the taming of hyperinflation, currency stabilisation through pegging the peso to the dollar, and the privatisation of state companies.
Once again Argentina’s emerging market promise shone through, and external lending resumed.
However, economic mismanagement and financial turmoil was soon back with a vengeance. In 2001, Argentina defaulted to the tune of $100bn, the biggest ever sovereign default. By 2014 it had come to terms with most of its external bondholders and was ready to pay out in settlement , but a technical eighth default was triggered by a New York court ruling supporting the claims of a handful of holdout investors.
Argentina’s birthday market comeback under the ostensibly fiscally responsible administration of president Mauricio Macri is certainly a welcome and remarkable triumph. But bullish emerging market investors might ponder whether this time really is different?