Argentina: Who’s Wearing the Trousers?

On Monday we were treated to the announcement of Argentina’s July 0.5% monthly shiatsu inflation figure. As a Buenos Aires friend commented, “(The headline inflation rate) makes you laugh right up to the moment you walk in the supermarket.” Apparently, as a pair of men’s winter trousers could be snapped up at a 32% discount (Which pair of pants? Was that a month-on-month same store comparison? How many pairs of the same style and at the same store did they sell in June?), we can all rest easy. Not surprisingly, stocks and bonds sold off on the news, the Merval index dropping 1.8% and not taking its normal lead from the Dow Jones and its 289 point rise.

Later, comments to the press by highly influential cabinet chief Alberto Fernandez reminded us all that there is a presidential election up soon. From Bloomberg: Aug. 7 (Bloomberg) — Argentine Cabinet Chief Alberto Fernandez said declines in the country’s bonds track a global rout and aren’t because of inflation concerns.

“The U.S. housing bubble has popped,” Fernandez said during a conference in Buenos Aires. “This isn’t because of doubts regarding inflation. What is happening to us is happening to all on the continent.” Pass the Kool-Aid, Beto. The EMBI+ LatAm spread of 241 basis points is apparently the same as Argentina’s 473 basis points. In fact, LatAm fixed income risk peaked on the 26th July and has dropped ever since. Argentina’s spread also jumped on the 26th, but just kept on spreading.


So what to make of this? There are many theoretical, statistical and even philosophical conclusions that can rightly and usefully be drawn, but a more practical answer would be to buy Argentine sovereign bonds. Inflation is certainly a problem, but it’s no worse than in Venezuela. Politics are centre stage presently, but with U$43Bn in central bank reserves and Chávez willing to buy up Argentine paper wholesale (and judging by the chart above, increasing his own country risk!) there is an all-but-zero risk of a default under present circumstances. Not bad for a 10% yield. What is more, the Argentine Peso is a knock-down bargain at the moment, having sold off from its already pegged P$3.10 level to the dollar in recent days to stand at P$3.14. As we also expect the Peso to appreciate in the first part of a Cristina Kirchner government to around P$2.80 to the dollar, a medium-term investment in Argentine bonds (preferably local currency) is one of the more attractive risk/reward investments in Latin America right now.

4 Responses to "Argentina: Who’s Wearing the Trousers?"

  1. Anonymous   August 9, 2007 at 7:46 am

    I wonder if you are willing to put your own money in Argentina????

  2. Anonymous   August 9, 2007 at 4:08 pm

    Buying Argentine bonds? With the spreads widening in the last month and global markets being in turmoil? I am not sure!

  3. mark turner   August 9, 2007 at 5:16 pm

    Yes, I am more than willing to put my own money in Argentina. However, i also keep my ear close to the ground in that market and don’t listen to anyone who tells me that “all is well” when all is patently not well. A good example of this being international banking organizations telling people throughout 2001 that Argentina would not default, which was advice bordering on the criminal.  Please be clear that i am not talking about trading bonds and making differences on coupon prices day-to-day. A medium-term holding is mentioned in the text. To be more specific, i would call that 2 years approximately (again, with the caveat of keeping a watchful eye).   As it happens, i consider $100 invested in argentine sovereign bonds rather less risky than $100 invested in many parts of the present US financial system. At least the ratings agencies are not trying to pull the wool over anybody’s eyes in LatAm with phony AAA ratings!

  4. Non-Trader   September 6, 2007 at 1:29 am

    I am whith Mark Turner. It’s a classical example of a market trading with noisy news from the Argentine (crazy) political system, and completly ignoring fundamentals. If the global economy will continue to growth at this rates (decoupling ..?), what are the chances that the country with the highest natural resource endowment per capita in Latin America -if not in the world- to be in problems?