Austria and Argentina may be alphabetically close, but economically they are at opposite ends of the spectrum.
Much has been made in recent weeks of the exceptional performance of the 100-year Austrian government bond. Year to date returns have breached 80%; not what initial buyers would have anticipated for a AA+ rated issue. In a parallel universe, the Argentinian 100-year bond has lost 30% in the past week. Bond performance typically lies with the more opaque role of duration and convexity yet, in this instance, the looming Argentinian election is the cause of the decimation in the value of its local financial assets.
What is happening?
Argentinians go to the polls this October to vote for either a continuation of President Macri’s market-friendly (although frugal) orthodox economic policies, or back a return to a more populist approach. Primaries last weekend were effectively a dry run for October’s election (given the mandatory turnout) which resulted in Macri losing by a damning 16%. The now very real prospect of future default that is being priced in is being driven by two factors: (i) the leading opposition candidate Alberto Fernandez served as “Chief of the Cabinet” in 03-08; and his Vice President candidate Fernandez de Kirchner served as President in 07-15 when Argentina last defaulted; and (ii) whether or not a potential Fernandez administration wants to restructure its debt, it may have no choice should a run on the Peso leave the sovereign unable to repay its public debt which is 80% in foreign currency.
Argentina’s precedent for such actions warrants this week’s moves in prices; having defaulted in 2001 and 2014. The last default saw bondholders experience a loss of 60% on their par holding. Losses year-to-date have been significant for holders, but could become worse depending on October’s election outcome and the direction of policy thereafter. There is still time for Macri to regain ground, but for now volatility seems the only certainty.
How much does this matter for global credit?
The figures being discussed are substantial – gross external debt at the end of 2018 was $267bn. However, the spill over risk should lie largely within emerging market (EM) credit. Even within EM I suspect the damage from this episode will be somewhat contained – the damage in Argentina has been induced by domestic politics, as we have also seen to a lesser extent in Turkey, rather than induced by common stress factors like the dollar or commodities.
That this fallout has been contained to date is also indicative of an asset class which has become broader and deeper. There have been 32 sovereign EM debuts in foreign debt markets in the past decade and the concentration of the market has consequently reduced – the top 5 sovereign issuers accounted for 51% of the market value in 2011, but this has reduced to 33% today. Mutual drivers of stress will continue, but indications are that the asset class is less susceptible to contagious domestic crises than it once was.