Mark Twain remarked that “history doesn’t repeat but it often rhymes”. He’d probably never been to Argentina. A year ago, it issued $2.75bn of debt at a yield of 7.9% in a capital raising that was 3.5x oversubscribed. The duration of this bond (its life) was 100 years; a detail that Gillian Tett, writing in the Financial Times, described as ‘pioneering’. That is one way of describing it but perhaps ‘laughable’, ‘incredible’, ‘bonkers’ (from a lender’s perspective) or ‘money for old rope’ (from the Argentine treasury’s perspective) represents a more accurate assessment.
In its 200 year history as an independent nation, Argentina has defaulted 8 times and in the last 60 years has been through 20 International Monetary Fund (IMF) economic recovery programmes. As Lady Bracknell might have said, to default once is unfortunate but to default 8 times is beyond careless. Right on cue, 12 months later, Argentina’s president, Mauricio Macri, is discussing an emergency $20bn loan from the IMF, having raised interest rates to 40% in order to combat 20% inflation and protect a crumbling currency. Plus ça change…
It seems to us that investors of all stripes are frequently guilty of believing in outcomes that are, in reality, unlikely to be delivered. The investment industry thrives on rosy predictions and tends to treat economics like a natural science. However, unlike, say, chemistry, where a combination of compound A and compound B will always deliver the same result, economic inputs are a little less predictable. Prior to its bond launch, many were lauding Argentina’s economic reforms and predicting a bright future but as the investor/philanthropist Sir John Templeton opined, “this time it’s different are the four most expensive words in the English language”. Inevitably, forecasting will always be subject to a margin of error but lending money to Argentina for 100 years is akin to watching ‘Titanic’ and expecting Kate Winslet not to get wet.
A century ago, Argentina was one of the world’s wealthiest countries. Who knows, perhaps it can reclaim such status but Twain and Templeton aside, lenders may care to note the thoughts of American actor, author and comedian Will Rogers. “I am more concerned with the return of my money than the return on my money.”
John Newsome can be contacted on: 01423 705123 or email:john.newsome@williams-im.com
