Having been locked out of international markets since defaulting on more than $80 billion of debt in 2001, Argentina recently stormed back into the markets with the largest emerging-market debt sale on record of $16.5 billion.
Demand for this issue, which mainly took place to pay holders of defaulted bonds, was so strong that Argentina was able to lower the yields on offer by 50 basis points and increase the size of the deal by $4 billion.
However, we fear investors are being overenthusiastic – Argentina remains a ‘B’-rated country, and is therefore significantly sub-investment grade. While we applaud the achievements the country has made thus far, there remains a lot to be done and the government must continue with a package of severe fiscal consolidation. This must be carried out against a backdrop of weak global growth, and with Argentina’s largest trading partner, Brazil, currently experiencing its own crisis. In addition, Argentina is running a considerable current-account deficit, and two thirds of its debt is denominated in US dollars, such that any further weakening of the Argentinian peso will affect the country’s ability to service its current debt.
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