Top 3 Main Challenges to Investors in Argentina

Fast forward to the end of May, when Argentina reached an agreement to repay the Paris Club $9.7 billion in full over a 5–7 year period, according to Axel Kicillof, the country’s economy minister. Things are looking rosier, right?

Not necessarily. Back up to February, when Argentina reached the settlement with Repsol. At the time, Antonio Brufau, Repsol’s chairman, said it could take up to two years to sell off the $5 billion in bonds. On May 8, however, Miguel Martinez, Repsol’s CFO, said that the company could sell them sooner if it found “a window of opportunity.” The window opened, and the bonds flew out and into the coffers of JPMorgan, which bought the first package of bonds on May 9 and the rest on May 23. Then JPMorgan began to sell the bonds, which flooded the market and further depressed already-falling emerging market bond prices.

Then there’s Elliot Management Corp. Billionaire Paul Singer’s firm is one of the holdouts that refused to settle with Argentina at the time of negotiations on default, instead holding on and insisting on better terms than were accepted by 93% of the nation’s creditors. Singer has already sued Argentina, and Elon Musk’s Space Exploration Technologies Corp., over rights to launch-services contracts.

The firm is also awaiting a decision by the Supreme Court about whether justices will hear arguments to uphold a lower court judge’s ruling that mandates Argentina to pay the holdouts in full when it pays restructured bonds. The country has said the cost of such a payoff would be $15 billion; fears are that a Supreme Court decision not to hear the case could spark another default.

And now Elliot Management Corp.’s NML Capital claims to have found a “smoking gun” indicating that Argentina intends to default if the Supreme Court decides not to hear the case. A memo containing legal advice to Argentina’s economy ministry is at the heart of NML’s action.

The memo, from law firm Cleary Gottlieb Steen & Hamilton LLP, was posted by an “unauthorized” person to the Argentine website Seprin.info, and says in part, “We believe that, barring revision by the Supreme Court of the lower-court’s ruling, the best option for the Republic is to permit the Supreme Court to force a default and then immediately restructure all of their external bonds such that their payment mechanism and other related aspects stay outside the reach of the American courts.”

Nicholas Smithie, chief investment strategist at Emerging Global Advisors, said that Argentina is in “almost an un-investable bracket … following the nationalization of YPF and repercussions with Rebsol and Spain, [Emerging] thinks that the equity market is considered to be amongst the highest risk of all, and excludes it from eligible countries for investment.”

However, Fran Rodilosso, portfolio manager of the Market Vectors taxable fixed income ETFs at Van Eck Global, had another view. While the Supreme Court decision looms, Rodilosso said, “An adverse ruling against Argentina raises risk in the market, but does not mean that they will fall into default on their outstanding debt. There’s probably greater risk to bonds issued under international law rather than local law, as far as their ability to make payments.”

Rodilosso characterized Argentina as “a small yet noisy part of the [investing] universe,” and pointed out that there is still demand for its debt, which has “traded very well this year…. Investors don’t forget, but they’re willing to forgive, if you pay enough. A lot of people stayed away from Argentina on the active side for a long time, but part of what drives a rally is people chasing returns. So you see Argentina performing fairly well.”