Don't Laugh For Me:  Why Argentina's Bond Market Fairy Tale Is Just That 6
Skyscraper with homage to Evita Peron, on Avenida 9 de Julio in Buenos Aires, Argentina.

Once upon a time, not so long ago, in the faraway land of Patagonia, evil vultures ripped the flesh from babies and stole the purses of mothers.

Queen Cristina closed off the land in the hope the monsters would fly away, but they only became angrier.

And so it followed that a new King was enthroned. He made friends with the birds until very soon they were eating out of his hand. Upon hearing the news, people from around the world were in such enthrall that they handed the new King Macri more money than he knew what to do with and the people of Patagonia lived happily ever after.

Bar a few minor details, this is roughly the fabled return of Argentina to the world’s capital markets. The $70 billion of orders for the country’s almost legendary international bond sale last week set a new record for emerging markets. The $16.5 billion raised was more than enough to pay off the vultures, or holdout bondholders that had held Argentina to ransom since its default in 2001.

Yet beyond the land of make-believe, we found one investor who wasn’t lining up to hand money to President Mauricio Macri.

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Kieran Curtis, who manages $1.3 billion of emerging market debt for Standard Life, says he’s looking for more detail from the miracle Macri.


“In the end, we actually didn’t participate in this,” Curtis confesses on this week’s Emerging Opportunities show. “We felt that the frenzy made it just a little bit too expensive for us.

“Clearly, there’s a lot of short-term goodwill towards this government, and they deserve that goodwill, certainly.

“We think, though, that they’re going to find things a bit more difficult” than people might expect.

“One of the things that we were slightly disappointed with was the lack of detail that we heard from the Republic, in terms of what the plans actually are going to be to fix the economy – because there still needs to be a lot of fixing.

“They’ve experienced plenty of support from the other side of the aisle in Congress so far, in order to get this financial reform through, which enabled them to settle their prior debts and issue this new bond.

“But the next piece of work is going to be to get inflation down, and also to get the public deficit down. Both of those, we think, will be much more difficult to get bipartisan support for.”

Since taking office in December, Macri has allowed Argentina’s currency to float, scrapped trade restrictions, lowered some export and income taxes, and slashed energy subsidies.


Yet inflation is running at 30% and the government expects the fiscal deficit will reach 4.8% of gross domestic product this year. It’s relying on an acceleration of economic growth to help take the deficit down to 3.3% next year and 1.8% in 2018. The inflation target is 25% this year and 17% for 2017.

Meanwhile, more than a third of Argentines are living in poverty, putting Macri under pressure to balance austerity. New measures this month have included broadening child allowances and help for the elderly.

“I think they have a plan,” says Curtis at Standard Life. “But they weren’t able to tell investors too much of the details of that plan.

“What we saw were headline numbers projecting lower deficits each year without telling us exactly where those savings were going to come from.”

While Macri has won backing from Congress for the steps needed to sell international bonds, maintaining control isn’t assured.

“The government doesn’t have majority support in Congress,” says Curtis. “We think the support will be more difficult to come by when they’re talking about cutting spending, rather than about borrowing more money.”

In this week’s Emerging Opportunities podcast, Curtis also explores the outlook for Brazil, China, Indonesia, Panama, Peru and Turkey. Listen here

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