Mad About Argentina

There must be something very wrong with investors and the capital markets if a serial defaulter like Argentina can even consider returning to market soon after it ended a three-year default, the biggest in modern history. Yet Argentina may indeed launch a benchmark bond in the next few months, and the crazy logic of emerging market investing makes the offering seem perfectly sensible. Argentina has lightened its balance sheet by restructuring $74 billion in defaulted bonds. The new low-yielding, long-dated bonds it issued in the bond exchange mean the government can easily afford to issue new debt. New York investment banks hungry for mandates are more than willing to underwrite a new issue. The bonds would be priced at a tempting spread over US Treasuries. Emerging market portfolio managers would buy because they like the yield and see little immediate risk of default. Passive investors who track market indices would need to buy the bonds. Argentine corporate issuers would also benefit from sovereign issues that lay out a new yield curve. So much for the rigid discipline that bond markets are meant to impose on irresponsible borrowers. Argentina scalped its bondholders but will soon be back at the table looking for more willing dupes. Of course, a lot of those buyers are sharp-witted hedge funds aiming to flip their Argentine bonds to gullible investors after taking profits. As always, buyer beware.