Argentina has always had a loyal investor base in Europe, thanks to its historical ties to the Old World. Most of its immigrant population came from Italy and Spain. Investors there and those from Germany and France bought Argentine bonds issued in their local currencies long before the euro came on the scene. So it’s no surprise that Argentina-its current problems notwithstanding-should be a leading issuer in the single currency. This year, Argentina placed e5.2 billion in euro bonds. The euro has enabled Argentina to consolidate its faithful European investor base and boost relatively low liquidity in the secondary markets. Argentina can now raise more money from a greater number of investors in a single transaction than it could before with local currency issues.
“Argentina’s [securities] have been well known in Europe since long ago,” says Federico Molina, director of the national bureau of public credit. “And despite the debt crises of the 1980s, we have been able to pay our bonds normally. That created a good reputation for us there.”
Argentina’s access to world financial markets could easily be constrained by mounting concerns about its weak economic growth, financing needs and political turmoil, but the euro has at least given the sovereign certain advantages it didn’t have before. Rick Liebars, head of Latin American origination for Caboto, which underwrote two of Argentina’s euro bond issues, says that the sovereign could never get a “critical mass” of investors out of issues in European currencies. Now it can unify its investor bases on the continent and achieve greater liquidity.
The euro market has become a key part of Argentina’s strategy for raising the $19 billion it needs to finance itself next year. The European market is generally more stable than the Yankee bond market, with yields on euro-denominated bonds fluctuating less than dollar issues. This is important because a country as volatile as Argentina is susceptible to wild market shifts, unnerving investors.
“[European investors] take political questions with a more philosophical attitude than in the US,” says Molina. “It doesn’t mean there isn’t political noise and not-so-good economic news coming out of Argentina, but [Europeans] look more to the fundamentals and not to day-to-day changes.” European investors are also typically the first to accommodate fresh Latin bond issuance following a financial crisis, says Liebars.
But the drawback to the relative stability of European markets is the lack of liquidity. “In Europe, the prices of bonds in the secondary market are not a good indication of where you will end up placing the bond,” says Molina. “In the US, there is much more liquidity and you can usually take the secondary market prices as a most accurate reference point.”
Argentina, a dollar-based economy, needs to manage currency risk. The euro’s weakness now is welcome. The decline in the euro relative to the dollar this year has cut Argentina’s public debt by $2.7 billion. However, if the currency revalues it could increase pressure on Argentina’s troubled finances. With about 20% of Argentina’s exports-worth $48.8 billion in 1999-going to Europe, there is considerable exposure. The government is setting up a liability management program to mitigate foreign currency and interest rate risk, improve the maturity debt profile, reduce amortizations, and obtain net present value profits. LF