Argentina signals market complacency

Century bond symptomatic of widespread risk mispricing

Hyman Minsky, the late US economist and expert in financial instability, would be dismayed to see Argentina placing a 100-year bond in the market. Latin America’s second largest economy only returned to international capital markets in April last year. For Minsky, the century bond would be another indication of how little global financial markets seem to learn from experience. It would be a warning, too, of how complacent they have become about risk. Markets appear to be creating the conditions for a major global financial collapse.

Against the backdrop of the easy monetary policies major central banks pursued over the past several years, global investors are acquiring riskier assets in their search for higher yields. Taking advantage of favourable market conditions, Argentina issued the century bond in the amount of $2.75bn at a rate of 7.9%. Argentina received $9.75bn in bids, further indication of how desperate markets are for yield.

Investors are seemingly oblivious to how poorly managed Argentina’s economy has been over the last 100 years. They are overlooking how divided the country remains, as well as the questions which several years of mismanagement should raise about its ability to honour debt obligations.

A century ago, Argentina was considered to be an advanced economy, with living standards similar to those of Britain and the US. In 2017, Argentina is a middle-income country with living standards barely 40% of those of advanced countries. Such poor credentials should give investors pause when assessing the risks of a 100-year bond.

Since becoming independent in 1816, Argentina has defaulted on its debt eight times. Five of those occurred in the last 100 years, and investors were not treated kindly. In 2001 most holders of Argentine bonds received around 30 cents on the dollar for their claims.

If the Argentine century bond issue were an isolated case of market mispricing, there would be little cause for concern. The country, despite its regional significance, is not of systemic importance for the wellbeing of the global economy. However, the bond issue appears to be a symptom of widespread mispricing of risk in global financial markets. This is plain to see in the US high-yield debt market, the European sovereign debt market, and the emerging economy corporate bond market. Such generalised mispricing would perturb Minsky were he alive today. Investors, too, should exercise extreme caution.

Desmond Lachman is a Resident Fellow at the American Enterprise Institute. He was formerly a Deputy Director in the International Monetary Fund’s Policy Development and Review Department and the Chief Emerging Market Economic Strategist at Salomon Smith Barney.

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