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The Emerging View
23 August 2019
Argentina once again finds itself in the grip of financial turmoil. While the timing of Argentina’s blow-ups always entail a high degree of uncertainty, seasoned EM investors are not the slightest bit surprised that Argentina once again finds itself in trouble. After all, Argentina has a history of repeatedly failing the most basic macroeconomic policy challenges, neglecting deep structural reforms and regularly succumbing to rampant populism; and importantly, not establishing a proper domestic bond market based on a well-functioning pension system. On the other hand, the very fact that Argentina has such a rich history of failure, often leads to excessive market reactions, which can present opportunities. For example, the market’s wrongful expectation of default in 2009 was followed by a rally of more than 200% in Argentinian bond prices over the subsequent two years.
Today, Dollar-denominated bonds trade at a yield close to 20% with spreads at a similar level to those
encountered in 2009 (Figure 1).
Should investors buy, hold or sell? The answer depends on whether current prices are commensurate with
the underlying risks. This report complements a recent Market Commentary by explaining the nature of
Argentina’s current predicament through a series of Questions and Answers.
We conclude that the recent sell-off in Argentinian assets has gone too far and that current prices constitute
an opportunity to buy. We believe that investors should buy now, even if it may take a few months for
markets to become comfortable, given the incentives facing the main political actors in Argentina ahead of
the election on 27 October 2019.