Argentinian sovereign debt: oversubscribed and overrated?

We feel the market’s response to the Argentinian sovereign debt offer has perhaps been somewhat overenthusiastic. While we applaud the achievements made thus far, Argentina remains a B- rated country and therefore heavily sub-investment grade. At the same time, there remains a lot to be done and [the country] must continue with a package of severe fiscal consolidation.

This will take place against a backdrop of weak global growth, and with Argentina’s largest trading partner Brazil in the middle of its own crisis. In addition, around two thirds of Argentinian debt is denominated in US dollars; therefore any further weakening of the Argentinian peso will impact the ability to service its current debt and the new issuance.

Although macro headwinds have turned to tailwinds for the time being, the growth backdrop for many emerging markets remains challenging, and it keeps us mindful that the improvement in fundamentals has not been commensurate with the extent of the rally that we’ve seen in recent weeks. We’ll be looking for potential softness in the market – perhaps from congestion related to the extensive issuance that we’re expecting imminently; perhaps from the UK/European Union referendum (which poses considerable risk for the EU convergence story in central Europe); or perhaps a refocussing on the possibility of a June Fed rate hike – before adding further exposure from here.

Carl Shepherd – Newton, a BNY Mellon company

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