SOLD OUT: Argentina’s 100-year bonds. ¿Qué?
Written by: Charles Tan
It says something about the state of the world we live in when something crazy happens and our collective reaction amounts to no more than a shoulder shrug or a slightly raised eyebrow. Last week, the government of Argentina – that lovely South American nation which gave us Eva “Don’t Cry For Me” Peron, football legends like Maradona and Messi, and five sovereign defaults in the past century – sold $2.75bn of 100-year government bonds with an effective yield of 8% p.a. which were 3.5x oversubscribed.
There are a number of issues, both from a financial risk and a moral/philosophical perspective, with issuing debt that will not be paid off within a generation, much less a term of political office, but it’s been ages since I wrote a 10,000-word thesis and I’m not keen to start one today.
The reasons being given to help explain the voracious appetite for such “non-investment grade credit”, to put it kindly, have fallen along the lines of weak GDP growth and low inflation globally, coupled with market-friendly reforms from Argentina’s charismatic president Mauricio Macri, who is up for re-election in 2019 after narrowly winning the presidential race in 2015.
But the more likely reason why demand is so strong, in my mind, lies in the actions of the world’s largest central banks: quantitative easing has pumped so much liquidity into the financial markets, and investors are so desperately hungry for yield as a result, that even seemingly ridiculous ideas can raise millions in funding if the promised returns are high enough.
To me, Argentina’s discounted 7.125% bond offering, which matures on 28 June 2117 (remember to save the date in your calendar), stands in stark contrast to the real estate-backed bonds on our real estate crowdfunding platform, Property Crowd. To date, the bonds offered on Property Crowd have yielded in excess of 10% p.a. with maturities of 4 to 12 months, and the first two bonds we offered actually redeemed early – quite the opposite problem to that faced by bondholders of Argentina’s debt in 2014 when they underwent “selective default”.
Furthermore, these real estate-backed loans benefit from the security of institutional grade UK property assets, where the legal precedents and processes in the worst case scenario of a default and acceleration are well established and should result in substantial, if not full, repayment of debts owed to senior lenders. This is very much unlike the lengthy, costly and complicated arbitration process faced by the holders of defaulted sovereign debt – and it’s not just Argentina, by the way, have we completely forgotten about Greece?
As the Financial Times’ Gillian Tett points out in a recent article, the buoyancy of the financial markets seems to hint at a general sense of complacency among major players, supported by the assumption that monetary conditions stay ultra loose while inflation remains ultra low. Almost ten years to the day since since the failure of two hedge funds at Bear Stearns snowballed into the Global Financial Crisis, it’s hard to say definitively that we’ve learnt our lesson. But in these crazy times, with “experts” frequently being proved wrong by events unfolding in the political and economic space, who is to say that 100-year Argentinean bonds aren’t a great long term investment? Perhaps, perhaps, perhaps. But for me, I’d take a short-maturity bond with a 10.5% yield secured by UK real estate anytime.