An Interesting Case with Argentina, Part I

A brief on Argentina’s default

Argentina has technically defaulted on their debts as US Judge Griesa has blocked the country’s payment to restructured bond holders without paying the holdouts. The Finance Minister Axel Kicillof has claimed that Argentina cannot pay the holdouts without paying the restructured bond holders the same deal based on the RUFO Clause, the “Rights Upon Futures Offer” that was set to expire as of December 31, 2014.

But, why can’t Argentina just print the money and give out to the holdouts? Sure, that might trigger a devaluation of its currency, but that has been happening for the last decade, with a result of soaring M2 and a U.S. dollar black market. The most likely answer is the Argentine politicians don’t want to pay for it. And they didn’t, catching a lot of people off the guard, who expected that a final deal or compromise from either side will work out. Merval Buenos Aires, the Argentine stock index has responded to the shock by falling off approximately 10%, but has since then bounced back to a higher point based on optimism that somehow, at some point a final deal will be structured to work out.

Argentina m2

USDARS

The Best Performer with a Default

The Argentine stock exchange, Merv Buenos Aires has been the best performer in Argentinean peso among the roughly 60 equity indexes surveyed by The Economist, increasing by 82.0% through August 27, 2014. Moreover, the index has also been the best performer, in dollar terms, increasing by 41.1% through August 27, 2014. It’s important to note the large divergence of 41%, between the index return in Argentine peso and the index return in U.S. dollar term (the biggest among the surveyed indexes), due to the ongoing devaluation of the local currency in a rapid pace.

World Market

Source: Economist

A more important question from the investor would be how long will the index keep going up, at what point will the index halts and starts crashing. In this case, Argentina has experienced an inflationary environment for six years since 2008 and the equity index didn’t start increasing in a rapid pace until October 2012, when Argentine peso started devaluating in a fast pace as well; since then the index has increased from approximately 2,300 points to approximately 9,800 points. You can barely see the effect of a default from the following historical price chart.

Argentine Stock Exchange Historical Chart

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