Who is Stupid Enough to Buy Argentina’s Lies or Its Debt?

Since 2007, Argentina has saved $6.8 billion in interest payments on its government-issued, inflation-indexed bonds, according to Buenos Aires-based research firm ACM Consultores. That would be good news, except for the fact that, in this case, the word “saved” could be replaced more accurately with “chiseled.”

The International Monetary Fund recently took the rare step of censuring Argentina for systematically misstating economic data, including its inflation rate. By claiming that inflation is lower than it really is, the country has avoided paying the full interest due on its $37.6 billion of inflation-linked bonds. The bonds make up 21 percent of Argentine government debt.

In 2012, Argentina’s inflation rate climbed to 25.6 percent, according to private economists. The official report put the inflation rate for the same period at 10.8 percent. Rather than inviting the private economists to discuss the source of the discrepancy, the government has forced them to retreat into anonymity under threat of heavy fines for challenging the official figures.

The censure marks the beginning of a process that could eventually lead to Argentina’s expulsion from the IMF. Argentina has until Sept. 29 to implement reforms before it risks losing membership privileges, such the ability to borrow from the IMF. If it fails to mend its ways, Argentina would be the second country to be forced out for failing to provide accurate economic information. The former Czechoslovakia was kicked out for the same reason in 1954.

Neither Argentina’s data manipulation nor the IMF’s response comes as much of a surprise. What does surprise, or at least puzzle, me is that anyone is still willing to buy Argentina’s lies – or its debt.

Argentine bonds offer an attractively high yield, with interest rates averaging around 10 percentage points higher than those provided by similar U.S. Treasury products. But that higher rate reflects the risks of dealing with a national government that is a habitual deadbeat.

If Argentina defaulted on its current debts, it wouldn’t be the first time. In 2001, the country threw up its hands at $95 billion of debt. In later deals, the government paid off the majority of its one-time creditors by offering as little as 30 cents on the dollar. A small portion of the bondholders, however, continue to hold out for what they are owed. Last fall, one of those remaining creditors, the U.S.-based hedge fund NML Capital, which owns over $1 billion of Argentine debt, went so far as to file a claim seeking possession of an Argentine naval ship temporarily docked in Ghana.

Since the default, Argentina’s understanding of private property has not improved. That became more than clear last summer when President Cristina Fernández de Kirchner announced that her government would seize YPF, the country’s main oil producer, from its Spanish corporate parent Repsol. Kirchner had no intention of offering Repsol fair compensation. As I wrote here at the time, that move should have signaled to the international community that Argentina is prepared to regard anything within its borders as potential government property.

In fact, the Kirchner government’s grabs are not even limited to Argentina’s borders. Last year, following the news that the nearby British-controlled Falkland Islands might contain significant oil reserves, Argentina decided to renew its decades-old assertion of sovereignty over the islands, which were the scene of a brief but bloody war with the United Kingdom in 1982. For Argentina, the fact that the residents of the Falklands are happy under British rule and have no desire to hand over their resources to a foreign country is irrelevant. Kirchner and her government continue to insist that the Falklands, which the Argentines call the Malvinas, ought to ruled by Argentina.

Given all this, it’s difficult to imagine an interest rate that would make Argentine bonds worthwhile. Since the Buenos Aires government obviously has no particular qualms about mistreating its investors, it can advertise whatever rate it wants with the assurance that, when that money comes due, it can always change the numbers, steal from someone else or simply not pay. The IMF’s action highlights the problem, but until Argentines themselves become fed up with their government, I doubt any external force is going to put an end to the kleptocracy.

According to an old angling quote, often attributed to Samuel Johnson, a fishing rod is “a stick with a hook at one end and a fool at the other.” Investors trolling for returns in Argentina are likely to prove that definition true.

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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

2 Comments on Who is Stupid Enough to Buy Argentina’s Lies or Its Debt?

  1. Larry,
    Your article is very negative on Argentina and far from the real facts, why things happened they way they happened. The fact today is Argentina has 3rd largest find of shale gas and is going to be net exporter of energy in a few years. If other companies like Chevron doesn’t invest, still Argentina is going to invest from itself. This would be just like Gazprom. The trajectory of progress and Argentinean stocks are looking upwards from here. Malvinas is an occupied island, by British. People there are Britishers who are planted there. This facade of lies from England will soon go in air. The country is on path of progress and people like you are creating negative news just because you can.
    I totally reject the bias article.

  2. While many of your comments and observations have merit, it appears that someone put a porcupine in your picnic basket as your article tends to rant.

    Having lived in Argentina for four years I can say the people, nationals and foreigners do not consider Argentina the Hell Hole that you do or that it is about to implode.

    A suggestion, why don’t you write three follow up articles to show your objectivity:

    a) A list of other countries who have defaulted on their Bonds, and yes I understand you might
    need an extra sheet of paper because the list will be long and repetative.

    b) How Mexico’s nationalization of Pemex differs from Argentina’s nationalization of YPF.

    c) And as a comparison to your statement that the inhabitants of the Falkland Islands prefer to
    remain British, an article on New Jersey to see if New Jersey residents prefer to be remain American
    and not go back to the beginning and become members of an original Indian tribe(s).

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