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Two years ago, in a global economy awash with liquidity, investors were falling over themselves to buy 100-year Argentine bonds. Today, those bonds are trading at around 40 cents on the dollar and the Argentine government has announced that it intends to seek a US$100 billion government debt restructuring.
This raises the question as to whether the current Argentine debt-market debacle might not be a harbinger of things to come more generally for the global credit risk market. After all, that market too has been characterized by years of imprudent lending fueled by overly easy central bank money. This has driven down yields in the global credit risk market to levels that do not nearly compensate borrowers for default risk.
In June 2017, in a world hungry for yield, not only did the Argentine government manage to raise US$2.75 billion through the placement of a 100 -year bond. Rather, that bond was several times oversubscribed. It did not seem to bother investors that the country had defaulted on its debt no less than five times in the past hundred years. Nor did it seem to bother them that the country had the shakiest of economic fundamentals following years of economic mismanagement under Christina Fernandez Kirchner.
Fast forward to today, and the country is again in the grips of the deepest of economic and political crises. Despite a record US$56 billion IMF financial support package, over the past year the Argentine peso has lost more than 50 percent of its value. Meanwhile the Argentine economy is now in a serious recession, inflation is well over 50 percent, and the market-friendly Mauricio Macri government is all but certain to lose the October presidential election to the Peronists, who are not known for their economic management competence.
With the Argentine peso in freefall and with capital heading for the door ahead of the October election, the lame-duck Macri government had little alternative but to resort to extraordinary measures to stem the hemorrhaging of international reserves. It is against this background that it is now seeking to re-profile the repayment of its US$100 billion government debt.
The Argentine economy is too small for its proposed debt restructuring to have a material impact on the global economy. However, that debt restructuring might be an early warning sign of what might happen in other corners of the global credit market where very risky loans have also been made.
Policymakers should be asking themselves what might be the spillovers to the rest of the global economy if Turkey were to begin defaulting on its US$300 billion in US dollar-denominated corporate debt. More importantly yet, as Janet Yellen recently pointed out, they should be asking themselves what might happen in the next US economic recession to the US leveraged-loan market where around US$1.2 trillion has been lent at low interest rates. Worse yet, we should be asking ourselves what might happen in the US$2.5 trillion Italian debt market, if the European economy were to experience a serious economic recession.
The Argentine government has announced that it intends to seek a US$100 billion government debt restructuring. This might be an early warning sign of what might happen in other corners of the global credit market where very risky loans have also been made.
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