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Argentina does not deserve a clean slate

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While it is tempting to think of capital markets-friendly President Mauricio Macri as having wiped Argentina’s slate clean, it is not yet time for EM investors to forgive and forget.

The euro triple trancher Argentina printed last week took the amount the country has raised this year to $13bn. 

It is becoming clear that it is easy for investors, especially in this EM super-bull market, to wave aside concerns about just how large that number is. Argentina’s very messy default is a concern of the past — why not lend to a country that has a debt to GDP level that now looks very sustainable?

But emerging market history does have something to offer. There are cultural patterns to the treatment of investors and while today’s president may have investors’ best interests at heart, tomorrow’s may not. 

In emerging market bonds, which have a tendency to become illiquid fast as bondholders rush for the exit at the same time, it is not as simple as selling if you become uncomfortable. Investors have to decide at the point of purchase whether they are happy to be saddled with debt for a time frame that may extend past the next election cycle.

Once an issuer has popped its defaulting cherry, it seems that spanking investors becomes much easier. 

Take the example of the Kazakh banks, which restructured their debt twice during the financial crisis, leaving those investors who remained faithful to the sector sorely stung. The attitude often seems to be that once the copybook is blotted, an extra stain does nothing to hurt it. 

There is a reason that the debt of issuers that have defaulted typically trades wide to comparables that have not.

Some could counter this week that Venezuela, which doesn't have Argentina's extensive history of burning bondholders, is causing far more trouble this week than Argentina

But this is not a fair comparison. Of course the debt of any EM issuer has to be approached with caution, even those that have not defaulted. That's what you get paid the chunky yields for. A good history of debt maintenance is no guarantee of the same going forward, but a bad history of the same should warn investors to approach with caution.

Argentina has defaulted on its sovereign debt eight times since 1816, most spectacularly on around $100bn of bonds in 2001. Most recently, a clash with Elliott Management prompted a default in 2014. 

This should be fair warning to investors. Argentina’s recent treatment of investors may be new and improved, but buyers would be fools to mistake it for a different country entirely.

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