Why Argentina isn't borrowing abroad, yet
Investors (publicly at least) seem confused over why Argentina's Economy Minister, Luis Caputo, isn't raising dollars abroad. The FT notes that borrowing costs are likely to rise as next year's election approaches. But not raising seems to make sense from Caputo's perspective.
To simplify, suppose Caputo issues $100 bonds for 5 years with a 10 percent coupon. This is realistic: typical foreign-law dollar issuances have 5-10 year maturities and Argentina's bonds would yield around a 4 percent premium over US bonds, according to the article, and US 10 year-bonds currently yield around 4.5 percent.
After next year's election, here are the scenarios, assuming US rates stay relatively constant, for someone who buys the bond today.
- The market is happy after Milei wins. The bond's price rises above $100 since a buyer would accept a yield less than 10 percent. Rates would likely fall even after a narrow victory, since pre-election uncertainty may contribute to the current risk premium.
- The market is scared after the opposition wins. The bond's price falls below $100 since a buyer would demand a yield higher than 10 percent. (Technically anything below $90 makes the investor lose money when accounting for the first year's coupon).
An investor may want to gamble on these scenarios, risking scenario 2 for the upside of scenario 1. But does Caputo? If he is in office after next year's election, rates will probably be lower as the electoral uncertainty will no longer be priced into the bonds. If he is out of office, will he have wanted to fill coffers for the opposition at 10 percent? Instead, he would probably prefer to hamstring the opposition, forcing them to maintain some fiscal orthodoxy in order to issue debt at a reasonable rate.
Analysts note that tapping more foreign funding now may serve to reduce borrowing costs next year. But a current political risk premium for next year's election is likely already baked into the funding rate. If the opposition polls poorly, and funding costs fall, no harm to the incumbent; if the opposition polls well, and funding costs rise, this could help the incumbent by allowing them to campaign on looming economic chaos should the opposition win.
Assuming Caputo can keep financing Argentina's debt through next year with cheap, although perhaps temporary, funding, his dominant strategy may be to avoid issuing debt abroad.