Processing Beliefs

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 4 percent coupon. This is realistic: typical foreign-law dollar issuances have 5-10 year maturities and Argentina's bonds would yield around 4 percent according to the article.

After next year's election, here are the scenarios for someone who buys the bond today.

  1. The market is the same after a narrow Milei victory. The investor can sell their bond for $100 and pocket this year's 4 percent coupon.
  2. The market is scared after the opposition wins. The bond's price falls below $100 since a buyer would demand a yield higher than 4 percent. (Technically anything below $96 makes the investor lose money when accounting for the first year's coupon).
  3. The market is happy after Milei wins resoundingly and/or the economy is improving. The bond's price rises above $100 since a buyer would accept a yield less than 4 percent.

An investor may want to gamble on these scenarios, risking scenario 2 for the upside of scenario 3. 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 give the opposition 4 years of funding at 4 percent? Instead, he would probably prefer to hamstring the opposition, forcing them to make concessions to issue debt at a reasonable rate. Assuming Caputo can keep financing Argentina's debt through next year with cheap, although perhaps temporary, funding, his dominant strategy may be to stay out of foreign markets.