Many investors are looking towards some South American countries, some of which still branded pariahs, since developed markets are offering measly returns. Two countries that are receiving a large amount of attention are Venezuela and Argentina, who have pushed yields to new lows, making issuances increasingly attractive. Additionally, Ecuador’s President Rafael Correa is planning to release the country’s first international bond since he voluntarily defaulted on $3.2 billion around five years ago.
Argentina is not expected to be issuing new foreign debt before resolving a legal dispute with “holdout” creditors who refused restructured debt after the 2001 default. Although it is facing this problem, the government has admitted it received loan proposals from international investment banks, such as a $1 billion loan from Goldman Sachs. The initial investor interest in Argentina was revealed when an oil company, YPF, ...view middle of the document...
Furthermore, carry-trade, which is when investors borrow money at low interest rates to invest in higher yielding assets, has returned to fashion. This is certainly the case in Venezuela, where there is are rates that are close to zero. For example, Venezuelan state oil company PDVSA’s bonds maturing in five months yield double-digit returns.
An important thing that many investors seem to be forgetting is how high the risk is in the debt for these countries. The appetite for the debt from countries like Argentina, Venezuela and Ecuador are prompting concerns that investors are underestimating some of the risks. All of these countries have considerable macroeconomic imbalances and are dependent on natural resources as the commodities “super cycle” comes to an end. The head of Latin America strategy at Jefferies, Siobhan Morden, is concerned about asset price inflation in Argentina, which is struggling to avert a balance of payments crisis as central bank reserves plumb seven-year lows. She also goes to say that although bond prices have rallied due to market-friendly economic policy changes, such as devaluation, raising interest rates, phasing out expensive subsidies and releasing a new inflation index, they do not take into account the danger of a technical default if the “holdouts” secure a favorable ruling in the US Supreme Court.
In the case of Ecuador, which declared some of its foreign debt “illegitimate” in 2008, analysts say it may secure interest rates on new debt of as much as $700 million. Consequently there are concerns that growing fiscal and current account deficits will slowly eat away at the country’s capacity to pay its debt in the long term.
Overall, there is somewhat of a credit bubble forming in these Latin America countries, there is a large amount of doubt as to how long this rally will continue. As mentioned above, there is a huge possibility for gains in the debt markets, but associated with these gains is a large amount of risk. With not only legal and economic problems, the markets are as risky as ever, which may attract investors looking for high returns, but many fail to estimate just how much of a risk is being taken.