Emso Asset Management bets on a recovery of the Argentine debt, one of the countries with the most notorious defaults in the world, attracted by the possibility of a market-friendly turn in this year’s election.
It is a bet that depends on the departure of the president Alberto Fernandez, during whose tenure the country’s economy has tanked and inflation has soared to a three-decade high of 95%. According to Emso’s Patrick Esteruelas, a new leadership would trigger a recovery of Argentina’s debt in dollars, which would reward the bravest on Wall Street.
“Argentina is the most exciting emerging market credit opportunity out there, bar none,” says Esteruelas, who runs the hedge fund’s research parla from Miami. “It’s not just a matter of underlying cheapness, because Argentina, in that sense, has always been cheap. You need a catalyst, and for me it’s the election.”
Argentine public debt: a bomb for 2023?
Some of Emso’s most successful bets in recent years include debt from Brazilian giant Petróleo Brasileiro SA, general obligation bonds from Puerto Rico and a bullish view of Argentina’s debt between 2013 and 2015, which according to data from JPMorgan Chase & Co. It was up regarding 80% on a total return basis during that period.
Recently, the country’s bonds due 2035 have been held below 30 cents on the dollar, a price at which they yield regarding 20%, a level of difficulty that reflects the risk of default.
Of course, this is typical of Argentina: the country has defaulted nine times on its foreign bond obligations since its independence more than two centuries ago. The government owes approximately $65 billion to external bondholders of the debt that was most recently restructured in 2020.
For Esteruelas, whose company manages $5.3 billion in total assets, such low prices mean that a possible new government — and a new set of reforms and economic policies — will go a long way on Wall Street. Furthermore, even with rigid exchange controls, the 42% drop in the official peso exchange rate last year and the fraud conviction of the vice president Cristina Fernandez de Kirchnerthe economy is still in better shape than it was two decades ago.
Why debt in pesos is not less risky than debt in dollars
“Argentina today is a disaster, but it is not a disaster like the one in 2002,” Esteruelas said, referring to the worst economic collapse in the country’s history, when public debt soared to over 150% of gross domestic product. “To think that the situation is similar to what it was in 2002 and that we should discount that level of restructuring and discount values is stupid.”
Although he admits the risk of a new default in 2024, when the highest debt payments are due, Esteruelas expects recovery values under a new government to be around 50 cents on the dollar, well above current levels.
Meanwhile, he speaks of an opportunity, as the cash-strapped Fernández government faces voters exhausted by high prices. Those difficulties might trigger widespread rejection of Peronist politicians, he says, both in the presidential palace and in the Senate.
Argentina plans to hold mandatory primaries this year, which will be followed by general elections in October.
“It’s a phenomenal opportunity,” he said. If the new political leadership leads to economic improvements, “There is a state of the world in which Argentina may not even have to restructure its debt.”
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