Why Argentina may make sense

by | Jul 27, 2001 | Archives

Contrarian theory is usually right. See why this may create a case for investing in Argentina now.

Last message we looked at several factors affecting emerging currencies, inflation, current account and foreign reserves. We did not mention external debt. When a country has more debt than it can pay the temptation is to devalue the currency so that the pay off is reduced. However this only works for repaying local currency debt. Such devaluations does not help with external US dollar debt because the debt remains in dollars. In many ways a devaluation makes it harder to repay US dollar debt.

Still many currency traders fear countries that have too much debt. This is why Argentina is having a tough time now. Many doubt the country's ability to handle its huge debt burden due to a sustained (three year) recession there. This may create an unusual opportunity because nations rarely default on debt. The World Bank, IMF, OECD and the bankers of the world are all too willing to help reschedule (ie. refinance) troubled nations.

Hence when investors shy away from an emerging debt problem as they are doing in Argentina now and yields are high (26% in real terms on short term CDs) there may be some interesting opportunity. We are researching this now at our course and I'll report more to you next week. Meantime you can study debt statistics at the Worldbank website http://www.oecd.org/doc/debt/

Until next message, good global business and investing!