Argentina Revisited

by | May 24, 2002 | Archives

Last week we looked at how today's blue chip can be tomorrow's disaster and how tomorrow's great deals will be unexpected (see link below). This is one reason we have looked at investing Argentine bonds over the last year as the country slid into economic disaster.

A recent message from a reader and a reply from eClub advisor Teddy Christiansen shows why this makes even more sense now.

Here is what the reader wrote:

“I have been studying Argentina bonds, I would like to ask some questions about it, How can I buy Argentina bonds? are they still purchased at 43 cents of a dollar?. Once that I buy them, what can I do with them?

I would really appreciate a quick answer, I think your staff is making a great job. Thank you very much” S.R.

Here is Teddy's excellent reply.

Dear S.R.

I am sure that you have heard about the situation in the Argentine. Banks have been closed and the country is right now in a “Stop Payment” situation. This means that you cannot get interest paid out by Argentine nor redeem some Government Bonds that had matured. Since December 2001 the whole market has been locked.

If you still want to invest in Argentine, which you are able to do at this moment, you have to consider the worst case – you will lose all your money – but this has not happened for a long, long time. We have some experience from Russia in 1997 when they stopped payment. The expired 8,750% Russian Government Bonds were prolonged for a 8 years period and the value dropped from 97 to 32. A couple of years later they were back to the a level close to 100 and nobody lost anything except the possibility to take out the matured amount to invest in something else. But a 8,375% USD investment was not bad at all.

Now today you can buy a USD 100,000 11% Argentine maturing in 2005 for USD 28,000. There is no coupon included due to the stop payment situation, and you have to evaluate if Argentine will be able to pay you the USD 100,000 back in 2005. If Argentine gets an agreement and approval from the IMF a new interest rate will be fixed – also on your bonds, but it might be 6% or 20%, who knows, they have to fix an interest that will attract the investors.

Personally I do not believe in a total default – that would affect the emerging market all over the world and create a disaster. However be sure not to gamble with all your funds. You are free to ask me for more details.

Teddy Christiansen”

Until next message, good global investing!