Investors may regret buying those 100-year bonds from Argentina

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Mauricio Macri, President of Argentina

Argentinian assets plummeted in price today after Alberto Fernández, a leftwing populist opposition politician, soundly defeated rightwing incumbent president Mauricio Macri in a nationwide primary election over the weekend. The vote determines which candidates can run in the presidential election in October, and is seen as a key barometer of public opinion.

In Sunday’s primary, Fernández received 47.7% of the vote to Macri’s 32.1%, blowing away an expected margin of just a few percentage points. Fernández’s running mate is a very familiar name: Cristina Fernández de Kirchner, Argentina’s president from 2007 until 2015. “The opposition’s primary results represent a landslide victory completely unforeseen by pollsters, experts, investors, and ourselves,” wrote UBS analyst Alejo Czerwonko in a research note.

Another Fernandez victory over Macri in October may result in a bond default and reworking of the IMF’s support to Argentina. The possibility that a new administration would reverse Macri’s market-oriented policies appears to have spooked investors.

The Argentinian peso lost more than 30% of its value against the dollar at one point in trading today, and the country’s 10-year government bonds also sold off, trading near 60 cents on the dollar. Argentina’s MERVAL stock index quickly shed 35% of its value when markets opened.

Symbolically, the 100-year government bond that Argentina sold in 2017—heavily oversubscribed amid optimism about Macri’s administration—sank sharply. The dollar-denominated bonds’ price dropped from 74 cents on the dollar at the end of last week to just 54 cents today.

Argentina was the first junk-rated country to sell a so-called century bond, raising $2.75 billion at a 7.9% yield in June 2017. But not long after that, runaway inflation and a sinking peso drove Argentina into the IMF’s arms. Many Argentinians blame the IMF for making the country’s brutal 2001 financial crisis worse.

In retrospect, lending money for 100 years to a serial defaulter may not seem wise. Some had qualms at the time, to be fair: “When you look back in history, I’m not sure we can find a 20-year period where Argentina has not defaulted,” one investor told Reuters when the century bond priced.

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