Urgent Alert – an Argentine Update


An article in the Financial Times indicates that the top opportunity for Argentine bonds may be near.

I am delaying the sending of my intended message about opportunity in Japan because of an at article in the Economist

The article is entitled war of nerves and says "Several days of negotiations between Argentine officials and the IMF in Washington, have yet to yield a new rescue package for Argentina, but there is now growing speculation that a deal may be close. Fears persist that an Argentine financial crisis could spread to other emerging-market countries."The article points out that there is an Argentine economic team in Washington and thatAfter several days of talks, there is a growing expectation that a bailout deal may be imminent.It also says "that governments around the world, and emerging-market investors, fear that a crisis in Argentina now could spark financial panic on a global scale. Attempts to play down the risk of such "contagion" do not always sound convincing when considered in the context of sharp economic slowdowns already under way in many other parts of the world, which are making investors everywhere jittery.

There are, in essence, two separate but closely related problems which have coincided with unfortunate timing. The first is the economic and political mess which Argentina's government has got itself into.The second, and far more pressing, problem which Argentina's government now faces is the currency regime put in place ten years ago as the central element of the strategy to eliminate the country's chronic hyperinflation. The decision to set up a currency board and peg the Argentine peso firmly to the American dollar was the brainchild of Mr Cavallo during his first stint as finance minister. For a long period the strategy was successful. Inflation was brought under control, the country finally achieved a measure of financial stability and, as important, credibility. Argentina managed to weather the financial storms caused by the so-called tequila crisis in Mexico in 1994-95, and the Asian financial crisis in 1997.

But for some time now, the peso policy has been in trouble, and Mr de la Rua brought Mr Cavallo back into government in a last-ditch effort to prevent disaster. Although the government's persistent failure to deliver the economic reforms needed to make the dollar policy work has contributed significantly to the present difficulties, two external events competed for title of last straw. The first was the devaluation of the Brazilian real in 1999, which made the peso seem overvalued and Argentine exports uncompetitive with those of its neighbor.

The second has been the relentless rise of the dollar, and thus the peso, against most of the world's currencies. The consequent squeeze on Argentina's exports, and on domestic producers struggling to compete against cheap imports, has brought the economy to its knees.

Privately, many economists believe the time has come for the government to break the link with the dollar, and to devalue.

But the risk a default is that other emerging market countries would be penalized for Argentina's actions. In its latest report on emerging markets, the IMF says that, so far, contagion seems less of a problem: but the report went on to warn that it was an open question whether contagion and volatility would remain relatively low in the event of a full-blown crisis such as debt default.

This fear of contagion has encouraged some to argue that Argentina's government should get whatever help it needs to stick with it dollar policy. So far, the IMF has only offered modest help (especially when compared with a new deal just agreed for Brazil), and mixed signals from the Bush administration have encouraged the view that the US is prepared to see Argentina go under. America's Treasury secretary, Paul O'Neill, remained non-committal during a television interview on August 15th. Any new package will have as much symbolic as substantive importance for the country's economic stability."

This is the balance hanging on the scales. Will Argentina devalue? Will Argentina default? The reward for betting that they will not could be a return of up to 20% a year for 27 years.

If you invest in Argentine dollar denominated bonds the risk drops. Will Argentina default or not? The currency will not matter. If you invest in long dated bonds even the risk of default diminishes.

If a bailout is announced and the chances of a default reduce these high returns will quickly fall.

So gamblers and those who have a little they can afford to have tied up or lose, this is your chance. Just do not forget that Argentina could default. For more information on how to invest in Argentina bonds try Steve Rosberg at steve@steverosberg.com or Teddy Christiansen at Jyske Bank at teddy@jyskebank.dk

Tomorrow we'll return to another area of opportunity in Japan, the message intended for today.

Until then, good global business and investing!

Gary


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