By Russ Dallen
“History may not repeat itself, but it does rhyme,” quipped Mark Twain -- and he might have been speaking of Argentina, which is in the headlines again for the prospect of its third international debt default since 1980. While only President Cristina Fernandez de Kirchner and her maverick economic cabinet know whether Argentina will default on the bonds her husband issued to pay the country’s $95 billion in 2001 defaulted debt, history can give us a few hints in iambic pentameter.
Argentina defaulted for the first time in its history back in 1828 in what was to become the first of many Latin American debt crises.
Between 1822 and 1825, seven of the newly independent Latin American nations – Chile, Peru, Brazil, Buenos Aires for the United Provinces of the Rio de la Plata (Argentina), Mexico, Gran Colombia (Colombia, Venezuela, Ecuador & Panama), & Guatemala (Central American Federation) -- issued over 20 million British pound sterling of sovereign bonds, mostly via dominant British investment banks Baring Brothers and N.M. Rothschild. By 1829, nearly 19 million pounds of that 20 million was in default (with Brazil the only exception).
Buenos Aires (B.A.) had issued its first bonds in 1824: £1 million of 6% coupon bonds to mature 46 years later in 1870, underwritten by Baring Brothers.
By 1826, however, BA had gone to war with Brazil, and on January 8, 1828, BA announced that they were unable to pay the January dividend.
Brazil and Buenos Aires finally made peace in December of 1828, but Argentina was a financial mess and coups and civil war broke out sending the still unpaid defaulted bonds to a low price of 22 the following year (around roughly the same price that hedge funds NML, Elliot and Aurelius would buy Argentina’s current defaulted debt in 2008). From the chaos, General Juan Manuel de Rosas emerged as Governor of what then became the Argentine Confederation, becoming the premier prototype for the Latin American caudillo in a 30 year dictatorship in which bondholders would see very little of their investments.
By 1831, Argentine Ambassador to England Manuel Moreno wrote that British bondholders had grown increasingly angry and exasperated at the Argentine government’s repeated failure to pay its debts. Not unlike the present publicity war between Argentina and the holdouts, disgruntled bondholders in 1832 took to the London papers in a huge press campaign against Argentina, vilifying the Argentine government for its delinquency, and later that year, Britain would send ships to occupy the Falkland (Malvinas) Islands.
(With interest still festering and unpaid by 1838, Rosas even wrote to Ambassador Moreno to tell the British that Argentina might surrender its claims to the Falklands if Britain would pay off the bondholders for them.)
In 1852, however, Argentina was once again at war with Brazil, and Rosas was overthrown when Argentina was defeated. Barings tried for years to reach a settlement on the debt, repeatedly sending representatives to Buenos Aires, but it was not until 1857 – 29 years after the default -- that Barings and bondholders (backed by the threat of some stiff English gunpowder diplomacy) reached a settlement with what was now the Republic of Argentina -- by issuing new bonds, of course.
And with Argentina’s credit now restored with a £1.6 million Barings recapitalization of the arrears, Barings went on to market another £550,000 for Argentina in the first portion of a £2,500,000 33 year Argentina 6% bond maturing in 1899 and even more issuance followed.
By 1890, however, Argentina was on the brink of default again and almost took Barings down with it. With the Bank of England becoming the world’s lender of last resort, it was Baring’s old rival, Rothschild, who would persuade the British government to put together what became a £17 million rescue on the principle that the collapse of Barings would be a “terrific calamity for English commerce all over the world.” Lord Rothschild then chaired a banker’s committee that forced Argentina to peg their peso to gold – a scenario that would be repeated almost verbatim exactly 100 years later with the International Monetary Fund playing the role of the lender of last resort with Domingo Cavallo, the Argentina Finance Minister who would peg the peso to the dollar in 1991 (And just as in the past, Argentina’s 1982 default had been precipitated by the final straw of a disastrous war that year, this time with Britain over the Falkland Islands).
While Madrid’s George Santayana may have said that those who don’t study history are doomed to repeat it, those of us that do study history are often doomed to stand by while everyone else repeats it. Luckily, the financial markets provide sharp investors a way to profit from the madness of crowds. With contract law, U.S. courts, and dollar diplomacy now playing the role of the big gunpowder-laden stick of old, those of our clients and investors who took our advice to buy Argentina’s defaulted debt in the 30s last year have now quadrupled their investments as the untendered dollar bonds are trading at over 120. Those who bought on our widely publicized calls in May and June when the untendered bonds were in the 40s and 50s have now more than doubled their money. Plus ca change, plus c’est la meme chose.Russ Dallen is the head of Venezuela investment bank Caracas Capital Markets and the Publisher of the Latin American Herald Tribune. You can follow him on twitter @RussDallen or email him at RDallen@CaracasCapital.com.
Argentina 6% 1868
Buenos Ayres Bond Recapitalization 1858