It would take a spectacular return of global growth in combination with a significant devaluation o...
It would take a spectacular return of global growth in combination with a significant devaluation of the dollar to turn the Argentinian economy around.
The stark warning from Richard Keery, investment manager on Edinburgh Fund Managers' Latin America desk, comes as the ailing South American giant struggles to cope with a huge debt burden, which it is seeking to restructure.
Edinburgh, which is zero weighted in Argentina, believes the country has run out of options and has been left behind while neighbours Mexico and Brazil have surged ahead. Its currency, the peso, is overvalued and its economy, which has not kept up in terms of technological advances or industrialisation, has little to offer global trading partners as it is highly uncompetitive compared with other countries operating in similar industries, says Keery.
Argentina does not even have the option of devaluing its currency, as Brazil did two years ago, he adds. If it depegged the peso from its one-to-one parity with the dollar, something that is deeply unpopular in a country which remembers hyper-inflation, its debt ' largely dollar-denominated ' would become too large to handle.
Keery says: ' We are entirely negative on Argentina. It continues to waste money and we have got no optimism that the debt swap will be successful. We feel the pressures going forward are building and there will be a decisive break somewhere.'
Keery says the events of 11 September have done nothing to lessen Argentina's plight. The debt swap, he says, is essentially a division of Argentina's debt into domestic and international components. The government plans to redefine coupons paid to domestic borrowers to protect capital. Externally, it plans to re-negotiate terms, a delicate process.
All this comes against a backdrop in which capital is fleeing offshore and liquidity in the banking system is rapidly drying up, which Keery says has simply contributed to the country's deepening recession.
Keery's negative view is widely shared. The state of Argentina's economy and its crippling debt will lead to at least a further year of recession, says Bob Attridge, head of fixed interest at Old Mutual Asset Managers. He says: 'Of course, Argentina has had some bad luck. Brazil's huge devaluation has put severe competitive pressure on its industry. High oil prices and the strong dollar have added to the problem. However, even if Argentina's luck had remained good, it could not have sustained austerity indefinitely. Years of falling output have exhausted its economic, social and political systems, and now it is a question only of how it is to 'restructure' its debt.
Attridge saysÃ¥: 'The issue is how to share out the pain among Argentines and foreigners as the value of Argentina's huge dollar debt collapses. Even if a comprehensive deal is agreed, Argentina seems certain to suffer another year of recession, with output and prices falling, again. Its debt is currently the lowest-rated in the world and it is hard to believe investors will return with any enthusiasm for many years.'
The Argentinian crisis is, according to some, likely to have knock-on effects on some equities and credits around the globe transferred through the international banking system. Some Spanish banks are likely to be involved, as are pension funds.
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