Milei struggles to unlock global capital markets for Argentina
Despite excitement over libertarian’s reforms, country’s borrowing costs remain too high for it to tap foreign funding
Investor enthusiasm for Argentine President Javier Milei has yet to translate into cheap dollar financing for the cash-strapped country, which is still locked out of foreign currency issuance on global markets despite a huge IMF bailout.
Chronic economic crises have led Argentina to renege on its sovereign debt obligations nine times in its history, most recently in a 2020 restructuring. Resulting investor disputes and high interest rates have left the country unable to borrow overseas for most of the past two decades.
Changing this is crucial for Milei, a wild-haired libertarian economist who has won applause for eliminating Argentina’s fiscal deficit and taming severe inflation. Without market access, the country’s economic growth will be stunted and it will be unable to pay back the $57bn it owes to the IMF.
“Milei needs fluid access to markets to make his programme sustainable,” said Gabriel Caamaño, an economist at financial consultancy Outlier in Buenos Aires. “But to get access he needs to prove his programme is sustainable, and investors still have doubts . . . It’s kind of chicken and egg.”
While Argentina’s sovereign bonds have rallied since Milei’s 2023 election, implied borrowing costs remain well above the rates most developing countries would be willing to pay.
The interest premium or spread over US Treasuries that investors demand to hold Argentine dollar-denominated debt stands at 7.71 percentage points, down from more than 20 points under the previous left-leaning Peronist government.
Jeff Grills, head of US cross markets and emerging markets debt at Aegon Asset Management, said that “there is no magic number” for the spread at which Argentina could access markets again.
But “the marginal participant in the next issuance by Argentina is going to want to do it at a tighter level, so it can become a self-fulfilling prophecy” that helps the debt to be repaid in future, he said.
Investors are haunted by the memory of Argentina’s jubilant return to capital markets in 2016 under conservative president Mauricio Macri. When Macri’s business friendly reforms stalled, Argentina fell into a market crisis in 2018, triggering the IMF’s biggest ever bailout package, the Peronists’ return to power in 2019 and substantial losses for investors.
Milei’s economy minister, Luis Caputo, was also Macri’s finance chief. A former Wall Street trader, in 2016 Caputo brokered Argentina’s return to markets by settling with holdouts from the country’s record-breaking 2001 default.
In 2017, he sold a 100-year bond that became a symbol of the stunning rehabilitation of Argentina’s reputation. But then came the crisis under Macri, and the bond was restructured in 2020.
In April this year, Caputo secured a fresh $20bn loan from the IMF to help Milei relax Argentina’s strict currency controls, together with $22bn from other multilateral lenders. He has also negotiated $3bn in repurchase agreements with international banks and issued $1.5bn in peso bonds that offshore investors could subscribe to in US dollars.
But Milei remains unable to tap international dollar markets, as many governments do to borrow or to roll over existing debts. Caputo told the Financial Times last year that access might be achieved in time to refinance principal repayments that came due last month.
One reason investors continue to doubt Argentina’s ability to service its debts is its failure to rebuild its foreign currency reserves.
The IMF said last week that Argentina had missed early targets for replenishing reserves, which at the end of July were $6.4bn in the red when accounting for liabilities, despite an increase of about $2bn since the fund’s latest bailout began.
Reserve accumulation has been slowed by Milei’s currency policy, which has diverted billions from central bank coffers to prop up the peso in a bid to curb inflation and please voters. Buenos Aires has also been forced to sacrifice reserves to repay its debts. Weak prices for Argentina’s top agricultural and energy exports have reduced the amount of dollars available.
But the biggest risk factor for potential investors is politics, analysts say.
Previous stabilisation plans have come undone when governments lost support for unpopular spending cuts. In recent weeks, opposition lawmakers have approved several spending increases that threaten Milei’s drive for fiscal balance.
The hope for Milei is that his La Libertad Avanza coalition will do well at October’s midterm elections, curtailing such fiscal risks. Pollsters say the coalition could win as much as 40 per cent of the votes, significantly expanding Milei’s tiny congressional minority.
Such a victory would reassure investors and reduce Argentina’s global bond spreads to less than 6 percentage points over Treasuries, said Nicolás Dujovne, who served as economy minister alongside Caputo in Macri’s government.
“There’s a good chance that if the government does well at the elections, spreads fall and it will start being able to roll over debts,” he said. “Then we enter a virtuous cycle where reserves build and Argentina becomes a more attractive investment.”
Yet the months after the midterms may be just as pivotal, as pressure builds on Milei to deliver structural reforms, including on labour laws, as well as moves to boost export competitiveness, which has been hit by the stronger peso.
“The market will be watching closely to see if you finally make the tough decisions that you’ve postponed until after the elections,” said Caamaño. “There will be no more excuses.”
