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EMD insider: how to play LatAm's mavericks

EMD insider: how to play LatAm's mavericks

I’ll start the year with a prediction: global economic growth is likely to pick up, with both the US and China coming back up from the bottom.

Europe is a more complex case – I wouldn’t bet on its being out of the hole yet, especially with such a strong euro. This economic trend is a good development for emerging market countries and for their bonds.

Now let’s talk about the three main country events making waves at the end of 2012.


Last year ended with a relief rally in Argentinean bonds because the country was able to appeal its pari passu case and could thus pay the pending coupon.

Prices have not yet recovered to previous levels as the appeal is still floating about Judge Griesa’s desk and its outcome can come anytime and in any direction.

Some of the bond holders who participated in the two Argentine restructuring exchanges (roughly 93% of the debt holders agreed with the restructurings) have realised that their investments are at risk if Argentina loses the lawsuit brought on by the vulture funds.

They have become involved in the fight on Argentina’s side and justifiably argue that since there was a democratic approval of the country’s debt restructuring, hold-outs should fly off and lick their wounds in peace – especially as they represent less than 7% of the bonds, most likely bought at a deep discount when the country defaulted.

Vulture funds must not be given the upper hand on these types of issues or debt markets will never be the same again. I, for one, would never buy a corporate bond again if these types of lawsuits were expected to win.

The basic premise of bond investing is that there is a probability of default and a proper risk associated with that. If the country/corporate defaults, the investor is punished for not having done his homework.

He is still able to participate in the restructuring process and might eventually recover even more than he lost. If this fundamental ‘game’ element is taken away, then bond investing will likely converge with asset-backed lending and that would be like returning to the stone age of finance.

Should you be buying Argentinean bonds? I would hold my horses. We never know judge Griesa’s motivations and the outcome and timing is unpredictable.


Brazil’s Supreme Court found most of those accused of participating in the Mensalão corruption scheme guilty. But sentences were relatively short, around five years on average, with most being able to eventually serve them outside prison. Furthermore, the final decision on when the sentences should begin was postponed, until all potential appeals are logged.

Adding insult to injury, one of those found guilty, Jose Genoino, ex-leader of the Lula’s Workers’ Party, was elected federal deputy and chose to be sworn in, claiming he should not lose his seat until a final Supreme Court decision was announced.

On top of that, the leader of the lower house announced that he disagreed with the Supreme Court’s right to punish politicians! Remind me why this country is still investment grade?


Meanwhile, Brazil’s journalists were making fun of the events in Venezuela, claiming its political structure was a circus. Why? Because President Chavez was unable to attend his inauguration due to worsening health problems. Wisely, opposition parties accepted they should wait for him to take office once his health recovers.

The country’s judges supported the postponement, as long as it is reasonable. The reality is most Venezuelans like Chavez and are willing to wait. He brings stability.

As the crisis worsened, the country’s bonds continued their stratospheric rise, eyeing a potential change in power. This brings investors to an interesting inflection point: should one sell bonds bought much cheaper and realise profits now, but give up the high carry – expecting Chavez to return and the country be run just as before and bond prices to potentially drop again?

Alternatively, should one stay invested in the hope that the end-game brings even higher returns? I would bet on the latter because the upside in case of a peaceful change in power can be much higher and in the meantime, the investor would continue to earn one of the highest carries available. This is a difficult call and will depend on the investor’s risk tolerance.

Ratings farce

Finally, there are two good reasons for placing ratings agencies under strict control:

  1. Because issuers can choose who will rate their debt, as was the recent case of Turkey allowing S&P’s contract to expire and then replacing it with Fitch. Is it possible the Turkish government was unhappy with S&P’s unwillingness to upgrade the country’s debt more quickly? Should any issuer be allowed that privilege?
  2. Because rating agencies tend to make decisions at the wrong time, such as Moody’s deciding to place Venezuela on negative watch just as the health of President Chavez worsened. Moody’s has been slow to upgrade Venezuela for a long time reportedly due to Chavez’s continued rule. But when chances of his departure increase, the debt repayment is suddenly at a higher risk. It does not make sense and must be scrutinised – otherwise investors will continue to be clowned with, just as they were in the sub-prime crisis.

Raphael Kassin’s consultancy firm, Mirage Capital, advises on emerging market investment

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