Lending to governments

Argentina’s “century bond” didn’t last long, but its rise and fall holds lessons for investors at a time of market optimism despite widespread economic dislocation.

An August restructuring guarantees that foreign creditors will get little more than half of what they were due on $65 billion of debt, including the 100-year bonds the government sold three years ago at the height of a decade long emerging-markets boom.

They call lending to governments “risk free” in the jargon.

17 thoughts on “Lending to governments”

  1. Who would lend to any Latin American country and especially Argentina ?
    Unless of course they are scrap metal merchants.

  2. To be fair, Ecksy, it was never going to be repaid in 1694…

    Despite all the slaves making Britain rich.

  3. UK’s debt will never be repaid to the point we’re in the black. I assume we’re up to date on interest & capital becoming due to be rolled over. When was the last time UK (or its constituent countries) defaulted – Henry VIII or later?

  4. @MC
    I wonder how many people buying this Argie debt did so with their own money?
    And how many were spending other people’s money while being otherwise incentivised?
    A detailed look at their personal accounts may be interesting,if anyone cared about bribes, corruption and fraud nowadays. But unless they made thir dog salute, they are in the clear I guess.

  5. “ As the WSJ notes, buying long-dated debt from a serial defaulter is puzzling…”

    Not as puzzling as many assume though.

    Although it didn’t work out, there is a possible rationale behind buying instruments like this even if you think Argy will default at some point.

    Really long bonds have high duration – that’s not just a tautology; it’s also a financial mathematical property that means that the valuation of the instrument is very sensitive to changes in expectations of future interest rates.

    The maths is quite simple (google it) but the basic idea is that if an instrument is going to pay you 6% and then the relevant rate declines to 3%, you’re now earning ‘double’ the yield on the market due to your smart purchase. If you get that for one year, that’s nice, you end a little bit better off (roughly 3%). If you’re going to earn it for a hundred years… quids in! (The value of the instrument doubles, speaking crudely)

    If you think long-term interest rates are going to continue to decline in the near future (a trade that has basically been the winning bet since the early 80s until today), you can buy an instrument like this and make a fortune in a short space of time.

    The risk you run of course is that the credit may default in the meantime. But if that doesn’t seem imminent, you can take the view that you’ll make a stack of money due to interest rates falling, well before you need to worry about it.

    So funnily enough, a lot of people will buy a hundred year bond with no intention of holding it for a hundred years. They can make their money from the high duration and hand on the hot potato to someone else by selling it, if all goes well.

    But of course when it goes wrong someone has to be holding it!

    Argentina under the Macri government genuinely looked for a while like it was getting its house in order. But unfortunately they hadn’t made enough progress by the time the first economic shock came along, so they went back to being Argentina again.

  6. Although it didn’t work out, there is a possible rationale behind buying a bridge in London from a convincing Cockney who demands cash and hand-writes the receipt.

    Buying Argie 100 year debt is idiocy, regardless of the coupon, your interest rate forecasts or what you see in the tea leaves. The past 100 years demonstrates the populace has no appetite for sound finances and so any politician who aimed to deliver them was bound to fail.

  7. Mexico issued 100-year USD denominated bonds in 2010. The coupon was 6%. Anyone know how they’re doing today?

  8. “Yes: the “bigger fool” strategy“

    Yes very much that, although I prefer to use the hot potato description because it’s really time-dependent.

  9. Oblong said:
    “I prefer to use the hot potato description because it’s really time-dependent”

    Although an actual hot potato cools the longer you hold it; Argentinian government debt is likely to get ‘hotter’.

  10. When was the last time UK (or its constituent countries) defaulted – Henry VIII or later?

    Some argue that the failure to pay WWI war loans in 1932 was a technical default, but it really wasn’t. Probably the last actual default was “The Great Stop of the Exchequer” in 1672 during the reign of Charles II.


    It was this action which led to the founding of the Bank of England and there has not been an actual default since.

  11. They call lending to governments “risk free” in the jargon.

    It’s exactly this sort of foolishness, along with the extravagant spaffing up the wall of politicians that makes matters worse. Still, there’s little you or I can do about it and Tarquin makes a bundle trading this bullshit in The City.

    If you ever really want smaller government then controlling the ever increasing issuance of new debt would be a good place to start, followed by the settlement of old debt instead of eternally rolling it over.

    I understand the need for liquidity and having the Bank of England as a “lender of last resort”, but if you are so critical to the economy but verging on bankruptcy then the last thing that should happen is anyone lending you money, especially the bloody taxpayers.

  12. It’s puzzling to me that countries which routinely go tits up and default, like Greece and Argentina, are locked out of bond markets for less than three years. Admittedly, that’s longer than their periods of solvency, but still..

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