Argentina’s local debt puzzle

28 January 2020/No Comments
By Nick Dunbar

It hides under the shadow of government protection, and has been growing rapidly. Sub-sovereign or quasi-government debt encompasses municipal debt, agencies, state-controlled banks and other entities.

To see its importance, look at Germany. According to IHSMarkit iBoxx data, there are about $1 trillion of federal German bonds, excluding short term debt. But when you include state banks such as KfW and regional issuers, this adds another $500 billion to the total.

Sub-sovereign debt as a percentage of GDP

As a rule of thumb, such debt should always be riskier than that of the equivalent sovereign. Rating agencies reflect this by notching sub-sovereign ratings down according to the level of support they expect governments to provide. This ranges from rock solid in the case of the UK, to more uncertain or unreliable, as in many emerging markets.

Investors typically agree. As we see with the Risky Finance sovereign tool, sub-sovereign issuers trade at slightly higher yields to their corresponding government. This difference can be very small as in the case of Germany’s regions or Canadian agencies, or larger when it comes to German state-guaranteed banks or Canada’s regions. The same story is observed in emerging markets too: sub-sovereign debt is invariably viewed as riskier than the sovereign.

But then we have the case of Argentina, whose foreign currency bonds are rated B- by S&P and Caa2 by Moody’s. Investors currently price these bonds at an average 50 cents on the dollar. Both rating agencies give an identical foreign currency rating to the city of Buenos Aires, but whose dollar bonds are priced at 99 cents. In other words, debt issued by the nation’s capital is valued at twice as much as that of default-prone Argentina itself.

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