nterview with economist mariano kestelboim

Wednesday, April 20, 2016

‘Investors placed higher bids just to get a larger piece of the cake’

By Fermín Koop
Herald Staff

While celebrated by government officials, the US$68 billion in offers received for the country’s debt issuance isn’t realistic, as investors actually bid more than the real amount they wanted in order to get a larger piece of the cake, economist and university professor Mariano Kestelboim said.

Kestelboim told the Herald that the government could have scored a lower interest rate based on the large amount of offers, which he described as “artificial.” Nevertheless, he said rates will be lower on upcoming smaller issuances not only by the national and provincial governments but also by private companies.

The government received offers worth US$69 billion for the debt issuance. Nevertheless, you claimed the amount is bloated. Why?

It’s artificial because of how the issuance was carried out. Everybody knew Argentina was willing to issue only a limited amount of bonds, all government officials said that publicly. It was a fixed sum. Investors knew that if they bid for more bonds than the amount they actually wanted they would have higher chances of getting a larger part of the issuance. That’s the only reason behind the large number of offers.

Could the government have reached a lower interest rate based on the high demand?

Yes, with such a high offer the government could have lowered the interest rate and saved Argentina some money. But they kept the rate high instead. Government officials called the main interested investors to ask them to bid for more bonds so they could later get a larger piece of the cake.

How was this issuance compared to previous ones?

The Cristina Fernández de Kirchner administration issued the Bonar 2024 bond last year and paid a 8.75 percent interest rate. Compared to that, it’s fair to say Prat-Gay was able to lower the interest rate considerably. But the drop could have been larger. There was also a plan B. The government could have done a smaller issuance now with a higher interest rate and then do other ones with smaller rates.

And compared to other countries in the region?

Brazil, in the middle of one of its worst political and economy crisis, was able to get US$1.5 billion last month with a 10-year bond, which had a 6.1 percent interest rate. Argentina has already settled with the “vulture” funds so the rate should have been lower.

Despite this not being the case, could we expect new issuances on the near future?

Yes, but not as large as this one. Shares of Argentine companies are going up because the market expects they will be able to access cheap debt soon. Provinces will also issue more debt as many are facing a complicated financial situation. But they will have to pay a higher interest rate than the one of the national government, which will probably tax new debt on the upcoming months to get funds for infrastructure.

Will the national government access a lower interest rate with future issuances?

As credit rating agencies start improving Argentina’s rating, the interest rate will go down. There’s a large interest in the market of getting hold of the country’s debt. It’s an economy without much debt, going through austerity plans and normalizing its relationship with international credit agencies.

Do you see a link between the banks chosen to carry out the debt issuance and some of the government officials?

There are very close ties between Finance Ministry officials and the banks who carried out the debt issuance. For example, Finance Secretary Luis Caputo used to work at Deutsche Bank and Prat-Gay at JP Morgan, with links to HSBC as well. The government should clarify why those banks were chosen, I hope it wasn’t only because of their own interests.

@ferminkoop