I am neither a historian nor a political analyst, thus this brief comment is not about history or politics. It’s about investing and the meaning of ‘entrusting’ your money to anyone. For the record, I also have nothing against Argentina, Russia or anyone else in this world; I pick issues that I find useful in guiding my investment decisions.
Buying financial services is the most obvious way to entrust money: you hire someone or an organization to look after your savings and to manage your portfolio with the aim of producing results in line with your objectives. There is also a more direct way to entrust your savings: the purchase of a stock or a bond, where you take the economic risk of the issuing entity of your choice and expect, in return, that the entity’s management will do its best to provide a return on your money.
In the case of Argentina, a recurring high-risk country, investors decide to lend funds or buy its bonds in exchange for a substantially higher prospective return, a return deemed sufficient to compensate for the high risk of default. In determining what the return should be, the same investors rely on the careful and sophisticated analysis of economic factors, with perhaps a glance at the current political situation.
Experience tells us this is clearly not enough, just like it’s not enough to look at P/Es or growth rates when you invest in Russian equities. When there appears to be a lack of moral or cultural will to pay back debts (like in the case of Argentina), or when a superior controlling hierarchy determines who gets what in business in a unilateral and arbitrary fashion (like in Russia), no amount of analysis will suffice. This unquantifiable risk goes beyond the generic ‘political risk’ category; it sits at the heart of trust in a world of interconnected finances.
You may plead ‘The Argentinians are unlucky, constantly baffled by unfavorable circumstances over which they have limited if any control.’ And that is certainly true. But, referring to a similar class of debtors who arguably have it even harder, what should we say of the poor people who get served by the microfinance industry, people who truly have nothing except their will, wit and determination to develop entrepreneurially? Their credit ethics (and standings) are so good that they put to shame not only Argentina but just about any common credit card borrower in major developed countries.
You may further point out ‘Let’s say it’s like you describe it; in any case the price Argentina pays on its debts is what the investors are willing to grant them given all the underlying risks.’ And here too there is some truth to the idea. With one caveat, which I find easier to express by asking a question in return: ‘How do you determine a price when you know you’re lending money to (or investing in stocks of) entities with a culture of getting away with it?’
Memories are short, I know. Perhaps I’m in the wrong business.
Roberto Plaja, April 25, 2020
Cover: Emilio Pettoruti, ‘La Última Serenata’, 1937