Why Argentina’s country risk is 18 times higher than Uruguay’s

By Juan Pablo Álvarez

The 21st century started turbulently on both sides of the La Plata River: both Uruguay and Argentina faced an economic and financial crisis in the early 2000s, which affected not only their citizens but also the ability of the states to meet their commitments to creditors.

However, more than two decades later, the credit evolution of both countries has been entirely divergent.

The Uruguayan state has consolidated with the Chilean state as one of the safest in the region for international investors.

Today, the Uruguayan government has the lowest country risk in Latin America.

At the close of Thursday, February 2, Uruguay had only 102 points in the Emerging Markets Bond Index (EMBI) measured by the international bank JP Morgan.

On the other hand, Argentina’s country risk, or EMBI, stood at 1,797 units at that date.

To reach Argentina’s country risk, not only do we have to multiply Uruguay’s almost 18 times, but we also have to leave behind practically all Latin American countries: the only American state with riskier bonds than Argentina’s is Venezuela, whose EMBI stood at 37,462 units as of February 2.

Below Argentina are El Salvador (1,442 points) and Ecuador (1,107).

The EMBI or country risk marks the risk differential of a state’s private debt compared to US debt, considered risk-free.

Today, an Argentine bond maturing in 2030 yields 29.1%, given the fear of a default in the future.

On the other hand, an Uruguayan bond maturing in the same year yields 4.2%.

Ergo, Argentina would have a completely closed market if it wanted to finance itself.

At the same time, Uruguay could enjoy a rate similar to that of the most developed countries in the world if it needed fresh funds.

WHY URUGUAY HAS THE LOWEST COUNTRY RISK IN THE REGION

“We have to look at two issues: the repayment capacity, that is, the macroeconomic aspect, and the willingness to pay, which involves institutional aspects, more subjective, such as the issuer’s track record”, said Jerónimo Nin, Investment Manager at Nobilis, when asked why there is such a difference between Uruguay and Argentina in terms of sovereign debt.

On this basis, the executive explained that in the last two decades, Argentina and Uruguay “have gone in opposite directions” concerning the aforementioned metrics.

“At the macroeconomic level, Uruguay has achieved stability after the 2002 crisis. And, in addition, it came out of that crisis with a strong message to its creditors that ‘we are going to pay and we want to pay, give us the deadline that we are going to do the impossible to pay,'” said Nin.

On the other hand, he emphasized the maturity of the Uruguayan political class concerning this consensus:

“You don’t hear practically anyone from the whole ideological spectrum saying that there is no need to pay. Uruguay is a small country open to the world that needs investors and takes care of them”.

In line with this view, Agustín Caticha, head trader at Adcap Securities Uruguay, remarked that Uruguay is a nation with “orderly accounts” and that its debt reprofiling took place 20 years ago.

Contrary to this, Argentina has already had three international defaults and one local one during this century, in addition to a debt restructuring with the International Monetary Fund:

• In December 2001, then President Adolfo Rodríguez Saá announced that Argentina would suspend its foreign debt payments.
• In 2014, US Judge Thomas Griesa demanded that the country pay bondholders who had rejected the 2005 and 2010 debt renegotiations. Argentina complied with that ruling in 2016, for which it was in technical default for two years.
• In 2019, the government of Mauricio Macri reprofiled debt payments in pesos.
• In 2020, with Alberto Fernández as President, Argentina restructured its debt with private creditors.
• In 2021, Argentina renegotiated its program with the IMF.

Returning to the case of Uruguay, Caticha pointed out three aspects that explain the current good score:

• “Much emphasis has always been placed on the order of public accounts, even considering that the country has had administrations with different political orientations.”
• “In 2021, with the Urgent Consideration Law, a new fiscal rule was created to provide even greater sustainability to public finances, which is transcendental for credit.”
• “The current administration is complying with this rule, radically lowering the deficit, which undoubtedly impacts its credit standing. Uruguay’s country risk, therefore, is the result of a virtuous circle involving efficient management of the fiscal rule and legal certainty.”

THE ADVANTAGE OF A LOW COUNTRY-RISK

Uruguay was one of the countries that, in 2021, took advantage of the global mega liquidity to finance itself long-term and at low rates in the international market, taking advantage of the low credit cost it has due to its low country risk.

“Uruguay has the longest maturities in dollars in the entire region”, highlighted Jerónimo Nin.

With information from Bloomberg