Fact Check: Argentina

937 days, 15 hours, 37 minutes ago


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Turns out, it CAN get worse…

With the news today that “McDonald’s Bonds Walloped in Argentina,” Bloomberg reinforced what might henceforth be dubbed, “the Kirchner/Kicillof Principle of Self-Perpetuating Economic Destruction”:  when you voluntarily plunge your country’s economy into chaos – then actively spurn all reasonable attempts to rescue it – you shouldn’t be surprised when it coughs up misery after misery.

The Argentine people know this principle well…it is the enduring legacy of the Kirchner/Kicillof years, never more starkly on display than during these last five months, after the duo spurned its creditors and sacrificed its citizens to the degradations of voluntary default.

So, today’s news that Arcos Dorados Holdings Inc. (ARCO), the world’s largest franchisee of McDonald’s Corporation restaurants has “seen its benchmark debt tumble since Dec. 9, when Moody’s Investors Service cut the Buenos Aires-based company’s ratings for the first time as currencies from Venezuela to Brazil depreciated” isn’t shocking.

But it’s certainly not good news.  In fact, the 3 percent drop in the bonds is more “than twice the average in Argentina and emerging markets.”

The irony here is that until recently, Arcos Dorados – which operates more than 2,086 restaurants across Latin America – had actually benefitted from Argentina’s depressed economy and the onerous foreign-exchange rules instituted by Kirchner and Kicillof.  That’s because about 75 percent of Arcos Dorados’s sales were rooted in foreign markets, enabling the company to take advantage of lower borrowing costs.

Pity for Arcos Dorados, and cash-strapped consumers all over the region, but that “advantage is now dwindling as the region’s currencies suffer the longest losing streak since 2001.”  Everyone gets a little taste of Argentina…

Bloomberg goes on to document that Arcos Dorados’s 3rd quarter profits last year (as reported on November 4th) fell 99 percent, “in part because weakening currencies resulted in lower revenue when translated into dollars.”  Those currencies have been on the decline for six straight months, “falling about 13 percent against the dollar since the end of June.”

Significantly, even after Moody’s lowered Arcos Dorados’s rating one level to Ba3, (three steps below investment grade), Arcos Dorados remains Argentina’s highest-rated company, after Petrobras Argentina SA, a unit of Brazil’s state-controlled oil producer.

“Arcos Dorados’s $474 million of bonds due 2023 yield 7.05 percent, less than the 8 percent average for Argentine companies and below government borrowing costs of 9.3 percent.”

Frequent visitors to this blog may recall our September post (“Like Russia, Argentina is So Bad it Almost Can’t Get Any Worse”), the headline of which was extracted from the article within, and was a direct quote from Jim Grant, of Grant’s Interest Rate Observer.

It brings us no pleasure to report that Mr. Grant’s prediction was premature.  Argentina could get worse, and it certainly has.

With consumption, exports, wages, and the peso all wallowing at what seemed the bottom of a drastic downswing, and with inflation, labor unrest, and general misery at what seemed an unsustainable peak, who could have foreseen the boundless nature of the Kicillof Economy?