Argentina default shows downside of new markets

Losing in the World Cup final is nothing to be happy about. But, for Argentina, the loss to Germany last month did help distract people from its economic woes.

The south American nation has one of the world’s highest inflation rates; its economy is set to shrink this year; and, last week, the country defaulted on sovereign debts for the second time in 13 years, and the eighth time in its 200-year history. It is clear that all is not well.

For wind investors, this should act as reminder of the perils of emerging markets. Potential for high returns is little help if the government simply ignores its obligations to businesses.

Let’s look quickly at this saga. In 2001, the country defaulted on $95bn of sovereign debt and US funds moved in to buy Argentinian government bonds at knock-down prices. The country has since restructured most of these debts, by agreeing it would pay one-third of the bonds’ value to creditors. Ninety-three percent of bonds have been restructured.

However, the remaining 7% of bondholders have refused to accept this deal and want the total value of their bonds repaid ($15bn). The Argentinian government is refusing as it would mean that it needs to treat the other 93% the same, which could lead to claims of over $120bn.

This has been the subject of a long-running legal battle and, on 30 July, the US courts ordered Argentina to repay the full value of the bonds to that remaining 7%. Argentina didn’t and is now in default. There is little sign of any resolution.

Now, this case does not directly affect wind investors, but it does highlight risks of doing deals with governments that try to wriggle out of their obligations. It can be lucrative to put money into emerging markets, but only if you know the support is going to remain there. In other words, would you base your wind farm investment plan on a subsidy deal with the Argentinian government?

If you know its attitude to sovereign debt then the answer is: highly unlikely.

Of course, at this stage such talk is largely hypothetical because Argentina simply doesn’t offer the same opportunities as countries like Brazil, Chile, Mexico and Uruguay. In theory, Argentina looks to be progressing well. It added 76MW of capacity in 2013 to take its total to 218MW, and has a pipeline of over 2GW.

But these statistics don’t tell the story of a country that has big barriers for wind investors, including a lack of incentives and laws restricting imports. It isn’t feasible for Argentinian companies to build turbine parts when they have no track record.

The main hope for wind is in next year’s presidential election, when Cristina Fernandez de Kirchner cannot stand for a third term. She is on her way out, but wind will only start to benefit if her protectionist financial policies go too.