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Argentina misses out on MSCI upgrade but pins hopes on its century-bond sale

Argentina's recent foray into the global bond market with a 100-year U.S.-dollar bond has a number of market analysts debating whether this is a good move from a country that is still reeling from past defaults.

The country recently sold $2.75 billion of a 100-year bond on Monday, just a year after emerging from its latest-default, according to the government.

Finance Minister Luis Caputo stated that the deal's success highlighted how Argentina has regained market credibility and confidence, noting that the issue also was "prudent" as it was taking advantage of the low yield environment and balancing the country's debt profile.

Caputo further suggested that having raised its $10 billion initial target for 2017, Argentina is now expected to seek currency diversification, potentially including euro, Swiss franc or yen funding. Its overall target for the year will be increased to $12.75 billion, according to Caputo.

Argentine peso bills
Leo La Valle | AFP | Getty Images
Argentine peso bills

Soon after the bond hit the markets, Argentina received $9.75 billion in orders, as investors eyed a yield of 7.9 percent in a market where higher yields are tough to find. But a number of analysts have criticized this move.

"If ever there was an example of how financial repression has driven investors to ever more desperate investment decisions to try and generate higher returns, then it is Argentina issuing 100-year foreign currency debt," Marc Ostwald, strategist at ADM Investor Services, said in his daily note.

"As a matter of record, Argentina has defaulted on its foreign currency debt seven times since independence 200 years ago, and five times on local debt, its longest stretch without default was ca. 50 years.... as they say somewhere 'you do the math'!"

100 years too long?

Some analysts have also expressed concern over the term of the bond being too long. Bonds, however, are a way to raise capital by attracting yield-hungry foreign investors in a low-yielding environment. However, the success of the bond depends on Argentina's economic situation and how the country stabilizes its ailing economy in the years ahead.

Mauricio Macri, President of Argentina, at the 2016 Sun Valley conference in Sun Valley, Idaho.
Michael Newberg | CNBC
Mauricio Macri, President of Argentina, at the 2016 Sun Valley conference in Sun Valley, Idaho.

The Argentinian economy recently failed to win back its status as an emerging market in the influential MSCI benchmark equity index posing a contrast to the success of the launch of its 100-year bond. The failure is a setback for President Maurico Macri who has implemented several market-friendly reforms to deliver on his promise of reforming the country's economy after years of heavy intervention and non-payment of of international debt obligations under the previous government.

He ended a decade-long dispute with creditors that allowed it to re-enter global credit markets, but Argentina lacks an investment grade rating. S&P and Fitch rate the sovereign a B with a stable outlook, while Moody's has the debt at B3, according to Reuters.

Trophy deal?

But concerns over the state of the economy continue to loom and a number of analysts see the 100-year bond as a 'trophy deal' from the government.

"The deal exceeds the normal term for a long bond, 30 years. It can be seen as a 'trophy' deal," Brian Lawson, senior consultant, Banking, Country and Economic Risk at IHS Markit, told CNBC via email.

"As stated by Caputo, Argentina has joined a club which includes (in his words) 'Mexico, Belgium, Ireland, China, Denmark or Sweden'. This enabled him to claim that Argentina is "nearer to normal countries like Belgium or Mexico than Venezuela', with the deal representing a 'seal of confidence not only in the current administration but in the future of the country'.

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Tim Bradley | Getty Images

While Lawson said from a market's perspective the deal reflects the market's strong risk appetite for higher yielding debt, he also criticized the move keeping in mind Argentina's history of defaults.

"Argentina has a history of periodic default. Between 1824 and 2014, it actually defaulted eight times. While the current administration may be making positive economic policy progress, the longer term record suggests that Argentina is prone to periodic economic difficulties and political instability. However, it is unlikely that the investors in its debt view this is as a concern, with investment being driven by the prevailing yield hunger," Lawson said.

Although the failure to secure an emerging market status may be a blow to Argentina's dreams of making its way back into global markets, IHS' Lawson suggested that the deal could prove to be very attractive for the country.

"Only a few years ago, Argentina was struggling to borrow at single digits at any maturity. Now it has done so at below 8 percent for 100 years. If U.S. interest rates rise, market conditions worsen, or political instability returns to Argentina, this deal could appear very attractive funding for the borrower."

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