Six years after placing a multibillion-dollar bet on Argentina’s resurgence, Franklin Templeton’s Michael Hasenstab appears set to finally exit the money-losing wager, concluding a painful chapter for the once-vaunted money manager known for his moonshot bets in emerging markets.
The firm sold more than 25 billion pesos ($156 million) of local bonds in the third quarter, filing data show. It’s continued to offload Argentine debt since then, according to people with direct knowledge of the matter, who declined to provide details on the size of the sales. Market participants say a spike in trading volume last month, particularly in inflation-linked bonds known to be held by Franklin Templeton, hints at a sizeable retreat.
The exodus caps six brutal years of losses, estimated in the billions of dollars, and marks the departure of one of Argentina’s most important financial backers over the last half-decade — a span in which the nation struggled through a $65 billion default and a failed pivot toward market-friendly reforms. In total, Franklin Templeton’s stake, which once stood in excess of $5 billion, has shrunk to roughly $250 million, not including any divestments in October or November, according to data compiled by Bloomberg.
“The bet was horrendous, and on the one hand, you can fault Franklin Templeton for making it because similar wagers in Argentina have always ended in tears,” said Diego Ferro, founder of M2M Capital in New York. “At the same time, people in government were saying all the right things, were credible at the time, and made a lot of promises,” adding that “of course, hindsight is 20/20.”
Hasenstab didn’t respond to multiple requests seeking comment, while Stacey Coleman, a spokesperson for San Mateo, California-based Franklin Templeton declined to comment on the firm’s Argentine holdings or broader investment strategy.
Hasenstab shot to prominence more than a decade ago following massive, successful wagers on struggling countries including Ireland and Hungary that reaped billions in returns for investors.
But that same strategy would prove disastrous in Argentina.
He piled into the country’s bonds around the start of former President Mauricio Macri’s rise to power, betting the South American country was primed to lead a rebound among developing nations under his market-friendly watch.
Hasenstab was initially so bullish on Argentina’s turnaround that in mid-2016 the money manager decided to buy about $5 billion of fixed-rate peso bonds, convinced that inflation would quickly be cut in half, according to a person familiar with the matter. The bet was so big that Argentine authorities initially didn’t believe Hasenstab’s envoys were serious about the purchase, said the person, who asked not to be named discussing private conversations.
When Franklin Templeton did buy the notes around the end of 2016, it purchased them near par. In recent months, as it’s continued to exit what’s left of the position, some have traded below 30 cents, Bloomberg data show, while the peso has weakened more than 90% over the span.
Hasenstab’s wager took a turn in early 2018 as persistent inflation, drought and a global trade war dented investor confidence, sparking months of exchange-rate volatility and market selloffs that forced Macri to return to the International Monetary Fund to negotiate a record $56 billion bailout.
By that October, Hasenstab decided to personally travel to Argentina, furious that the country had made a deal with the IMF, which he believed had been primarily responsible for leading Ukraine — another one of his outsized wagers — into a debt crisis years earlier, the person said.
The following year, Macri’s stunning defeat in primary elections caused a steep sell-off that wiped out almost $2 billion of Franklin Templeton’s stake in a single day. Days later he defaulted on the nation’s local debt and brought back capital controls. That, along with the country’s decision to ultimately restructure its international bonds, would trap the firm and other large creditors, even as the government offered buybacks and swaps for local bonds to help ease the pain.
Hasenstab has been trimming down his position in Argentina since 2020, filings show, around the time Argentina was exiting its ninth default. Since then, the left-leaning government of President Alberto Fernández has applied patchwork economic policies to try and bring down inflation and lift the economy out of its pandemic-induced doldrums.
Those efforts have mostly been in vain, as inflation spirals toward triple digits, the nation’s international reserves wallow near a six-year low, and draconian capital controls continue to limit international investment.
Hasenstab was such a big player that the firm’s retreat may complicate Argentina’s ability to roll over large debt maturities due next year, squeezing the country’s tiny local market.
“We are seeing a more saturated local market, with fewer inflows to bonds in pesos,” said Carolina Gialdi, head of international-markets sales and trading at Max Capital in Buenos Aires.
Argentina’s parallel exchange rate, known locally as the blue-chip swap, strengthened 0.6% to about 310 pesos per dollar as of 5:05pm local time. Argentina’s official exchange rate weakened 0.7% to about 162 pesos per dollar.
Even with Argentines expected to pivot back to a more market-friendly regime when they head to the polls in less than a year, Franklin Templeton has shown little sign it’s willing to give the country a second chance.
Last month Fitch Ratings cut the nation’s credit grade one notch to CCC-, citing the country’s dwindling debt-repayment capacity.
“The country once again finds itself in a place of stagnating growth and high inflation,” said Jared Lou, a portfolio manager for emerging-market debt at William Blair Investment Management. “Although many expect regime change in next year’s elections, it's unclear how many dollars will be left in the central bank when a new government takes over, raising fresh concerns about Argentina’s ability to pay its debts.”
By Ignacio Olivera Doll and Scott Squires, Bloomberg