Wednesday, April 25, 2012

Argentina’s President Christina Fernandez Making History Repeat Itself

The History of a Great Country That Engaged in Economic Self Destruction

Argentina cannot borrow money in the world financial markets.  Why not?  Because over ten years ago they took their economy, which they had run into the ground, and defaulted on their debt.  It’s a funny thing about not paying your debts; whether you are a person, a company or a country people are not very anxious to lend to you after you renege on a promise.  Seems they think you might do it again.

Most governments facing a cash crunch turn to the debt markets. But Argentina has not been able to borrow in the markets for years, because investors demand punishing interest rates and because it is still mired in legal battles with the holdouts from its 2001 sovereign default. As a result, it has had to look for financing internally.

So the government of Argentina, first under the control of the current President, Christina Fernandez’s late husband and now under her control have essentially raided some public facilities to finance a welfare state designed, well, designed to keep Ms. Fernandez in power.

In the mid-2000s, Kirchner filled the treasury with taxes on soyabean exports. But when his wife tried to raise them again in 2008, farmers staged a political rebellion and she backed down. Since then, she has turned to temporary fixes to keep cash flowing. In 2008 she nationalised private pension funds. Two years later she began paying debt with central-bank reserves. That was enough to win her re-election.

But that was not enough, so Ms. Fernandez has taken the step to nationalize the countries leading oil and energy company.

On April 16th they got an answer, when she announced she would send a bill to Congress to nationalise 51% of YPF, the former state oil firm. It will exclusively target the shares that Spain’s Repsol bought in 1999, six years after YPF was privatised. “We are the only country in Latin America, and I would say in the world, that doesn’t control its natural resources,” she declared.

Argentina, like every other country that has the resources but lacks the capital to be an economic power player in world markets needs direct foreign investment.  Exactly how taking over a private company’s controlling interest in a private oil company will encourage more foreign investment is not clear, at least to anyone who applies logic to the situation.

The move will help the political fortunes of the ruling party and the current President.

Taking over YPF offers Ms Fernández both financial and political benefits. She can divert its $1.3 billion a year in profits, burden its minority shareholders with 49% of the losses from the government’s energy imports, stuff it with patronage jobs and choose its suppliers. She may have visions of an oil boom fuelled by YPF’s huge recent finds of shale oil and gas. And, like the Falkland Islands, YPF is seen as a symbol of national sovereignty. Argentines will surely rally to the cause, and the bill is expected to pass Congress by a landslide.

And as for energy development and production, the expected results are typical when government rather than the private sector is running a major business rather than meeting public goals by effective and efficient regulation.

The shale fields, which require special technology and over $5 billion a year of investment to develop, will lie fallow—as they have since their discovery. YPF’s output could fall as it suffers a hostile takeover and skilled employees leave: Daniel Montamat, a former energy secretary, predicts that the expropriation will increase Argentina’s 2012 energy trade deficit from some $5.5 billion to $7.5 billion. But that effect is difficult to distinguish from the industry’s broader decline.

So no, Argentina will not be joining Brazil and be a co-leader in South America’s economic growth and it will not become a player in global economics and politics.  Too bad, it’s a very nice country.

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