Jaime Daremblum
March 26, 2014
Late last month, the Spanish energy giant Repsol agreed to
accept $5 billion worth of Argentine bonds as repayment for the
government’s confiscation of YPF, Argentina’s largest oil company, which
was formerly controlled by Repsol until its April 2012 seizure by
President Cristina Kirchner. With the South American country mired in
financial turmoil and flirting with yet another sovereign default, the
true value of its bonds remains to be seen. But for now, President
Kirchner appears to have resolved a longstanding dispute that had
polluted Argentina’s image and accelerated capital flight.
Are
there any lessons to be drawn from this episode? There are, I think,
both for Western governments and Argentine policymakers.
At the time of the initial YPF seizure, in April 2012, three of the most prominent Western media outlets—the Economist, the Wall Street Journal, and the Washington Post—recommended that Argentina be expelled from the G-20 as punishment. Yet no such action was taken. The Economist also
suggested that Argentina be stripped of its borrowing privileges at
multilateral institutions, and that its citizens lose their
visa-free-traveling privileges in Europe.
There
was indeed some pushback on the financing front: While Argentina has
continued receiving Inter-American Development Bank loans, it has faced
much steeper challenges in accessing new World Bank loans, thanks to opposition from
countries such as the United States, Spain, Germany, the Netherlands,
the United Kingdom, Canada, and Japan. (This opposition, it should be
noted, predated the YPF seizure.) But the proposed clampdown on
visa-free European travel went nowhere.
A
stronger, more unified Western response to the YPF nationalization
might have prompted a quicker and more equitable settlement by Buenos
Aires. It might also have compelled President Kirchner to settle other
outstanding international financial disputes and to rethink the economic
policies that have turned her country into a basket case. All of that
would have been in the interests, not merely of Repsol, the Spanish
government, and other Western companies and countries, but also of
Argentines themselves, for their nation remains on a collision course
with economic disaster.
Ever
since Argentina’s historic 2001–02 default—which followed prior defaults
in 1989 and 1982—it has effectively been frozen out of global capital
markets. It still owes the Paris Club of creditor nations an estimated $10 billion, and it’s still embroiled in a legal fight with
private creditors who refused to participate in earlier debt
restructurings and are demanding full repayment on their defaulted
bonds. In mid-October, Financial Times correspondent Benedict Mander noted that, “Of
a total of 439 legal disputes between countries and companies” at the
World Bank’s International Court for the Settlement of Investment
Disputes, “no fewer than 50 involve Argentina—far more than anywhere
else, with socialist Venezuela lagging some way behind in second place.”
(As Mander acknowledged, the number was about to drop from 50 to 45,
with Argentina announcing on
October 18 that it had agreed to issue $500 million worth of debt to
settle disputes with three American companies and two European ones.)
Regarding
the private bondholders who have sued Argentina in the U.S. court
system in hopes of receiving full payment on their defaulted debt: Back
in August, the U.S. Second Circuit Court of Appeals upheld a
district-court ruling that had ordered Buenos Aires to put $1.33
billion into an escrow account for the private creditors, and in
November the same court refused to rehear the case. Last month, the Kirchner government formally asked the
U.S. Supreme Court to reverse the Second Circuit’s decision. Regardless
of whether the Court chooses to hear Argentina’s appeal, Buenos Aires
has repeatedly declared that it
will not comply with U.S. court orders to compensate the holdouts.
Indeed, as Ohio State University law professor Steven M. Davidoff
recently pointed out: “A number of
Argentine officials have stated that the country will default on its
current bonds if it is required to first pay the old holders.”
The
threat of yet another default highlights the magnitude of Argentina’s
ongoing economic crisis. On March 17, Moody’s Investors Service once
again slashed its government bond
rating. Explaining the decision, Moody’s cited both the dramatic fall in
Argentina’s foreign-exchange reserves—from $52.7 billion in 2011 to
$27.5 billion today—and the country’s “inconsistent policy environment.”
Its official statement read in part: “While reserves have stabilized in
the last month, there are continued high risks of further drops, a key
credit risk since Argentina lacks international market access and
utilizes central bank reserves to meet its foreign currency debt
obligations.”
A declining trade surplus has fueled a dollar shortage, which in turn has created a huge black market in Buenos Aires and other cities. Annual inflation was close to 30 percent in 2013, and may reach as high as 45 percent in 2014. Not surprisingly, capital flight from Argentina continues, despite the government’s imposition of strict currency controls, and the country has also been shaken by police strikes, teacher strikes, power outages, and deadly riots.
“The situation is a lot more serious than the government is letting on,” Kathy Lien of BK Asset Management told Bloomberg Businessweek last
month. “If we were to see them default in this environment, it would
have global repercussions. While the world is very different than it was
in 2001, I don’t think other economies will escape without damage.” At a
January 15 Hudson Instituteconference,
Diego Ferro of Greylock Capital Management said that, absent
significant policy changes, “I doubt that Argentina can reach 2015 in
one piece.”
Argentina is a nation of vast natural resources, including agricultural commodities and oil and gas reserves. In fact, it has more shale-oil reserves than
all but three other countries (America, China, and Russia). But such
resource wealth does not translate into broad-based prosperity without
substantial investment—and investment only flourishes when government
policies treat capital and private property with respect.
Next-door
Bolivia offers a good example of what can happen when government
officials fail to respect property rights or the rule of law. The
landlocked nation boasts enormous hydrocarbon reserves and mineral
deposits. However, President Evo Morales nationalized the oil and gas
industries in 2006, and he has made a habit of lawlessly seizing private
businesses, including electricity, telecom, and smelter companies. The
result has been capital flight and declining foreign investment. In the
Behre Dolbear Group’s 2012 rankings of investment risk in 25 leading mining countries, Bolivia placed second to last (ahead of only Russia). In the 2013 rankings,
Bolivia didn’t even make the list. Behre Dolbear explained that
“Bolivia’s unstable political climate strongly discourages foreign
investment as the government continues to nationalize mining companies.”
And
yet, with better economic policies and a stronger commitment to the
rule of law, Bolivia could attract far more investment and become a much
richer country. The same is true of Argentina, whose current
predicament is largely the result of bad policy decisions rather than
bad luck.
A bit of good news arrived earlier this month, when the Paris Club invited Buenos
Aires to begin official debt-settlement negotiations in late May.
“Argentina needs to take many steps to regain access to international
capital markets and this is one of them,” Alejo Costa, the head
researcher at a prominent Buenos Aires brokerage, told Bloomberg News.
“This will help unblock loans from European countries and attract
foreign direct investment.” Meanwhile, even though Moody’s recently
slashed Argentina’s government bond rating, Bank of America recently upgraded its rating,
citing factors such as the stabilization of foreign-exchange reserves
and the announcement of the upcoming Paris Club talks. As mentioned
earlier, the Kirchner government recently agreed to$500 million worth of legal settlements with various foreign companies, and it has begun publishing inflation figures that, while not perfect, are much closer to reality than the laughably bogus data that earned Argentina a censure from the International Monetary Fund.
Make
no mistake: Argentina’s economic crisis won’t be resolved quickly, and
its ongoing legal battles with former creditors make default a very real
possibility. But smart policy moves, along with successful debt
resolutions, could ease the crisis significantly. In October, Capital
Economics analyst Michael Henderson told the Financial Times:
“A few small tweaks could make a massive difference in returning the
economy to a more sustainable growth path.” That may have been
excessively optimistic. But Argentines are not doomed to suffer through
economic dysfunction forever. Bad government policies created the mess,
and better government policies can help clean it up.
Jaime
Daremblum, who served as Costa Rica’s ambassador to the United States
from 1998 to 2004, is director of the Center for Latin American Studies
at the Hudson Institute.
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