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Argentina’s in a tight spot.Last month, the entire world started paying attention to the country’s economy when hedge fund billionaire Paul Singer seized an Argentine naval vessel, the ARA Libertad, as collateral for its debts — debts that the country’s government is ideologically opposed to paying.
For a rich country with a desire for access to international credit markets, this is obviously not a good look. Add to that problems with inflation, civil unrest, and an unpopular president, and you’ve got quite a mess on your hands.
The question is, how did it get so bad?
During a recent talk in Buenos Aires, economist Nouriel Roubini, who usually focuses on big fish like the U.S. and the Eurozone, added Argentina to his list of worries.
He argued that the government’s state-centric economic policies are scaring away investors and consumers alike.
“Argentina has moved away from market oriented policies with imports substitution protectionist measures; national control over natural resources; a more predominant role for state companies and banks and discouraging foreign investments and the influx of capital” said the economist who was especially invited to the annual convention of the Argentine Chamber of Construction in Buenos Aires.
“These policies have a negative impact for investors and consumers’ confidence, which on the long run has its influence on growth”.
This form of “state capitalism,” added Roubini, makes the country more vulnerable to any domestic or international turmoil.
And the country has quite a lot of that.
First, there’s its problems in the international credit market. Singer had the ARA Libertad impounded because Argentina has been embroiled in a massive fight with him and other bond holders for 10 years. They all bought the country’s sovereign debt in 2001 and now they’re suing for $1.3 billion they’re owed.
Argentina has refused, and still refuses, to pay these bond holders because they didn’t restructure their debt in 2005 and 2010. President Cristina Fernandez de Kirchner has made it an issue of national sovereignty.
A New York Judge, however, has ruled that Argentina absolutely will pay.
Regardless of how either party moves forward, the whole mess is wreaking havoc on Argentine bond markets.
Argentine spreads on JP Morgan’s EMBI Global sovereign bond index blew out 55 basis points on Thursday to yield 12 percentage points above underlying U.S. Treasuries, heading for a level hit last month that was the widest in three years…
“We haven’t had a default on our portfolio since we started the fund 12 years ago and sometimes the signals are so strong you know something bad is going to happen,” said Jeremy Brewin, a portfolio manager at Aviva Investors.
A major vulnerability at home, first and foremost, is the country’s inflation rate, which private banks say is the fourth highest in the world, after Sudan.
The government disagrees. It reports the inflation at a much lower rate, which has prompted the IMF to demand a review of Argentina’s statistical methodology. IMF Head Christine Lagarde has said the country has to correct its numbers or face expulsion.
That didn’t sit well with President Cristina Fernandez de Kirchner, whose approval rating has plummeted by half in the last year and now hovers around 35%. The last few weeks have seen massive protests in the streets over not only inflation, but also corruption, crime and wages.
They also feel that Kirchner, without a successor since the death of her husband in 2010, may seek to do away with term limits so that she can stay in power.
None of this has slowed the Argentina’s hand in terms policies that Roubini might file under the “state capitalism” category.
For one, there’s the government knock down drag out fight with the country’s largest news organisation, Clarin. The company must come up with a plan to comply with new media regulations by December 7th, or be broken up.
Then there’s Argentina’s issue with power. Outages are getting more and more common, because according to the FT, too much use and the power grid fries.
So when it’s hot, like it was in Buenos Aires on November 7th, the lights go out. In that case, they went out for 3 hours, freezing the city during rush hour.
Energy companies say that they need more money to break even. The government has agreed to raise energy tariffs, which have been low for over a decade, but says that it will collect additional funds for itself. The money will go to a federal fund to improve the power grid’s infrastructure.
Fernandez de Kirchner is, as ever, defiant in the face of all this pressure. In the midst of last week’s massive union general strike, she said “Nobody pushes me around, least of all bullies with hooligan tactics.”
Bullies or no, she may have a cash flow problem on her hands, according to Deutsche Borse’s Market News.
Even though the government has put restrictions on capital moving out of the country, its central bank is going to have a difficult time maintaining the $45 billion reserve it needs to pay off its usual debts.
From Market News:
…there are signs of weakness, with the energy and tourism sectors running deficits and foreign-currency lending in decline. The central bank has to shoulder the foreign currency credit deficit, which reached $1.4 billion in the third quarter after running a $1 billion surplus a year earlier.
These factors are making it harder for the central bank to sustain reserves at $45 billion in order to allow the executive branch to make debt payments.
None of this is to say that Argentina can’t hold it together. Former central bank chief Martin Redrado told the FT that it all depends on the soy market. Argentina is a major exporter, and if the market stays strong, it could muddle through its troubles.
But it looks like it won’t be pretty no matter what.
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