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 Institute conference, 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.