Thursday, April 19, 2012

Argentina, a Classic

Argentina continues its nose-dive towards economic distress as its president, Cristina Fernandez, stretched its hand on the YPF, which was sold to Spanish firm Repsol in the past.

Argentines have wondered for years which kitty Cristina Fernández, the president, would grab next in order to satisfy her government’s voracious appetite for cash. On April 16th they got their answer, when she announced that Argentina would expropriate and nationalise 51% of YPF, the former state oil company, which had been sold to Repsol, a Spanish firm, in 1999.

(Source: Link)

Furthermore, Fernandez resorted to what seems like demagoguery to justify her actions.

“We are the only country in America, and basically in the whole world, that doesn’t control its own natural resources,” she declared—a puzzling assertion, since foreign companies own resource assets in every oil-producing country in the Americas save Mexico.

Meanwhile, economy minister Hernan Lorenzino alluded to autarkic notions that would make communists very proud; no offense intended.

Hernán Lorenzino, the economy minister, claims Argentina’s only goal is “energy self-sufficiency”.

Furthermore, the Argentine government and the YPF clash as to the reasons behind the partial nationalization of the said company, although the YPF seems to gain the upper hand.

The government says it has been forced to import because Repsol has failed to invest in domestic production. In recent months, six provinces confiscated oil concessions from YPF on that basis. But YPF counters that it has invested $11 billion in its Argentine operations over the past five years, and only distributed $3.5 billion in dividends—many of which have gone to pay the loans that Petersen, an Argentine company, took out to buy a share of the company with the support of Néstor Kirchner, Ms Fernández’s husband and predecessor as president. Moreover, Repsol says that the real cause of Argentina’s declining energy trade balance is its maze of price controls and subsidies, which makes investment unprofitable and encourages excess consumption. Most independent energy analysts agree with this analysis.

Repsol pretty much dropped the bomb on the government by pointing out the classic problems caused by irrational government intervention; subsidies which stagnate growth and drive away other producers and would-be investors, as well as price controls which grotesquely distort market signals. Energy analysts seem to be on the right track with this.

The article then proceeded to discuss the benefits of nationalizing a substantial fraction of YPF for the government, and the government alone, possibly at the expense of the people and the business cycle.

Taking over YPF offers Ms Fernández both financial and political benefits. She can now use it to conduct the government’s money-losing energy imports and have its minority shareholders suffer 49% of the losses. At a time of high oil prices, she could also use the company’s profits to finance public spending, since Argentina cannot borrow money because it faces punitively high interest rates and legal threats from holders of its defaulted debt. Politically, after failing to convince the rest of the countries at the Summit of the Americas last weekend to support Argentina’s claim to the British-controlled Falkland Islands, the decision provides her a new foreign scapegoat to distract attention from a slowing economy. On the day of the announcement, posters went up around Buenos Aires reading “True sovereignty means taking back what is ours” above the YPF logo.

The article has divulged on the effects of this action of the state, and it pretty much nailed it. Nationalizing YPF will inevitably drive away investors, as the government imposes itself on the company, which will just aggravate the fact that Fernandez made things a whole lot worse for Argentina from the very beginning. 

As of now, Argentina has managed to keep itself afloat, and that is certainly not thanks to the government.

And the economy has remained buoyant for nearly a decade in spite of such policies, because of ever-rising soyabean prices and economic growth in neighboring Brazil.

To make things worse for Argentina, the Spanish government through its foreign minister, Jose Manuel Garcia Margallo, has stated that it will defend Repsol's shareholders, and that it will cut diplomatic ties with Argentina should something really nasty happen.

The article ended with the critical move that must be done if Argentina is to remain in relatively good terms with the Spanish; by paying a big sum for 51% of YPF. In effect, Fernandez's foolishly selfish decision of taking YPF for herself put her entire country in jeopardy, both economic and political. 

What the world has witnessed is but a classic example of the ills of excessive government intervention, as discussed by several Austrian economists like Ludwig von Mises and Friedrich von Hayek. Too much meddling from the state, specifically nationalization, is harmful because;

1. It undermines trade and private investment. In nationalizing a company, fully or partially, it renders that fraction immune from local and foreign investors who through their collective effort have much to offer than government bureaucracy. Too much nationalization narrows down the spots where investors can, well, invest, which stagnates economic activity. 

2. It usually leads to more taxes. The government inherently has no money. A money-generating mechanism innate to businesses is not possessed by the government. And then the government announces that it will own more than half of a crucial oil company in Argentina. Where will the government get its money? From the people via taxation. People are forced to give up a large part of their income to satiate the state's hunger for nationalizing. 

3. Nationalization is supposed to be an emergency safety net, and a temporary one. In times of deep economic crises that threaten key economic institutions (the loss of which can deal a lasting blow to national economy), it is a justified action to have the government soften the blow through its accumulated tax revenue and contain the shock until things settle down and investors start pouring again. By that time, the government is obliged to let go of the company and let the private sector finish the job. Nationalization is a social safety net in extreme situations, and is not meant to be perpetuated, as far as economic progress is concerned.

Argentina is in a lot of trouble should this horrible governance persist. After all, Greece was involved in the euro crisis due to astounding sovereign debt, and Argentina is well headed that way, too. Perhaps the people can demand a re-election and legally oust Fernandez for good. Or they can start a revolution or something; although I don't really fancy bloody uprisings. But if economic progress is the topic, Fernandez's administration is, in all likelihood, not part of the equation. 

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