Spain, in the grip of hardship, feels stabbed in the back by erstwhile friend Argentina
IN 2002, when Argentina faced the gravest economic crisis in its history, Spain’s government organised an emergency $1.2 billion support facility for the country to try and help contain the worst of the social fallout.
Now a decade later, as Spain battles its worst crisis in decades, Argentina has repaid the gesture by seizing Spanish oil giant Repsol’s controlling share of Argentinian oil company YPF, estimated to be worth about €4 billion.
Monday’s announcement by President Cristina Kirchner that Argentina would expropriate a 51 per cent stake in its former state oil company by exclusively seizing shares from Repsol drew a furious response from Madrid.
“Spain had worked with Argentina during its hardest hours,” said Spanish foreign minister José Manuel García-Margallo. “Now this has broken the cordial climate that existed between Spain and Argentina.”
The blow is a grievous one for one of Spain’s flagship companies at a moment when the country is trying to implement a brutal fiscal readjustment in the battle to save the euro. With one decree, Mrs Kirchner has stripped Spain of a key strategic investment. The government of Mariano Rajoy has promised to retaliate and is already rallying support among its EU partners.
There is a deep irony that Mrs Kirchner issued the decree renationalising YPF. She and her deceased husband and predecessor Néstor were key allies in former president Carlos Menem’s successful campaign to privatise the company in 1993, in the face of widespread public opposition.
In return for the Kirchners’ backing, Menem controversially agreed to recognise a YPF debt of almost $500 million with the province of Santa Cruz, payment conditional on privatisation.
As the province’s governor, Nestor Kirchner kept these funds abroad for almost a decade. His critics say that tens if not hundreds of millions of dollars of interest and investment return were never declared and used by the Kirchners as a secret political slush fund.
Mrs Kirchner has now placed her planning minister, Julio de Vido, in charge of YPF and he will be responsible for boosting domestic oil production and proving that government intervention in the economy does work. One of the strongmen of the Kirchner era, he was accused by the country’s former ambassador to Venezuela of maintaining a “parallel embassy” in Caracas in order to manage a kickback scheme in which Argentinian companies were paying hundreds of millions of dollars in commissions for the right to win lucrative business contracts negotiated by the Kirchners with Venezuela. He denied any wrongdoing.
Mrs Kirchner says Argentina will pay Repsol compensation for the shares it seizes, but that it will decide the value itself.
Markets are already pricing in a derisory token sum for the Spanish company, which bought YPF in 1999 and which, once the nationalisation is approved by Argentina’s congress, will be left with just over 6 per cent of the firm. This will likely lead to litigation and further economically isolate a country shut out from international capital markets for over a decade, ever since a $100 billion sovereign debt default in December 2001 and a botched debt-restructuring deal in 2005.
Indeed, the swoop on YPF can be seen as the latest fallout from the crash in 2001. In an effort to ameliorate the impact of the subsequent devaluation on consumers, Argentina has kept the cost of energy below international prices for the last decade.
Popular with voters, the policy scared off investment in the sector. Eventually this resulted in the former oil exporter having to import supplies despite the country’s abundant reserves. Last year’s fuel import bill of €7 billion threatened the country’s trade surplus, a vital support for an administration unable to access credit markets.
Mrs Kirchner accused Repsol of sucking up oil from Argentinian fields and repatriating profits abroad. This is true. Rather than reinvest in price-controlled Argentina, Repsol used cash earned there to prospect for fields in countries where it will be allowed to sell any oil found at something approaching market prices.
Now Argentina’s government will keep YPF’s cash for itself, useful for an administration that has seen fiscal surpluses wither in recent years. In this regard, the seizure of YPF mirrors the 2008 seizure of the country’s private pension system by Mrs Kirchner at the height of the global financial crisis.
But now getting its hands on one of the economy’s biggest cash cows, the government’s latest actions have even some of the few market analysts that were willing to give Mrs Kirchner’s economic policy the benefit of the doubt issuing warnings. They say Argentina’s almost 10-year-old boom, fuelled by an artificially low currency and food exports, might be about to come to an abrupt halt amid no sign she will abandon her increasingly populist measures.
“The latest interventionist policy mix suggests that the risks of a hard landing are on the rise. Can we say mea culpa?” asked Morgan Stanley’s closely watched Latin American team of analysts.
EU CONCERN: RULES LIMIT RESPONSES
EU OFFICIALS have expressed serious concern at Argentina’s announced seizure of a controlling interest in the oil firm YPF from Spanish energy major Repsol. They cautioned, however, that current EU rules limited their possible responses.
European foreign policy chief Cathy Ashton said Argentina’s manoeuvre created legal uncertainty for all foreign firms in the country.
In the European Parliament last night, she said the measure sent a very negative signal to international investors and could seriously harm the business environment in Argentina.
“I am also alarmed to note that the president [Cristina Fernandez de Kirchner] referred, in her speech, to investments in other sectors such as telecoms and banking,” Ms Ashton said.
“The government of Argentina must ensure compliance with its international commitments on the treatment and protection of investments originating from the EU.”
Earlier, European Commission president José Manuel Barroso said: “We expect Argentinian authorities to uphold their international commitments and obligations, in particular those resulting from a bilateral agreement on the protection on investments in Spain.”
His spokeswoman, Pia Ahrenkilde Hansen, said that the European Commission would take two immediate steps.
EU trade commissioner Karel De Gucht would write to Argentina’s trade minister to “reiterate our serious concerns”, while the commission and the EU foreign policy chief would postpone an EU-Argentine joint committee meeting scheduled for April 19th and 20th.
The commission would analyse available options, she told a news conference in Brussels. “I don’t think we are in a position to detail any such options at this point,” Ms Ahrenkilde Hansen said.
The EU was supposed to have responsibility for dealing with investment disputes under a new architecture introduced two years ago. The Lisbon Treaty was designed to make the EU more efficient and coherent. However this new role has not yet been converted into regulations to enable the commission to act, an EU official said.
Mr Barroso said he hoped to persuade Argentina to come to an agreement that would fix the problem.
“We emphasise the need for mutually agreed solutions which do not harm the business environment,” he said. – (Reuters)
