In-depth analysis on Credit Writedowns Pro.

Argentina is not the model

There have been a lot of people talking about Argentina as if it were the model for other governments in sovereign difficulty to follow. Yes, Argentina’s decision to default was realistically the right call given the crushing debt load. And that is the path the euro zone periphery is on. But, beyond this, I fail to see where Argentina is the model.

In fact Argentina has just nationalised YPF, the Argentine subsidiary of Spanish oil giant Repsol. This is expropriation plain and simple. The Spanish press is all over this.

It will have negative repercussions. The EU is threatening Argentina but has yet to decide what the consequences will be (link in Spanish). Spain will almost certainly pull its ambassador. They are also discussing what the appropriate response will be. The nationalist/socialist turn in Argentina has been years in the making. President Kirchner raided the pension kitty, replaced central bankers, fudged the inflation statistics, put up import restrictions, started a diplomatic row with the UK over the Falklands, and has now made the most aggressive move in her reign in expropriating oil assets.

My prediction: the next to go is freedom of the press. Kirchner has already warned daily newspapers Clarin and La Nacion. I am sure there will be much more to come on this. My sense is that any move toward economic nationalism and unilateral action in the EU will be part of a whole campaign of nationalism that will pervade all parts of the political economy. The euro zone needs to handle the periphery carefully because Argentina is showing us what happens when national socialism becomes the governing raison d’etre.

Also see “Argentina’s latest looming crisis” from November for a balanced view of prospects for the Argentine economy.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

7 Comments

  1. ANDRES says:

    I am Argentinian and live in my country.

    Your view is perfect IMO

    Regards
    Andrés

    • I have many Argentine friends, Andres and I have great sympathy for you. Good luck. I hope I am wrong about Fernandez de Kirchner but she is becoming ever more dictatorial and that’s no good for Argentina.

  2. Paul says:

    “Yes, Argentina’s decision to default was realistically the right call given the crushing debt load. And that is the path the euro zone periphery is on. But, beyond this, I fail to see where Argentina is the model.”

    Are commentators actually suggesting that Argentina is a model in other ways? My impression has always been that people reference Argentina to take away the whole stigma of national default as if the country is immortally screwed if they go through with it (not to say that default is costless, but as you say sometimes it is the best option). Whether or not the government screws things up later seems moot imo.

    • Commentators are actually suggesting that Argentina is the model in other ways. They point to the growth trajectory of Argentina post default as a sign not just of defaulting allowing the economy to be unburdened by unpayable debt but also of Argentine economic policy post-default as something worthy of emulation. I am making the point here that the two are not the same. Moreover, the same urges that led to default in the first place have nationalistic overtones. That means as I said above for the EU: “any move toward economic nationalism and unilateral action in the EU will be part of a whole campaign of nationalism that will pervade all parts of the political economy.”

  3. Cap'n Credit says:

    I agree that ARG practically had no choice but to default in 2001. However, it is my impression that the country wasted the subsequent decade of commodity boom (bubble?) driven growth by failing to reform its fiscal infrastructure. The subsequent actions of the government (nationalizing the pensions/fudging econ data/export controls/YPF) are merely increasingly desparate measures to ward off further decline. The EU should take note that default without subsequent structural reform (ie. labor markets/ease and cost of doing business) merely perpetuates decline. And the EU will not be able to rely on the vast natural resources that benefitted ARG.

    • 100%. The government is now facing peak oil. That is what is behind the YPF grab. Kirchner wants to show she is doing something about the fact that Argentina is now a net importer of energy while demand continues to increase and production drops. It is only going to get worse.

      • David Lazarus says:

        As a Brit my concerns are that if she becomes desperate she may drag the country into another war over the Falklands. That is what dictators do to deflect criticism of their leadership.

        I can understand to an extent the nationalisation of YPF. The deals struck with oil companies are far too one sided in favour of multinationals and if that is not redressed then sovereigns have no option but to stop the theft of national assets by a foreign power. The same will happen in Spain once the Troika have their way. Private banks will walk away the Spanish, Greek Irish Portuguese French, and eventually German gold and silver.