Marshall Auerback sent me this joke about Mark Sanford.

Mark Sanford’s staff thought he was hiking in the mountains. In fairness to his aides, "I’m getting some Argentinian tail." sounds a lot like "I’m hiking the Appalachian Trail."

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You have probably heard the stories about China National Offshore Oil Company (CNOOC) bidding for Repsol YP’F’s Argentine assets in a quest for more natural resources for China. Well, apparently, the Chinese want a lot more than just Argentina; they want the whole of Repsol’s Latin American asset base.

The Chinese have been buying up African oil assets left and right.  But, this is a HUGE asset grab by the Chinese in America’s backyard.  Remember the Monroe Doctrine? Well, forget about that now, because it is game on for the Chinese.

Here’s my translation of the important bits of a Spanish-language article discussing this development.

Contacts between Repsol and several Asian companies goes beyond their Argentine subsidiary YPF. As confirmed by sources close to the talks, the Spanish oil company has negotiated with China National Offshore Oil Company (CNOOC) to unite all exploration activities in Latin America.

According to what Finanzas.com has learned, the discussions between representatives of the Spanish energy group and the Chinese oil company began a little over six months, but intensified in April and May. The aim was to create a group owned by the two companies, with the majority owned by Repsol, which bring their exploration activities.

The negotiations progressed to the point that both requested a valuation of the assets by two investment banks. However, according to official sources of the Spanish group, there has been no agreement between Repsol and CNOOC on price, such that the contacts have cooled in June. In fact, yesterday, the president of the third largest oil company in China said "CNOOC’s strategic focus remains focused on the search for cooperation, rather than mergers and acquisitions," explained Fu-Chengyuan.

Irrespective of whether these developments yield results, CNOOC obviously is willing to spend a lot of money to get access to more oil.  And several sources are saying that Chinese companies are willing to pay top dollar.  You will recall that CNOOC is the same company that attempted to buy Unocal in March 2005.  Their overtures were spurned on national security grounds despite the very limited domestic asset base that Unocal controlled and despite their offer being materially higher than Chevron.

I have a couple of takes on this news.  First, the Chinese clearly want access to natural resource assets in order to power their domestic growth. Previous attempts to acquire Unocal and and the over-indebted Rio Tinto by Chinese companies proves this. But, these attempts have been met with protectionism and I imagine the Chinese find this extremely frustrating.  So, they have decided to look elsewhere for their natural resources.

In my view, the fact that they have met protectionist hackles in the West makes them all the more desirous to acquire good assets outside of developed countries both to power their economy and to reduce dependence on the West. Let’s see if the Repsol deal meets with a protectionist response.

Source

Repsol negocia una alianza con la china CNOOC para toda Latinoamérica – Finanzas

Related posts:

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• China detains Rio executive on suspicion of espionage
• Should we expect a protectionist China?
• Spain: consumption drop four times as much as in ‘93
• China company performance

The riots on the streets of Vilnius and Riga in the Baltics are not being covered in the least in the U.S. media (Hat tip Ken). I believe they should because, as with Greece, the social unrest we are witnessing in those countries is the likely outcome of failed economic policies and depression. This was certainly the case during the Great Depression in the United States. While we are not seeing Argentina-level social unrest yet, these events are forerunners of a more ominous social climate.

Police used tear gas and rubber bullets Friday to disperse anti-government protesters who were throwing rocks and eggs at Lithuania’s Parliament.

The Interior Ministry said 15 people were injured, including four policeman. One protester lost a finger to a rubber bullet, police said. About a dozen windows on the Parliament building, in downtown Vilnius, were shattered.

Some 7,000 protesters had gathered outside Parliament on Friday morning to demonstrate against reforms aimed at easing the economic crisis. The violence started when police pushed away protesters who were demanding to see the parliamentary speaker.

By evening Vilnius was quiet. Police said more 82 people had been detained.

“According to police information, this is a well orchestrated action against Lithuania,” Prime Minister Andrius Kubilius told journalists.

“There are forces that are interested in destabilization and chaos in Lithuania, and they are using the public’s dismay over painful reforms to achieve their hostile plans,” Kubilius said, adding that police knew who was responsible.

Kubilius’ center-right coalition, in power less than two months, has been criticized for tax increases the government said were needed to shore up state finances. On Friday, Lithuania’s Finance Ministry announced it intended to borrow €1 billion (US$1.3 billion) from the European Investment Bank to plug a yawning budget gap. The Baltic country’s economy is expected to enter a recession this year.

Liucija Mukiene, a 63-year-old retiree, said the government was arrogant and corrupt.

“We are here today because this government is mocking us,” she said. “They taking away our last money and providing nothing. I am fed up with the lies, corruption and those grinning, fat faces behind the windows of Parliament.”

The clash echoes violent protests this week in Latvia and Bulgaria, and recent demonstrations in Greece, as a wave of discontent over economic woes, difficult reforms and government corruption sweeps through parts of Europe.

In Latvia, police detained more than 100 people Tuesday after protesters pelted police with rocks.

Source
Protesters clash with police in Lithuania – IHT Europe

Related articles
Baltic Protests Erupt as EU’s Worst Economies Shake – Bloomberg.com
Around 7,000 protest anti-crisis measures in Lithuanian capital – RIA Novosti
Thousands protest against government in Lithuania – Forbes.com

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Has Paul Krugman been reading my stuff? He is certainly thinking like me regarding emerging market risk. He has a post today talking about Latvia as the new Argentina. He says:

I’ve been saying this for a couple of weeks, but Edward Hugh has the goods.

Hugh puts his finger, in particular, on one gaping hole in the logic of the opponents of devaluation. We can’t devalue, they say, because the Latvian private sector has a lot of debts in euros, and a devaluation would make it very hard for borrowers to service those debts. As Hugh points out, the proposed alternative — sharp wage cuts, and basically a major domestic deflation — will also make it hard to service those debts. In fact, I’d be a bit more specific than Hugh: other things equal, a nominal devaluation and a real depreciation achieved through deflation should have exactly the same effect on debt service (unless some of the debt is in lats rather than euros, in which case devaluation would do less damage.)

This looks like events repeating themselves, the first time as tragedy, the second time as another tragedy.

For those of you who have been reading my stuff regularly, I made a similar argument back in July in my post “Are the Baltics the new Argentina?“:

The Baltics are looking a lot like Argentina was before it collapsed at the beginning of the decade: fixed exchange rate, large current account deficit, significant foreign bank lending, overheating economy turning to bust.

This combination is a toxic mix that will certainly end in the disaster it did for Argentina. I have a vivid memory of being in Buenos Aires when workers were rioting in the streets, knocking over cars and setting them on fire. Foreign banks were littered with Graffiti, including the word “ratas,” scrawled across them. Many banks were shut down and closed and too many bank I could see had armed guards with submachine guns out front to protect them. I can’t say this same disastrous scenario awaits the Baltics, but things could get pretty dicey there in any event…

The Baltics have a lot of hot money invested in their economies as much of the lending growth came on the back of foreign financial investment. When distress hits, one should expect a giant sucking noise from foreigners repatriating funds. This will leave the Baltics subject to credit deflation just as the economy is entering recession.

When one adds the slow economy and the high inflation to a fixed exchange rate and high current account deficits it says: the Baltics do not have the appropriate fiscal and monetary policy for a fixed exchange rate.

One of two things must give: the exchange rate peg or the economy. In Argentina, it was both.

Make sure you read Edward Hugh’s analysis sourced below. It shows that the IMF has made a big mistake in NOT correcting the exchange rate disaster in Latvia.  As you can tell from my post in July, all of this was readily apparent months ago.  Don’t let anyone tell you otherwise.

With Hungary and the Ukraine also taking money from the IMF, the other Baltics in deep trouble and many more countries in peril, I fully expect Eastern Europe to be a problem. And for banks in Germany, Austria, Denmark and Sweden, loaded to the nines with loan exposure there, that spells massive credit writedowns and loan losses. Get ready.  It will happen.

Sources
Latvia is the new Argentina (slightly wonkish) – Paul Krugman
Why The IMF’s Decision To Agree A Lavian Bailout Programme Without Devaluation Is A Mistake – A Fistful of Euros

Related posts:

• Are the Baltics the new Argentina?
• Event risk in the Baltics is critically high
• Latvia – the insanity continues
• Estonia and Latvia: headed for the rails
• The Euro and Baltic currency overvaluation

For those of you who actually care about anything international, there is an Emerging Markets crisis brewing right now in the Baltics. After reading posts from Alpha Sources, naked capitalism, Market Movers, and Bronte Capital on the subject, I started to think people actually cared about the tiny Baltics. So, let me add my two cents.

The Baltics are looking a lot like Argentina was before it collapsed at the beginning of the decade: fixed exchange rate, large current account deficit, significant foreign bank lending, overheating economy turning to bust.

This combination is a toxic mix that will certainly end in the disaster it did for Argentina. I have a vivid memory of being in Buenos Aires when workers were rioting in the streets, knocking over cars and setting them on fire. Foreign banks were littered with Graffiti, including the word “ratas,” scrawled across them. Many banks were shut down and closed and too many banks I could see had armed guards with submachine guns out front to protect them. I can’t say this same disastrous scenario awaits the Baltics, but things could get pretty dicey there in any event.

Claus Vistesen at Alpha Sources says:

As the Q1 GDP numbers came in for the Baltics I concluded that it was very likely that the region had entered a recession. In light of the proverbial definition of a recession as a consecutive quarter contraction it seems clear the Lithuania managed to smartly skirt the recession in H01 2008. As far as I can see at this point and from Eurostat’s data Estonia was the only one of the three Baltic economies that contracted in Q1 2008 (-0.5% and 0.1% for Latvia).

However and as ever before, the Baltics is increasingly getting stuck in stagflation and one of a particular sinister kind. In the case of the Baltics they may already be seeing the beginnings of a hard landing, whereas others continue to build up steam making it almost inevitable that they too will erupt at some point.

More to the point, the Baltics have a lot of hot money invested in their economies as much of the lending growth came on the back of foreign financial investment. When distress hits, one should expect a giant sucking noise from foreigners repatriating funds. This will leave the Baltics subject to credit deflation just as the economy is entering recession.

When one adds the slow economy and the high inflation to a fixed exchange rate and high current account deficits it says: the Baltics do not have the appropriate fiscal and monetary policy for a fixed exchange rate.

One of two things must give: the exchange rate peg or the economy. In Argentina, it was both.

Related posts:

• Baltics: Violence from an Argentina-style collapse
• Event risk in the Baltics is critically high
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Tariffs and price controls? Apparently, Latin America thinks it can stop the growing tide of inflation and end the riots on their streets by just imposing tariffs and imposing price controls. They better get ready for a blind date with Econ 101. But, I guarantee you this date won’t end well either.

The Financial Times reported yesterday “Mexico’s centre-right government on Wednesday announced the widest range of price controls in more than a decade in an attempt to curb rising food prices.” Inflation is spiraling viciously out of control around the world. Meanwhile, ordinary citizens are rioting in the streets because of the state of affairs.

Over in Argentina, they are using tariffs to deal with the problem. They are actually raising tarrifs on their own grain exporters to increase the money collected by the government as grain prices soar. The Financial Times says:

“A bitter conflict over the tariff regime, lasting nearly 100 days, has opened up deep divisions within the ruling Peronist party. Members of Congress from northern and central farm-based provinces will come under intense pressure from their constituencies to seek tariff changes.”
-The FT, 18 Jun 2008

In both cases, the government is trying to control the price and availability of basic foodstocks in the domestic market, insulating the population from the rising inflation around the world.

The experiment in Argentina has already led to food shortages and rising inflation, despite the official doctored inflation numbers. Obviously, this is the opposite effect of what policy makers are hoping to have.

In Mexico, I reckon the outcome will be the same, a food shortage. Price controls don’t repeal supply and demand; they artificially hold prices below the level at which sufficient supply can be met. This results in demand outstripping supply and food shortages.

Ultimately, these are two desperate attempts by emerging market governments to stem the tide of food inflation. If we don’t get this thing under control soon, we may be headed for trouble. I’m beginning to think rate hikes in the UK, US, Europe and Asia are inevitable.

Sources
Mexico imposes price controls on food, The Financial Times, 18 Jun 2008
Argentina tariff bill calms farming crisis, The Financial Times, 18 Jun 2008
Argentine inflation index under fire, The Financial Times, 11 Jun 2008
Argentina’s conflict over tariffs intensifies, The Financial Times, 23 May 2008
El conflicto del campo argentino se atasca, El Pais 3 Jun 2008

Related posts:

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Argentina is on the brink again. Earlier today, I wrote about doubts regarding the country’s official inflation statistics. The official statistics showed 9.1% inflation when many believe inflation is running 25% and more.

Now, it emerges that the country is on the verge of a cataclysmic debt default. In 2001, Argentina had a massive default and was forced to de-link its currency from a 1:1 peg with dollar. The Argentine Peso fell to 3:1 on the dollar and the country was thrown into turmoil.

“Argentina’s debt levels are now higher than they were when it crashed into the biggest sovereign debt default in history in 2001, and a worsening crisis of confidence in the government has brought the spectre of a new default closer, a report to be published next week says.”
-The Financial Times, 12 Jun 2008

But, after renegotiating its sovereign debt agreements, Argentina seemed on the road to a quick recovery. With agricultural prices skyrocketing, they seemed like a can’t miss nation. That dream has ended and we must now wonder if there are other time bombs lurking in the emerging markets.

Related posts:

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Argentina too has a government statistics problem. Their new inflation index is seen as unbelievable.
(see FT article here.)

Related posts:

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• A note on government statistics and unemployment
• Latvia as the new Argentina redux
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• Is this the way to fight inflation?