Don’t cry for the bolsa

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Becoming the world's first stockmarket to fall victim to globalization might not seem like much of an honour. But Argentina may find in years to come that the rapid decline of its bolsa proved a blessing in disguise. Now is the time for the government to heed the sentiments of the Andrew Lloyd Webber musical and shed no tears for its dying stockmarket. It will do better to embrace the new reality and plug the country into what finance secretary Daniel Marx calls "the global pool of liquidity".
The Buenos Aires stockmarket is an antiquated institution with a cumbersome management structure, high charges and an army of small unprofitable brokers whose main aim in life is to block reforms. They may prove successful in which case they are setting themselves up to be a scapegoat for the exchange's demise. Irritating as the small fry are and absurd as their situation is the blame for Buenos Aires downfall is not correctly placed on their shoulders.
The reason has to do with Argentina's openness to capital flows. Since the early 1990s foreign direct investment has poured into the country with sectors such as banking, telecoms, retail and oil now consisting of huge swathes controlled from beyond Argentina's borders. The bolsa reflected this trend for a time with most of the blue chips that attracted the lion's share of investment and trading turning into the subsidiaries of multinationals.
In past times the multinationals would have welcomed this because of the increased capital-raising opportunities and the PR effect of being local as well as global. But in an era when the risk manager's viewpoint can surpass in importance even that of the chief executive, emerging market listings are just too volatile. Every time the rouble wobbles or Mexico gets strung out on tequila, down goes the Merval. Investors worry this is the moment for the peso/dollar peg to come unstuck and they start to sell.

Multinationals can do without this additional headache, especially when stock prices in their home countries, mainly Spain in Argentina's case, are soaring. As a result Repsol, Telefónica and BSCH have decided to delist their Argentine subsidiaries (YPF, Telefónica de Argentina and Banco Rio) offering as a consolation prize locally-traded stock in the parent.
Their actions, together with some smaller delistings, have halved the exchange's market capitalization, reduced trading to $20 million to $30 million a day and created, says one broker, "a pall of death hanging over the market". Argentina is one of the big three Latin economies yet its stock market capitalization to GDP ratio is a measly 8%.
Things are no brighter on the local supply side. Argentina's family-run companies have shirked away from listing. They don't want to lose control and don't want to open up their books to outsiders, least of all the tax authorities. Over-stringent regulations and high costs may also play a part in their reluctance but it's not the crucial reason. The Argentine companies that do list go straight to Nasdaq because their stock, like that of the foreigners, is worth more in a developed country market that doesn't easily get the jitters.
International portfolio investors say they have given up on Argentina because the market is too shallow. Most of their focus is now in Brazil and Mexico with some suggestion that Chile could eventually overtake Buenos Aires in significance. Argentines themselves have never much trusted equities and the new pension funds can hardly find enough stock to invest in.
Something must be done surely? Well, actually, no. While development economists have always argued that a stock market is essential for a country to channel savings, usually forced savings, into growing industries, their theory is lagging behind reality. While the World Bank and other development institutions will no doubt be lending money to emerging countries to establish stock exchanges for many years to come, the rationale for having them is fast disappearing.
Argentine corporates and investors are realizing that they live in a global marketplace and can go anywhere to raise funds and earn returns. Why should they want to restrict themselves to the local equity market and what economic difference does it make if Argentine savings are invested in Argentine companies via the Nasdaq and not the Merval?
It's indeed refreshing that government officers in Buenos Aires are not making patriotic speeches about the decline of a national institution that must be reversed at all costs. The hint from finance secretary Marx is that the government realizes that the nature of world business has changed dramatically and propping up a national institution that is failing to keep up is not a viable option.
In this single decision Argentina may be taking a giant leap forward. The country stands poised to leapfrog into the era of internet finance. Argentines are going to move directly from buying government bonds and certificates of deposit to purchasing international equities over the internet. Suddenly, Argentina without a physical stock exchange begins to look more modern and futuristic than Argentina trying to prevent the inevitable demise of an outmoded institution.

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Don’t cry for the bolsa

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