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Tuesday, April 17, 2012

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Argentina’s expropriation of Repsol’s YPF stake anticipated by country risk experts

by Andrew Mortimer, Sid Verma

The push to re-nationalize YPF represents one of the more dramatic shocks to confront foreign investors

In the comedy of economic errors that has blighted Argentina under president Cristina Fernández de Kirchner’s administration, Monday’s push to re-nationalize YPF, the country’s biggest oil company – expelling Spain’s Repsol as majority shareholder – represents one of the more dramatic shocks that has confronted foreign investors in recent years.

Understandably so. The prospective move harks back to Latin America’s penchant of yesteryear for asset expropriation and has triggered an ugly diplomatic spat between Spain and the commodity-rich economy.

But don’t say we did not warn you. Analysts participating in the Euromoney Country Risk survey, which tracks economists’ perceptions of sovereign risk in 180 markets, have reported rising political risk in Argentina since the beginning of 2011, while its score in the survey’s indicator for government interference/non-repatriation of capital is the worst in Latin America, having fallen from four out of 10 in September 2010 to 2.6 out of 10 in April 2012.

Here’s the story, charted:

Risk of government interference in Argentina - analysts' views 

(scores inverted, 10=safest, 0=riskiest)
Source: Euromoney Country Risk  

The nationalization push further throws into sharp relief the declining creditworthiness of Latin America’s heterodox economies – Argentina and Venezuela – relative to the rest of South America, with Uruguay recently attaining investment-grade status, an ever-expanding emerging market club.

And analysts’ views of Argentina’s financial position relative to Chile, the region’s poster-child for fiscal prudence, charted: 

Argentina: Deteriorating public finances

(scores inverted, 10=safest, 0=riskiest)
Source: Euromoney Country Risk 

In recent years, Argentina has scrambled under Kirchner’s populist administration to boost money supply to increase investment and growth. The government recently removed legal limits to access on central bank financing to public and private sectors. It’s no surprise that these stubborn fiscal monetization efforts have resulted in a sharp fall in the peso and a rise in inflation.

Against this backdrop, bank lending has collapsed amid risk aversion and soaring inflation. The ratio of bank credit to the private sector to GDP stands at only 12%. Contrast that with red-hot Brazil, which under a relatively more stable policy environment has managed to capitalize on soaring commodity prices – and a subsequent surge in portfolio flows – to boost consumer financing to eye-watering levels.

After raiding domestic capital providers in Argentina – the social security system, state-owned banks and the central bank itself – the government is running out of financing options fast. If the government makes good on its nationalization push, then the prospect for foreign capital has darkened further. 

- Euromoney Skew and Euromoney Country Risk

Final days of Ricardo Salgado and Banco Espírito Santo

Euromoney Pulse Survey: Renminbi’s internationalization continues apace
When BES collapsed earlier this year, markets briefly feared a return of the crisis to Portugal and to Europe. Even after the bank's bailout, investigators still pore over bank documents, transfers and deals, trying to make sense of Salgado’s last days battling to keep his empire afloat. The backstory is of an extraordinary decades-long rivalry between the country's two pre-eminent business families.