Argentina’s seizure of oil company YPF SA (YPFD) is making the country an outcast at the International Monetary Fund meetings in Washington, where the Obama administration is increasingly punishing President Cristina Fernandez de Kirchner’s government for abusing foreign investors.
Outgoing World Bank President Robert Zoellick yesterday called the seizure of Argentina’s largest energy company a “mistake” and the “wrong thing to do,” while an IMF official earlier in the week said policy making in South America’s second-biggest economy runs the risk of becoming “more unpredictable.”
Economy Minister Hernan Lorenzino arrived in Washington yesterday vowing to defend Fernandez’s decision three days ago to expropriate 51 percent of YPF from Spain’s Repsol YPF SA (REP), a move the government says will reverse a trend of declining oil and gas output since 1998. He’s unlikely to find many friends, as such “renegade” policies further isolate Argentina from the rest of the Group of 20, said Walter Molano, an emerging markets analyst with BCP Securities in Greenwich, Connecticut.
“A full pariah, it is no longer a member of the emerging markets club,” Molano, a frequent visitor to Argentina since the 1990s, said in a report yesterday. “It is a frontier market, with little regard for the rule of law, property rights and prudent macroeconomic policies.”
Zoellick, in an interview with Bloomberg Television, said Argentina is an “outlier” in Latin America though cautioned that the same “populist” pressures that led the government to take control of YPF and close off the economy are prevalent around the world.
“What investor in his right mind would put money into a country that nationalizes industries?” Zoellick asked, echoing comments earlier in the week from Mexican President Felipe Calderon.
The U.S. has been stepping up pressure on Argentina. Last month, President Barack Obama suspended trade preferences for the country in retaliation for the government’s failure to pay damages owed U.S. investors including Houston-based water utility Azurix Corp.
Trouble With IMF
Under the new rules, goods worth $477 million, about 11 percent of total U.S. imports from Argentina last year, will no longer be eligible for tariff reductions under the Generalized System of Preferences, a program to assist trade from developing nations.
Since September, the U.S. has also repeatedly voted against financing development projects for Argentina at the World Bank and Inter-American Development Bank to pressure Fernandez to settle with holders of bonds the government stopped payment on in 2001 as part of its $95 billion default.
Argentina has also run afoul of the IMF. The country is the only member of the G-20 that has refused to comply with an annual assessment of its economy by IMF staff. The IMF in its World Economic Outlook released this week noted that the nation’s benchmark consumer price index doesn’t accurately reflect inflation that some private economists estimate to be around 25 percent.
“There has been some deterioration in the investment climate in Argentina over the past few years,” Thomas Helbling, an IMF economist, said at an April 17 news conference in Washington to present the lender’s latest global forecasts. “Discretionary government interventions that worsen the investment climate make it also more unpredictable, which is not helpful for investment and long-term growth.”
Finance Minister Hernan Lorenzino accused the IMF of a “systematic bias” against his country. In a statement before traveling to Washington, he said the lender has repeatedly failed to recognize the government’s success growing the economy and reducing poverty. He said that he’d use his meetings with policy makers to defend the seizure of YPF, which is vital to ensuring the country’s “energy sovereignty.”
“The G-20 is a discussion forum, not an arbitrator,” Lorenzino told reporters following a panel yesterday at the World Bank.
While it’s unclear how Spain will respond to Argentina’s action, it’s possible that they could try to censure the country at the G-20, IMF or the World Bank. Spanish Foreign Minister Jose Manuel Garcia-Margallo said yesterday that his government would coordinate any action with the U.S., Deutsche Presse- Agentur reported, citing comments by the diplomat following a meeting in Brussels with Secretary of State Hillary Clinton.
By several measures, Argentina already stands out as an anomaly within the G-20, the elite group of major economies.
Its $448 billion economy is the world’s 27th biggest, smaller than those of non G-20 states like Spain, Sweden and Poland. It’s also the only G-20 member and major Latin America market classified as “frontier” by MSCI Inc., which removed it from its benchmark emerging-market index in 2009 following the government’s seizure of $24 billion in pension funds.
Argentina’s bonds are the riskiest among major emerging markets tracked by JPMorgan Chase & Co., with investors demanding an extra 1,023 basis points in yield to hold Argentine government bonds instead of U.S. Treasuries.
“Argentina has failed to honor its commitments as a member of the Group of 20 and its obligations to the IMF,” Treasury spokeswoman Kara Alaimo said in September. “We have consistently told the Argentine authorities that they must rectify these policies.”
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