Bloomberg News

Fernandez Angers Investors While Ducking Argentine Austerity

January 30, 2013

Greylock Capital Management President Hans Humes

Greylock Capital Management President Hans Humes said, “The economic and political crisis in Argentina is totally self-inflicted by Cristina and building off of Nestor.” Photographer: Ramin Talaie/Bloomberg

When outside investors like Hans Humes look at Argentina, they see a country that has missed its moment.

Humes, president of Greylock Capital Management in New York which manages $600 million of emerging market debt, says President Cristina Fernandez de Kirchner’s currency controls and vilification of the international financial community are robbing the country of its chance for a breakthrough, following a record $95 billion debt default in 2001.

“The economic and political crisis in Argentina is totally self-inflicted by Cristina and building off of Nestor,” Humes said in a Jan. 16 phone interview, referring to Fernandez’s late husband and predecessor, Nestor Kirchner. “I don’t think she has the facility to interact normally with the international community to get things back on track.”

The International Monetary Fund meets in two days to consider censuring Argentina for failing to honestly report an inflation rate that private economists estimate at 26 percent. Between soaring prices and the region’s worst performing currency, bond investors demand the highest return among major emerging markets to own Argentine debt. The country’s notes yield 1,079 basis points, or 10.79 percentage points, more than U.S. Treasuries, according to JPMorgan Chase & Co.’s EMBIG index.

Fernandez’s use of central bank reserves to pay debt and finance spending, her 2008 confiscation of $24 billion in private pension funds and last year’s expropriation of energy company YPF SA (YPFD), have caused foreign investment to lag behind the rest of the region.

‘Unpredictable’

“The country continues to shoot itself in the foot,” Jim Craige, who helps manage more than $54 billion of emerging- market debt at Stone Harbor Investment Partners LP in New York, said in a Jan. 25 telephone interview. “Politics is what drives everything in Argentina, it’s got a better balance sheet than a lot of fully developed countries with double A ratings. But it’s Argentina, it’s unpredictable.”

To domestic observers like former Economy Minister Roberto Lavagna, the foreign critics see a crisis where none exists. He says they miss the reality that growth is likely to rebound this year based on high commodity prices and a potential record harvest and debt that, in relation to the size of its economy, is half the level of the U.S.’s and a third less than Brazil’s.

Crisis Denied

“The image of Argentina abroad is worse than the reality, it’s full of preconceptions,” Lavagna said in Dec. 13 interview in Buenos Aires. “When we look at the cold numbers, there’s no crisis, there’s a progressive process of degradation.”

Surging commodity prices and bumper harvests helped Fernandez, 59, oversee average annual growth of 6.5 percent, double that of larger Latin American neighbors Brazil and Mexico, during her first four-year term ended in December 2011. Soybeans, the country’s main export, surged 34 percent since she took office to a record $17.71 per bushel on Sept. 4.

Last year, expansion slowed to 2.1 percent, according to the median estimate of 21 economists surveyed by Bloomberg, as drought hit the soybean crop, demand in Brazil, the country’s biggest trade partner, shrank and import limits created supply bottlenecks at factories. Industrial output fell 1.2 percent, the first annual decline since 2002.

“When you read the news you think this is a country in crisis that’s on the brink of collapse,” Walter Molano, head of research for BCP Securities in Greenwich, Connecticut, said in a Dec. 17 telephone interview. “I see a healthy country, progressing, with low levels of debt, with strong consumption growth. The economy slowing a bit is good, these are not abrupt changes that will sink the country into crisis.”

Debt Ratio

Argentine presidential spokesman Alfredo Scoccimarro didn’t immediately respond to phone calls and an e-mail seeking comment on Fernandez’s policies and investor criticism.

Argentina’s debt equals 45 percent of its economy, compared with 102 percent in the U.S. and 65 percent in Brazil, according to the International Monetary Fund.

Argentina attracted $5.4 billion in foreign direct investment in the first six months of 2012, compared with a $12.3 billion inflow to Chile, whose $268 billion economy is half Argentina’s, according to the United Nations.

The country’s benchmark Merval stock index has returned 6.9 percent in the past 12 months, ranking 58 among 94 world indexes tracked by Bloomberg.

Fernandez scorns critics, saying she skirted the fallout of the Lehman Brothers Holdings Inc.’s collapse in 2008 and the European debt crisis through increased spending and stimulating consumption through wage increases that raised purchasing power.

‘Right Path’

“We’re moving forward against wind and tide, the peddlers of hate, disillusion and against the prophets of failure,” Fernandez said in a Dec. 26 speech. “We’re going to keep moving forward in the conviction that we’re on the right path.”

Locked in a legal battle with owners of defaulted bonds and facing possible expulsion from the IMF for under-reporting inflation, Argentina hasn’t tapped global credit markets since its default more than a decade ago.

The Washington-based IMF, which questions the accuracy of data that puts 2012 inflation at 10.8 percent, is due to decide on Feb. 1 whether to censure the country. That would be unprecedented in the institution’s 69-year history. Argentina is the only member of the Group of 20 nations that is refusing to allow the IMF to conduct its annual mandatory review of the economy.

The cost to protect Argentina against default surged to the highest in the world in October after a U.S. court upheld a judge’s ruling that barred Fernandez from making payments on Argentina’s performing bonds unless she pays $1.3 billion on defaulted debt at the same time. An appeals court will hear the case Feb. 27.

‘Political Decision’

The probability of Argentina suspending payments over the next 12 months is now 47 percent, according to swaps trading, on speculation Fernandez would default on bonds issued in 2005 and 2010 restructurings rather than settle with investors she calls “vultures.’

With $42.7 billion of central bank reserves, a payments halt wouldn’t result from an incapacity to pay, said Bret Rosen, a New York-based Latin America strategist at Standard Chartered. Fernandez has used more than $20 billion of reserves to pay foreign debt since she began to tap reserves in early 2010.

‘‘Any technical default would be a political decision,” Rosen said in a Jan. 17 interview in Buenos Aires.

While bigger corn and soybean harvests, higher commodity prices and rebounding demand in Brazil will fuel faster growth this year, Argentina won’t achieve its full agricultural and energy-producing potential without access to foreign finance, said BCP’s Molano. Argentina is the world’s third-largest soybean producer and has the world’s third-biggest untapped reserves of shale oil and gas.

‘No Opposition’

“It would be very useful to have a better relationship with the market,” Molano said. “But instead of giving in, she tends to double down. She’s a very smart and capable person, and has no opposition.”

Fernandez swept to re-election with 54 percent of votes in October 2011. With no apparent successor, supporters including Planning Minister Julio de Vido are lobbying for a change to the constitution to enable her to seek a third term in 2015.

“The president is a clear alternative to continue with this process of transformation,” De Vido said in a Nov. 23 interview with C5N television channel.

A change in the constitution is unlikely, given a decline in Fernandez’s popularity and growing protests over rising prices and widespread crime, said Fabian Perechodnik, an analyst at political consulting group Poliarquia Consultores.

Exchange controls that prohibit most purchases of dollars, the traditional currency for savings and real estate transactions, have also alienated former supporters.

Street Protests

“There’s no social climate to seek a reform,” Perechodnik said in a Dec. 7 interview in Buenos Aires.

On Nov. 8, about 2 million Argentines packed streets and squares across the country, banging pots and waving banners in the biggest anti-government demonstrations since 1973, when former President Juan Domingo Peron returned from exile, according to Jorge Giacobbe, a political analyst at Jorge Giacobbe & Asociados polling company.

The peso, which depreciated 12.5 percent in 2012, may weaken 18 percent this year, Interior Trade Secretary Guillermo Moreno said in a Jan 22 interview with Pagina12 newspaper.

Fernandez’s tightening of currency controls since her re- election has led to the development of an illegal market in which the dollar costs about 50 percent more than the official rate. Argentines expect prices to rise 30 percent over the next 12 months, according to a poll published by Buenos Aires-based Torcuato Di Tella University on Jan. 16.

Supermarket Looting

Even lacking anti-inflation policies, excessive state spending and disregard for international investors, Argentina can count on abundant agricultural resources, which make up more than half of exports, to escape a repetition of the economic meltdown that followed the 2001 default, said former Economy Minister Lavagna.

Lavagna, 70, took office in 2002, after supermarket looting and rioting forced President Fernando de la Rua from office, banks were shuttered to stem a run on deposits and a decade-old fixed currency system was abandoned. That year, the peso weakened as much as 70 percent and the economy contracted a record 10.9 percent. Lavagna stepped down in 2005 after overseeing a debt restructuring and leaving the economy with a growth rate of 9 percent.

The current situation is far different from 2002, he said.

“There’s been a progressive process of deterioration in the economy that doesn’t have the characteristics of a crisis for one single factor: soybeans.” said Lavagna.

To contact the reporters on this story: Eliana Raszewski in Buenos Aires at eraszewski@bloomberg.net; Daniel Cancel in Buenos Aires at dcancel@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net


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