Zwangswirtschaft Becomes Full-Blown Socialism
First make the company unprofitable by price controls, then blackmail it by revoking its concessions, then steal it – that seems to have been the playbook of Argentina's government regarding YPF Repsol.
President Christina Fernandez-Kirchner noted in her press conference on the seizure that
Argentina will manage YPF “professionally,” Fernandez said, adding that the country is one of the few that doesn’t control its own oil.
Deputy Economy Minister Axel Kicillof will help De Vido to run the company, according to Fernandez.
Argentina is expropriating YPF for the “public good,” a government official said in yesterday’s speech.
By this she means: Argentina is one of the few countries where the oil industry was not yet fully nationalized, as if that were a bad thing. The reality of the situation is that the high share of government control all over the world over the oil industry has created a major supply problem, as governments can not possibly 'manage oil companies professionally'. As all state-owned enterprises, nationalized oil firms are inefficient and wasteful – they are not businesses, they are bureaucracies. To wit, a bureaucrat – the deputy economy minister – will now 'help to run the company'.
The stock market's assessment of the seizure speaks for itself:
YPF's stock market capitalization has collapsed. Note that the bounce late in the day was occasioned by speculation that the seizure will be subjected to international arbitration to obtain full value of YPF's Argentine assets. Whether Argentina will feel bound by such arbitration is a different matter – click chart for better resolution.
As several commentators have observed, this seizure makes Argentina into an even bigger pariah than it already was following the default in the early 2000ds.
To argue, as Fernandez-Kirchner does, that it is happening 'for the good of the country' is beyond ludicrous. In all likelihood YPF will now become a demesne and feeding trough for her political cronies. Oil production will probably collapse even further (it is already in deep trouble due to the government's price controls).
A few snips from the Bloomberg article linked above highlight the problems created by the seizure:
“They are going to be closing the country as an investment destination,” Anish Kapadia, an analyst at Tudor Pickering Holt & Co. in London, said yesterday in a telephone interview from the city. “What’s surprising is that they are expropriating assets rather than going through a fair market means to get hold of a stake in the company. That sets a terrible precedent.”
Argentina, which defaulted on a record $95 billion of debt in 2001, needs to regain control of Buenos Aires-based YPF to avoid becoming “an unviable country,” after oil production slumped, Fernandez said to the accompaniment of cheers from supporters at the presidential palace. Compensation for the seizure will be determined by the National Appraisal Tribunal, Fernandez said, without giving more details.”
In other words, the government wants to determine itself how much it will pay for the assets. This is how it plans to transform the seizure into an outright theft. As the analyst quoted above notes, Argentina is 'setting a terrible precedent'. The disdain for property rights won't be without consequences: as an investment destination, Argentina has just died again.
Not surprisingly, Spain is incensed over the seizure, as Spain's Repsol owns almost 60% of YPF. Meanwhile, the majority owners of the shares of the combined entity are – Spain's banks! It's not as though they can use yet another hit to their balance sheets. In fact, that's about as useful as a hole in the head to them.
The four biggest holders of YPF Repsol shares are Spanish banks – click chart for better resolution.
“The majority stake in YPF is owned by Spanish oil firm Repsol, whose shares fell by 8% in early trading in Madrid. Promising a "clear and overwhelming" response, Spain summoned the Argentine ambassador to express its concern.
The nationalisation has alarmed foreign investors but is said to be popular among ordinary Argentines. [just wait until they find out what it means for them, ed.]
Repsol has vowed to demand compensation, saying it could seek international arbitration over its 57% stake in YPF. "These acts will not remain unpunished," Repsol executive chairman Antonio Brufau told reporters.
The head of the European Commission, Jose Manuel Barroso, said he was "seriously disappointed" by Argentina's decision. The EU expected "the Argentinian authorities to uphold international commitments and obligations", he said.
Argentina's ambassador to Madrid, Carlo Antonio Bettini, was due to visit the foreign ministry at midday (10:00 GMT), the ministry told the BBC News website.
Earlier, Spanish Foreign Minister Jose Manuel Garcia-Margallo said the "climate of friendship" between the two countries had been broken.
The nationalisation was announced to applause on Monday at a meeting between Argentine President Cristina Fernandez de Kirchner, her cabinet and provincial governors. Reading out a statement at the meeting, an official said YPF had been "declared a public utility and subject to expropriation of 51% of its assets".
The government took over the management of YPF with immediate effect while the bill on expropriation was sent to the Argentine Congress. Supporters of the nationalisation celebrated in Buenos Aires, waving placards that read "YPF – we're going for everything". Graffiti appeared on a city centre wall that read "Repsol, get out of YPF".
Mrs Fernandez de Kirchner stunned investors in 2008 when she nationalised private pension funds and she has also renationalised the country's flagship airline, Aerolineas Argentinas.”
Apparently things are going so swimmingly in Argentina following the pension fund seizure and the re-nationalization of the airline that more and more assets need to be seized to keep the placard-wavers in the streets of Buenos Aires pacified. Readers would do well to remember that the seizures of the Nazis and the Bolshevik revolutionaries were also accompanied by enthusiastic placard-waving mobs. Alleged 'popular support' for a bad policy doesn't magically make the policy any better.
As you can see, we highlighted the term 'expropriation' a few times above. This is to make sure everybody fully understands what the government is trying to do. 'Expropriation' is definitely not the same as 'buying a stake' from Repsol. It is plain and simple theft.
Repsol has vowed to fight the seizure. As this article in the WSJ reveals, one reason for the action is that there is capital flight from Argentina. The government hopes it can cut down on oil imports by seizing YPF and forcing it to make investments that are clearly unprofitable due to its price controls (yes we know, it doesn't make a whole lot of sense). Why is there capital flight from Argentina? Is capital fleeing because Argentina's economic policies are so good? Just asking. Maybe one of the placard wavers can explain.
From the WSJ article:
YPF accounted for about 35% of Repsol's 2011 consolidated earnings before interest, taxes, depreciation and amortization, and 21% of the group's after-tax income. Argentine price caps on YPF oil and gas sales have prevented Repsol from reaping the full benefits of high prices in global oil markets.
Compensation, to be determined by an Argentine tribunal, could take months or years to reach Repsol coffers, and in any case is likely to be far less than the company's preferred value.
Repsol YPF SA (REP.MC) Tuesday said the value of its Argentinian unit is worth $18.3 billion, leaving the value of its stake in the company at $10.5 billion. The company said the YPF valuation equates to $46.55 per share.
We can be sure that Argentina's government doesn't plan to pay anywhere near to that amount. The UK Telegraph reports:
“Despite the threat of nationalisation, reports in the Chinese media suggested that China's second-largest oil company, Sinopec, was in talks with Repsol to buy YPF for more than $15bn. Mr Brufau declined to comment on the rumours, although he said that Repsol had received interest from foreign compaines over YPF.
Spain, which has several sizeable operations in Argentina, warned that it would take "clear and forceful measures" in response. "It's a hostile decision against Repsol, thus against a Spanish business, and thus against Spain," Jose Manuel Soria, Spain's industry minister, said on Monday.
In Madrid, Jose Manuel Garcia-Margallo, Spain’s foreign minister, said measures against Argentina would be announced in the next few days.
“This has broken the climate of friendship that existed between Spain and Argentina,” Mr Garcia-Margallo added. “Spain had worked with Argentina during its hardest hours.”
The Argentine government has been tightening the noose on Repsol over recent months, withdrawing operating licences and accusing the company of failure to invest adequately in its Argentine operations. Repsol has denied these claims.
Spain is one of the biggest foreign investors in Latin America. Banking groups Santander and BBVA, and telecoms giant Telefónica have operations in Argentina.”
It seems plain stupid to aggravate your biggest foreign investor, but there it is. Argentina is firmly embarked on the economic road to hell and it seems it is not even paved with good intentions.
Argentina's president Fernandez-Kirchner: enjoying the applause of her political cronies following the seizure of YPF. It may not be 'good for the country', but it is definitely going to be good for them.
(Photo via Stringer/Argentina)
Charts by: StockCharts.com, Bloomberg
Year-End Fund Raising Drive
Dear readers, our year-end funding drive has become a “beginning of the year funding drive” as we have yet to reach our target. By now you will be familiar with the many advantages a donation can secure for you, which range from sounder sleep, to children including you in their songs, to potentially obtaining privileges in the afterlife (no guarantees, but it seems highly likely). Lastly, a special thanks to all readers who have already made a contribution, we are greatly honored by your support.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
3 Responses to “Argentina Update: YPF Repsol Seized”
Most read in the last 20 days:
- Gold and Gold Stocks – A Meaningful Reversal?
A Negated Breakdown There have been remarkable gyrations in the gold sector lately. The typical rebound out of a November/December low (typical in recent years after the end of the tax loss selling period) was initially cut short in January in the course of the global stock market decline. This was a bit surprising, because it was widely held that the recovery in the gold price was a result of said stock market decline. Photo via genius.com We suspect that in it was...
- The Walking Dead: Something is Rotten in the Banking System
A Curious Collapse Ever since the ECB has begun to implement its assorted money printing programs in recent years - lately culminating in an outright QE program involving government bonds, agency bonds, ABS and covered bonds - bank reserves and the euro area money supply have soared. Bank reserves deposited with the central bank can be seen as equivalent to the cash assets of banks. The greater the proportion of such reserves (plus vault cash) relative to their...
- The Bank of Japan – Ringing in the Endgame?
Let's Do More of What Doesn't Work It is the Keynesian mantra: the fact that the policies recommended by Keynesians and monetarists, i.e., deficit spending and money printing, routinely fail to bring about the desired results is not seen as proof that they simply don't work. It is regarded as evidence that there hasn't been enough spending and printing yet. BoJ governor Haruhiko “Fly” Kuroda: is that a windshield I'm seeing? Photo credit: Yuya Shino / Reuters At the...
- The FOMC Decision: The Boxed in Fed
An Imaginary Bogeyman What's a Keynesian monetary quack to do when the economy and markets fail to remain “on message” within a few weeks of grandiose declarations that this time, printing truckloads of money has somehow “worked”, in defiance of centuries of experience, and in blatant violation of sound theory? In the weeks since the largely meaningless December rate hike, numerous armchair central planners, many of whom seem to be pining for even more monetary insanity than the...
- The Bubble Deflates - And Crash Risk Rises
A Harrowing Friday – Momentum Stocks Continue to Break Down The release of Friday's payrolls report was the worst of all worlds for the US stock market. This typically happens in bear markets: suddenly fundamental data that wouldn't have bothered anyone a few months ago are seen as a huge problem. Why was it seen as problematic? The report somehow managed to be weak and strong at the same time – it showed weakness in payrolls growth, but the entirely artificial U3 unemployment rate,...
- Gold's “Monkey Magic” - An Update on Gold and Gold Stocks
Has a Bull Market Begun? Gold stocks have risen so much and so fast recently that a pullback, resp. consolidation either has begun already or is likely to begin soon. We have therefore decided to post a brief update on the situation in order to discuss what might happen next. Back in late November, we made a few remarks in order to clarify why we have focused so much on the gold sector again since last summer. Processing plant of the Driefontein mine in South Africa Photo...
- Skyscraper Mania Goes Global
New Skyscrapers Wherever one Looks Readers may recall our recent discussion of the construction of the Jeddah Tower (see “Soaring to Bankruptcy” for details). This skyscraper is a typical symptom of an artificial boom that has moved past its due date, so to speak. The idea behind the skyscraper index is that in light of the immensity of projects that involve the construction of the tallest building in the world (or one of the tallest), they are only realized once the notion that boom...
- Softening up the Rubes – the War on Cash Continues
More Anti-Cash Propaganda by Bloomberg Former NYC mayor Bloomberg is probably one of the worst nannycrats who ever strode upon the US political scene. No-one has done more to take the fun out of New York than this man (we have chronicled the efforts of people of his ilk in “America's Killjoys”). It always amazes us to no end when successful businessmen - once they have made enough money to last them a thousand lifetimes – suddenly discover their penchant for socialism and State...
- China’s $6.6 Trillion Toxic Loan Problem
Rotting Vegetables “As long as you’re green, you’re growing. As soon as you’re ripe, you start to rot,” once remarked Ray Kroc, mastermind of the McDonald’s franchise empire. At the moment, no truer words can be spoken for China’s ripe economy. The Middle Kingdom’s 30-year economic boom is being overcome with the unpleasant odor that befalls rotting vegetables. What’s more, there’s no way to reverse it. Photo credit: fmh Economic...
- In Praise of Sarah Palin…
Up and Down MUMBAI, India – The Dow dropped 208 points on Monday – or about 1.3%. After last week’s pause, it will be interesting to see if the sell-off resumes. “Global equities in turmoil,” reads a CNBC headline. “A month after raising rates, Fed faces darker global economy,” suggests an AP newswire report. Neither of these is true. The world has not changed significantly in the last month. What has changed? The squiggly lines are going down instead...