Socialism: Argentina and Its Race to the Bottom

In April 2012, we wrote an initial essay on Argentina. Its opening paragraph was:

Argentina, which from time-to-time has seemed to have a need to express a death-wish, has once again moved  in that direction under the governance of another certifiable nutcase, Cristina Fernández de Kirchner. In what Spain is treating as a financial attack on its national interests, de Kirchner is in the process of seizing control of a Spanish energy company. And this without the support of the light cruiser ARA General Belgrano which lasted about 5 minutes against the British in the Falklands war in 1982.

Since socialism is Argentina’s ongoing problem, we are amending the essay under this larger topic.

A Glorious Past

Wikipedia gives a brief economic history of Argentinian development:

Between 1860 and 1930, exploitation of the rich land of the pampas strongly pushed economic growth. During the first three decades of the 20th century, Argentina outgrew Canada and Australia in population, total income, and per capita income. By 1913, Argentina was the world’s 10th wealthiest nation per capita.

In macroeconomic terms, Argentina was one of the most stable and conservative countries until the Great Depression, after which it turned into one of the most unstable.

Ranked by GDP, Argentina is now 25th (source).

Governed By Mal-governance

Argentina has experienced 9 banking crises since independence in 1816 with 4 since 1945 (Reinhart and Rogoff: This Time Is Different, Table 10.4) and the most recent in 1995 and 2001-2, the latter also being the date of its most recent default.

A brief history of government in Argentina reveals a turbulent past in which the military regularly intervened. Of the political parties, the governments under Juan Perón and later Perónists tended toward corporatism, an economic system involving state control and regulation of the economy without state ownership. Argentinian politics has been characterized by strong labour and socialist viewpoints and biases.

Argentina is currently governed by President Cristina Fernández de Kirchner and the Front for Victory (Spanish: Frente para la Victoria, FPV) party, a Peronist political party and electoral alliance on the political left.

In short, repeated state intervention in the economy along with corruption has brought Argentina to the brink of disaster numerous times.

Which Foot Shall I Shoot First?

Argentina has been suffering from energy shortages due to lagging development in their hydrocarbon industry. Shale oil had recently become a potential source of supply and possible foreign exchange. As the BBC notes:

In November last year, YPF [a subsidiary of the Spanish energy company Repsol], which was privatised in 1993, announced a major find of 1bn barrels of shale oil.

Argentina has some of the world’s largest reserves of shale oil and gas, hydrocarbons trapped deep underground.

It is ranked number three in the world in terms of recoverable resources, behind China and the US, according to the US Energy Information Administration.

Today’s announcement of the nationalization of YPF will kill private investment in the industry in Argentina while inviting a significant response from the Spanish government. The latter will be the important short-term effect. The former will lead to deepening economic problems that will likely follow the usual route to default.

Events of Note

The following is an occasionally update list of events that we believe indicate Argentina is on course to default:

  • 20130313: John Mauldin gives an extensive review of Argentina in his essay, Argentina on Sale. A few key points are:
    • the [Argentinian] peso in dollar terms since 1936 … [has seen] a devaluation of 90%!
    • President Kirchner is again experimenting with price controls.
    • Argentina has limited beef exports in the futile hope that doing so will drive down beef costs. All that has happened is that cattle herds have been reduced and exports are down. Similar export controls to try to keep bread prices down have seen wheat production fall.
    • Brazil has seen its cattle exports explode in 20 years, while Argentina’s have not grown at all as the government tries to control production and export prices.
    • Inflation is denied by government statisticians, but it is at about 30% and rising [a trend that will result in hyperinflation very quickly].
    • A government senator said: The bureaucracy is out of control in Argentina, and it just keeps growing and creating costs. There are too many subsidies to certain businesses. And, as a result of votes during the last crisis, power is now concentrated in the presidency and a few key positions. … there is a pervasive belief that the state can provide all that people need: jobs, welfare, everything.
    • The problem, he [the senator] explained, is that those who have the ear of the president see inflation as a way to growth and thus a good thing. Those in power deny there is inflation and think it is caused by “commercial” interests that selfishly raise prices. Kirchner and those around her actually believe that their current policies will work. It was the inability of the Wiemar government to understand the nature of inflation that was largely responsible for the Wiemar hyperinflation.
  • 20130201: Bloomberg reports that Argentina Becomes First Nation Censured by IMF on Economic Data. Essentially, Argentina is manipulating or nor reporting economic data so that the government can avoid paying rates lower than what the true data would mandate.
  • 20120728: A commentary from an Argentinian expat.
  • 20120727: We are updating this post on the socialist paradise of Argentina because Canada, with its socialist party (the NDP) tied with the governing conservatives in a recent poll, there remains a chance that the Canadian electorate has become so entitled that they may very well commit suicide and vote in a socialist government. Weirder things – but not much – have happened. See Argentina’s New Currency Rules Have Backfired Horribly.
  • 20120418: We apparently aren’t going to get any rest on this one either as Zero Hedge reports in: Art Cashin On The Clandestine War Among Central Banks, that the US and forty countries which formalized a joint statement before the World Trade Organization complaining about Argentina’s trade restrictions are considering moving a step further and begin a “disputes settlement” process which could lead to an open condemnation if the administration of President Cristina Kirchner does not lift the protectionist network.
  • 20120416: Zero Hedge reports: Argentina Default Risk Surges On YPF Nationalization, CDS Approach 1000 bps. CDSs are insurance instruments created to offset the default risk on debt. Increasing rates mean a greater estimated likelihood of default.
  • 20120416: The BBC reports: Argentina to expropriate Repsol oil subsidiary YPF. It said that The Argentine government will seize a controlling interest in oil company YPF owned by Spanish firm Repsol.

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