BIG PICTURE

So unless you live under a rock like my colleague Adam up until recently, you know that there is never a dull moment in Argentina’s economy. Or political system. Why even separate the two? I’m not saying that Argentina is socialist. But some events this week would suggest that Argentina’s version of “managed capitalism”, if you will, has indeed been lurching towards its estranged cousin, socialism. Yeah, I said it.

And when things are not dull, it certainly doesn’t bode well for the economy. “Yikes.” I know.

Here in Argentina, to name a few hot ticket items:

  • we have recently been forced to choose between birds or the fatherland (buitres patria)
  • Congress debates band-aid, job-killing laws interestingly dubbed to be “in the defense of the consumer” (the Law of Abastecimiento or Supply)
  • The Economy Minister attempts to rewrite debt contracts while acknowledging his efforts do not have the bondholder consent or legal ability to bear fruit
  • Foreign exchange reserves are at an eight year low

Argentine reserves 2000-2014

POST-DEFAULT SHENANIGANS

Where to begin.

Agriculture:

On Thursday, the United States Department of Agriculture (USDA) released an updated forecast on crop production in the United States. This is important because the United States is the world’s biggest corn and soybean producer, and third biggest wheat producer. Domestic supply fluctuations there drastically affect global agricultural commodity prices.

In Argentina, while agriculture composes a relatively small portion of total economic output and employment, it is the largest source of foreign exchange reserves for the BCRA, or central bank – and thus strong crop prices translate to higher export revenues which arrive via higher quantities of dollars that are handed over to (and remain) at the central bank, in exchange for pesos. Unfortunately for corn, soybean and wheat prices, the USDA reported that the United States is forecast to have a record year for both corn and soybean production and yields as well as higher than expected wheat production.

Argentina is already struggling with widespread theft in and around the main export hub of Rosario, and now with record crop production in the United States, corn and wheat prices are hitting four year lows (think supply up, scarcity down, price down) and soybeans are just shy of their 2010 low. On Wednesday the December corn futures contract (which is the most widely traded) cost US $3.41 per bushel, the September wheat futures contract priced in at US $5.03 per bushel, and November soybean futures went for US $9.815 per barrel. This leaves Argentine producers stuck between a rock and a hard place – prices are going down, indicating a good time to sell while their crops are still worth something, yet the looming expectation of another peso devaluation provides pressure for producers to wait until after devaluation in order to earn more pesos for their exports (or at least retain the value of their increasing stockpiles). Export demand would also rise, as it would be relatively cheaper for foreign buyers to import from Argentina given a devaluation. But could these existing stockpiles be under threat from even more sinister forces?

Enter the Law of Abastecimiento (Supply):

The proposed update to the decades old law, which after recently passing through the Senate and now needs to pass through the House of Deputies, allows the state to intervene in the price of goods and services intended “to satisfy the basic needs of the population.” While excluding small and medium-sized enterprises, the “Group of 6” association of businesses strongly opposes the so-called reform on the grounds that the measure threatens state intervention in business and the economy. This group and other opponents cite the “Law of Just Prices” in Venezuela as the model for the Supply Law’s reform. There, the law aimed to “protect consumers” and combat inflation yet in reality has been causing mass shortages of basic goods and done nothing to combat inflation, which now exceeds 60 percent.

Specifically, the reform will crack down on businesses engaged in the “distortion of the market,” which is crucially defined under current law as raising prices to unreasonable levels, gaining unfair profits, or the artificial creation of stages of production (?). Proposed regulatory powers to inhibit these practices include setting profit margins, price floors (caps), price ceilings (minimums), or setting minimum production levels (aka no hoarding…ojo, farmers).  If the latter constraint is not economically feasible, any subject firms would supposedly receive compensation.

Also, raids are allowed during business hours and after business hours too, given judicial approval. Punishments include fines from ARS $1-10 million, the confiscation of goods, closure of the business for 90 days, loss of legal ability to operate in the relevant industry for five years, and the loss of concessions. Critics of the law argue that rather than acting “in the defense of the consumer”, the law in fact curtails investment and production as it injects yet another dose of uncertainty into the economy. While consumers dislike rising prices, perhaps they dislike unemployment even more? But hey, if you’re into The Argentine Independent, perhaps you are still asking yourself, “what’s all the fuss about?” Really?

Inflation: Yes, inflation is still slowly eating away at everyone’s savings and wages. INDEC, the state statistics agency, said last week that August inflation went down to 1.3 percent from 1.4 percent in July. Private sector consultants found that it actually rose to 2.65 percent – the highest difference between official and private sector figures since January. This comes at a time when the IMF is judging INDEC’s ability to provide reliable statistics with the threat of expulsion from the fund, something that Argentina seems pretty apathetic about.

Peso: The peso recently only fell slightly last week on the black market due to continued BCRA dollar sales and currency restrictions limiting access to dollars by individuals, banks, and corporations. Still, the brecha, or gap between the official and blue exchange rates (and signal of confidence in the peso), widened to 71% as the dólar blue closed at 14.4 ARS/USD on Friday and the official rate finished the day at 8.42 ARS/USD. Eek.

Reserves, Imports, and Durable Goods: By selling its reserve dollars, the central bank can in effect maintain the relative value of the peso to the dollar. However, selling reserves comes at a high cost. Reserves are important for financial stability, not least because Argentina uses these funds to pay its external debts. In an effort to protect its reserves, the government has restricted access to dollars for importers. Importers must go to the central bank for dollars when purchasing goods overseas. According to General Motors this week, in light of the debt crisis with the holdouts, the lack of hard currency (dollars) in Argentina has resulted in the suspension of imports from its Brazil unit to Argentina. The government gave a conflicting response to these statements, with one official revealing to Reuters that there “may have been” a lack of access to dollars,  and another claiming that indeed car makers have sufficient dollars to meet production and sales targets. The government then announced that car manufacturers would have access to US $100 million per month to import auto parts. Jorge Capitanich, the government spokesman, “guaranteed” the availability of hard currency to car producers. GM manufactures 13 percent of Argentina’s cars.

On Thursday, CFK told reporters that people should “invest in things you can see and touch, the rest is nonsense,” and that they should buy durable goods with pesos and not dollars. Interesting word choices there. She then announced an agreement with Visa, Mastercard, and American Express that allows people to purchase domestically-produced durable goods, as well as clothing and bikes, using these member cards and paying via 12 monthly cuotas or installments, interest free, from Thursday through Sunday. While this may be a win for the consumer, the constant nominal and real depreciation of the peso means that ultimately the credit card companies extending credit will incur losses due to effectively locking in prices for increasingly undervalued products for the payback period. Meaning the companies may have had their hands tied behind their backs when this “agreement” was made. Meaning Argentina’s business and investment climate just worsened yet again.

Debt Swap: Argentina continues to attempt to rally support for its debt swap, which became law last Thursday morning. The successful bill stipulates that Argentina can move its exchange bonds from New York State law to Argentine law, and also change bond trustees. The trustee or custodian remains Bank of New York Mellon, and the goal is to take the exchange bonds from BNY and move them to Banco de la Nacion, a state-owned bank. Theoretically, 75% bondholder consent is all that is necessary to make the transfer happen. It’s not actually that simple in practice but you get the idea. Eventually this will, according to Argentina, allow bondholders to receive payments via the protection of either Argentina or French(!) law. For the foreseeable future, this idea remains erroneous, although there are a myriad of possible loopholes and proposals, none of which stand a good chance of working in practice, but fun to ponder nevertheless. If you care to ponder with me, stay tuned, because there is no more space in this post for more rambling pondering.

Default Part Deux: On 30 September another interest payment on a series of Argentine bonds are due – this series is referred to as “par” bonds. Argentina defaulted on its “discount” bonds by missing an interest payment in July. On 2 December Argentina has another payment due, on the the “Global 17 [principal due in 2017]” bonds. And you thought the drama ended in July!

The significance of these remaining bonds is that each time Argentina misses an interest payment on one series (and The Republic already has one strike), and the longer it negotiates with any already defaulted series, the risk of “acceleration”, or the immediate demanding of full interest and principal, increases, since more money and bondholders would be affected. Just 25 percent of the holders (or one holder owning 25 percent) of a series of defaulted bonds voting in the affirmative could opt to accelerate their claims. Moreover, another missed payment increases the possibility of all external bondholders (representing some US $28 billion, the same total as Argentina’s foreign exchange reserves) accelerating the repayment of their principal and interest, even if a specific bond series is not yet in default.  This is because if just one group of defaulted bondholders demands acceleration (which is currently a risk), the “Cross Default” clause could trigger, meaning all external or foreign bondholders (whether in default or not) could immediately demand their beneficial claims (whatever is owed to them)…feel free to peruse the 2005 bond indenture to read more about these semantics. It’s a doozy.

In Sum

So there you have it. The vulture funds may not be as immoral as once thought, the vulture funds are definitely in cahoots with U.S. crop producers and their record yields, the Economy Ministry is attempting Soviet-style central planning, your money is worth less, the risk of a balance of payments crisis grows faster by the day, Cristina wants us all to lose money by not converting pesos into dollars, the debt swap happened but might as well not have, and finally, we get to repeat July’s drama, kind of, all over again at the end of September when the next interest payment on par bonds falls due.

This does not bode well. Over and out.