So that’s that. Repsol and the Argentine government announced that they have agreed to terms regarding compensation for the 2012 nationalization of YPF, ending the long-running dispute over the Spanish oil giant’s perceived lack of investment in Argentina’s energy industry. The opposition lambasted the government in 2012, predicting dire economic consequences for what they claimed was a socialist dystopia, asserting that foreign capital would avoid Argentina like the plague. Argentina was doomed for all eternity to some kind of economic purgatory.
The funny thing is, there have been few tangible changes since a deal was brokered. The new compensation deal is basically the same deal originally offered by the government. The Argentine energy markets — after an initial drop in Repsol share prices in 2012 — have been stable. Both sides have shown respect for the negotiation process once it began in earnest. Repsol’s CEO Antonio Brufau, after initially threatening to go to court, was satisfied with the six-month mediation process. The deal itself: Various bonds, the last of which expires 20 years from now, have been assigned yields of 8.5%, a $5 billion compensation in today’s money — a good return, but less than say, an oil project in Africa that yields 10.25%. Intuitively, this figure seems reasonable to me given the circumstances of Argentina — risky, but not Africa risky.
But that very fact is what upsets the opposition. All of this seems a little too reasonable given the BIG HEADLINES! that this caused in 2012. Cordial discussions? Reasonable compensation?Something smells fishy.
Really, this is a mutually beneficial agreement. It gives the government assets it need urgently, such as the Vaca Muerta and refinery infrastructure, in exchange for long-term annuity that pleases Repsol’s shareholders? Wait a second, isn’t this Argentina we’re talking about? There’s got to be a catch.
Despite the public’s disbelief, the opposition has nothing to get angry about here. But in politics, this doesn’t matter — the opposition will continue clubbing away at the government regardless of the facts. They have argued that confidence in the Argentine government is now so low, the administration so closely resembling a lame duck, that it no longer has the credibility to secure money for vital new energy projects.
This is nothing more than doomsday prophesying. The opposition’s argument relies on unquantifiable factors like “loss of confidence,” and disingenuous ideas like government-provoked drops in production, something inevitable, given the steady decrease in reserves. The opposition abstains from setting any concrete goals or determining a plan of action, and makes up for their failure to respect the facts by being loud and pandering to an audience that is desperate for an excuse to complain about the country’s current state of affairs.
Who makes up this opposition I am speaking about? The right’s current spokesman, Federico Sturzenegger — despite his awesome name — has chosen not to let this self-perceived apocalyptic crisis go to waste, and spent most of yesterday in pander and shill mode, becoming the most vocal “intellectual” voicing opposition to the measures. A representative for “Propuesta Republicana“ (PRO) and apparently, an “economist,” Sturzenegger is either reaching Machiavellian levels of disingenuous rhetoric, or he’s a nutball who supports cargo cult economics, using fancy-sounding math to obscure the fact that he simply does not understand how the world works. I would like to make the case for both.
Applying the rigidness of empirical mathematics to a discipline like social science is difficult, because reality is often too messy. The math involved in social phenomena quickly becomes very subjective. It’s nearly impossible for a typical country’s economic activity to be modeled by mathematical formulas alone, let alone an economy like that of Argentina. Ironically, this means it is hard to prove anyone wrong here. Any justification you give for your pessimistic outlook on the value of an Argentine company, be it bad productivity, government theft or poor infrastructure, can be conveyed in the economic model of your choice. So when Sturzenegger goes off on a rant about why he’s against the entire process, we must be wary:
“Argentina agreed to pay 5 billion dollars, but it will end up paying 11 billion dollars”, the economist said today.
“The government accepted what we had proposed in the first place,” Sturzenegger said recalling his political force warned at that time the government had to immediately compensate the Spanish oil company when expropriating it to avoid a collapse in foreign investment.
He added “oil and gas production in Argentina fell 7 percent, there haven’t been investments, Vaca Muerta is lost, and as YPF cannot be financed, gasoline prices have doubled.”
“The government takes over companies and then begs for investors to come,” he told a radio show.
“We need coherence, to think in the long term,” he concluded.
We can break these statements down into the following set of beliefs:
a) He is against using long-term debt instead of hard cash to finance these operations.
b) He thought the government should have immediately compensated Repsol to please capital markets.
c) He believes Argentina is overpaying for YPF.
d) In the future, companies will not want to invest in Argentina because policy is incoherent and unpredictable.
e) He believes that gas and oil production fell 7% solely because of the nationalization of YPF.
f) Argentina has “lost” the Vaca Muerta because it will not be able to secure financing.
The contradictions here are staggering. How can one believe the government is paying too much for YPF (a) (c), yet also believe this will scare away those looking to do business in this country?
First of all, a government overpaying for things is good for business. Second, if the government and that private company reach an amicable agreement, this should send the signal that said government respects capital — and that they are committed to achieving long-standing policy agendas. Maybe the method is wrong — governments can’t do anything right, of course, and it’s malinvestment. But that’s not the point Sturzenegger is making — he argues that there is no coherence in this administration’s policy (d), and that for this reason, foreign capital avoids Argentina. This may be the case for many sectors here, but I argue that the administration’s longest standing strategic initiative — their energy policy — has been surprisingly consistent and coherent since Kirchner’s first term.
You may have noticed what I’m trying to do: I’m separating the concern with public perception (b) (d) from the question of whether the administration is getting things done, (c) (e). Yes I know, unorthodox in this country, but bare with me.
To show failure, they must argue that Argentina’s state-owned YPF/ENARSA team is struggling to extract and efficiently produce hydrocarbons, thanks to a mixture of incompetent management and lack of investment. Therefore, (c) + (e) = (f), and the result is an irreversible drop in long-term value of Argentina’s energy industry.
And why trust Struzenegger’s appraisal? His expertise is in asset valuation in emerging markets — he wrote numerous papers on asset valuation in different exchange rate environments (more on that later), all underpinned by the Efficient Market Hypothesis (EMH), which claims that the market value for companies is always correct, and that variation in that value is the result of random fluctuations or new information.
Essentially, Argentina “bought” an asset from Repsol (YPF) using some long-term bonds as payment. The government has permitted Repsol to sell these bonds on the open market if they wish to do so.
Now we get to the juicy part: If Sturzenegger is correct in his reasoning — that this is a bad deal and a shining example of bad economics due to the erosion of market confidence — then this will be reflected in the future price of these bonds. Remember, Repsol is a public company — it reports on the value of these assets twice a year. These numbers can be monitored. Furthermore, there’s a good chance that Repsol will sell them, or perhaps package them with its remaining 12% ownership of YPF.
It’s not often that a right-wing economist in Argentina unknowingly opens up his rhetoric, his academic theories, and his predictions to a real-world test, but luckily for us, he did exactly that. Let’s assume that the following occurs:
- Repsol sells the remaining 12% of YPF according to the current-value price that the Argentine government paid
- The new bonds paying 8.5% per annum — valuated on a balance sheet and possibly sold on the open market — lose value, increasing yield and the market’s perception of risk
- The government refinances YPF at a rate better than 8.5% p/a
In this case, Sturzenegger’s theories on how capital markets work will be proven wrong. The best part is, we don’t even need to wait until 2017, or whenever the Vaca Muerta becomes semi-operational — Sturzenegger believes adamantly that international capital markets are rational, and that any change in asset prices in the government’s favor will destroy his credentials as an economist and/or potential political funcionario. His own blind trust in the market has pushed him into an intellectual corner; he can’t say “I think the markets are wrong”, because of of his claims rest on that assumption.
This is my case under the “disingenuous Machiavellian theory” — Sturzenegger is babbling, thinking it will be without consequence. Dig a little deeper, I have a secondary theory: The “obscure cult of mathematics” theory. Fellow economist-types: Beware, things are about to get weird. Non-economists:
After extensive academic output in the 90’s about the wonders of dual-exchange rates, and how creating the perception that you are fighting risk cures all systematic risk, Sturzenegger made his triumphant return to Theoryland with a Magnum Opus of voodoo economics entitled: “The Valuation of Hidden Assets in Foreign Transactions: Why “Dark Matter” Matters.”
He tried to make it “a thing”, hilariously name-dropping Adam Smith in: “The Missing Dark Matter in the Wealth of Nations and its Implications for Global Imbalances,” and adding a little Asian spice in “The growing current account surpluses in East Asia: the effect of dark matter assets“. So what on earth is dark matter? I’m glad you asked:
“The inclusion of dark matter is indicated by the superscript DM. Our use of the concept of dark matter corresponds to that used in physics to account for the fact that the universe is more stable than you would think if it were held together only by the gravity emanating from visible matter. In the same way that physicists infer matter in the universe from its gravitational pull (but not from adding up the visible matter), we infer the assets from their returns and not from adding the current account imbalances. As a result, countries with net investment income larger than what is presumed on the basis of their asset base will have dark matter assets, while countries for which the net investment income is too low will have dark matter liabilities.”
If you have no idea what he said, you’re not alone — that’s borderline incomprehensible even for me. He later throws in some math equations and carelessly interweaves completely unrelated and complex theories. Not only that, but he uses the physics concept of “dark matter” as the chosen term to describe this phenomenon. That’s a little like naming someone’s karaoke act after a grand 6-piece symphony orchestra.
But okay, I’ll humor him. Sturzenegger presents a formula that takes into account the calculation of asset valuations, current account balance, foreign currency value — individually measurable, but together impossible to model in the present, let alone the future — and reconciles them all with one simple equation:
The DM is “dark matter” — the unexplained return premium . From that, he extrapolates that the cause of this must be foreign account deficit, which pumps up the value of US companies and makes them more appealing. He then concludes that since the US can’t run a foreign account deficit indefinitely (which is completely false), this suggests US asset prices are overvalued, or something.
So is he right? Read this abomination of a paragraph at your own peril:
“By capitalizing the income from these return differentials we are redefining the stock of assets in a way that more explicitly shows the value of underlying capital and services, regardless of whether they are included in official statistics. In other words, capitalizing these steady return differentials allows including in the asset estimates the advantage or disadvantage reflected in the differences in the rates of return, thus providing a more coherent picture of actual global imbalances. As we will show below, assimilating the return differential to an “asset” is tantamount to assuming that this differential will persist in the future. Herein lies the main difference when looking at global imbalances from the perspective of dark matter. “
You may ask why anyone would write something so convoluted. Answer: Because this person is a hack who spent his or her career building an intellectual wall of obscurity, masking the simple fact that he or she has nothing of importance to say about the real world and how it works. Yet from this persona, he’s been able to publish popular books, win an election campaign, get invited to speak on radio and TV shows and be quoted regularly in “respectable” publications.
Yet his rhetoric is laughably “cargo cult” — it operates under the assumption that if we offer shiny things to the superior foreign gods, they’ll give us everything we ever wanted — and his case for credibility is not just flimsy, it’s in contempt of court.
How has no one in the “serious Argentine economic circles” (Alfonso Prat-Gay, Miguel Broda) thought: “Hey, is this really the big thinker I want by my side to fix the massive structural problems we’ll be dealing with upon our electoral victory?”. Prat-Gay, a fellow “economist,” has cited Sturzenegger’s academic work for the last decade. Has he even tried to read any of it?
I don’t know how the YPF nationalization will turn out. Questions remain unanswered about foreign financing and operational efficiency. But here’s what I do know: By 2015, Sturzenegger will either be discredited or vindicated by my simple test. I hope it’s the former, but that’s the problem with Argentina — I feel like it won’t even matter. Credibility is just ideology + loudness + perceived credentials, not your track record in economic forecasting or letting your work speak for itself.