Quick.
Name the country whose economy despite the global recession nevertheless expanded 9.2 percent in 2010 and has kept growing in 2011 at an annual rate of about 8 percent.
Still unsure? The nation defaulted on part of its external debt, roughly $93 billion, at the beginning of 2002 after undergoing three years of brutal recession.
Argentina, Latin America's third largest economy. Quite a turnaround in nine years, when the nation quickly became a pariah state, foreign investment fled the country, and capital flow towards Argentina ceased almost completely. The government then decoupled the Argentine peso's parity with the U.S. dollar, tanking its value, depleting the Central Bank's foreign currency reserves and producing higher than average inflation.
So, how did Buenos Aires resolve the situation?
Essentially by staring down the World Bank and International Monetary Fund, which delivered dire pronouncements about Argentina's fiscal future if it did not honor its debts in full. The Argentine government remained firm and eventually refinanced its debt under a deal whereby 76 percent of the defaulted bonds were exchanged by others, of a much lower nominal value (25-35 percent of the original) and at longer terms, some of which were indexed on the future economic growth of Argentina.
Needless to say, there was still prolonged squealing by some of the private debt holders, with the International Monetary Fund assuming the role of advocate,…
Quick.
Name the country whose economy despite the global recession nevertheless expanded 9.2 percent in 2010 and has kept growing in 2011 at an annual rate of about 8 percent.
Still unsure? The nation defaulted on part of its external debt, roughly $93 billion, at the beginning of 2002 after undergoing three years of brutal recession.
Argentina, Latin America's third largest economy. Quite a turnaround in nine years, when the nation quickly became a pariah state, foreign investment fled the country, and capital flow towards Argentina ceased almost completely. The government then decoupled the Argentine peso's parity with the U.S. dollar, tanking its value, depleting the Central Bank's foreign currency reserves and producing higher than average inflation.
So, how did Buenos Aires resolve the situation?
Essentially by staring down the World Bank and International Monetary Fund, which delivered dire pronouncements about Argentina's fiscal future if it did not honor its debts in full. The Argentine government remained firm and eventually refinanced its debt under a deal whereby 76 percent of the defaulted bonds were exchanged by others, of a much lower nominal value (25-35 percent of the original) and at longer terms, some of which were indexed on the future economic growth of Argentina.
Needless to say, there was still prolonged squealing by some of the private debt holders, with the International Monetary Fund assuming the role of advocate, but the first repayment of the renegotiated debt made in January 2006 and four years later the debt exchange was reopened to holders of the debt.
And now? Consider the brief list below of recent foreign investments in Argentina over the past month.
Argentinean Industry Ministry sources confirmed that Citroen has received approval for a Bicentenary Credit of $35.2 million and consequently the company will invest $106.8 million to produce a new car in its plant in El Palomar, Greater Buenos Aires (GBA). This is in addition to the country's automotive sector having already received $238.4 million in loans from the state.
South African Anglo Gold Ashanti Mining Company next year will invest in Argentina, having been mining gold and silver in Santa Cruz for the past decade.
Bunge's new $200 million ProMaize project will begin clearing land later this month. And what will become Argentina's largest ethanol plant will begin production within the next 18 months, eventually producing 36.9 million gallons annually when at full capacity.
And in another positive bit of energy news, on 7 November the YPF SA, Argentina's biggest oil and gas company, confirmed its biggest oil discovery yet in Argentina in the country's Vaca Muerta basin in Neuquen province in northern Patagonia, where it estimated that its reserves now total 927 million barrels of recoverable oil and natural gas.
To be sure, aftershocks from the country's credit default continue to reverberate through the economy. Three days after President Cristina Fernandez de Kirchner won reelection on 23 October, in her first official act passed a decree requiring energy companies including Argentina's Pan American Energy LLC and YPF SA, France's Total SA and Brazil's Petroleo Brasileiro SA to keep at least 30 percent of their export revenue in the country after they had several years of exemptions, a move cynics describe as an attempt by the central banking authorities to stem capital flight.
Argentina's experience proves that the austere capitalist formulations of international lending agencies can be mitigated if a government has enough fortitude and stamina to endure the inevitable consequences of standing up for debt renegotiation.
And Argentina's view of its giant northern American neighbor? Last week Buenos Aires La Nacion 's Fernan Saguier in a dispatch from Washington wrote that, although hard to believe, the United States has never looked as much like Latin America as it does now: record unemployment, social unrest, polarization, protests with doses of violence unrecognizable for this country, squatters with tents in squares, with an unpopular president and a divided opposition. In an indication that Washington has yet to change its ways of doing business in Latin America, La Nacion reported on 11 November that the Obama administration has defended the U.S. vote against Argentina in the Inter-American Development Bank, with President Obama telling reporters on 9 November "We cannot have flexibility if a country does not follow specific guidelines. The U.S. decision to veto credits for the country surprised the Argentine government and President Cristina Kirchner, who had said that she fe lt proud after the praises "dispensed" by Obama at the G-20 Summit. In the same issue La Nacion reported that the former US ambassador to the Organization of American States Roger Noriega claimed again an alleged existence of a link between Venezuela and Argentina to increase Iran's regional presence.
Despite such setbacks and allegations, El Cronista reported that after nominating him to the Embassy in Washington, President Kirchner held a 90 minute private meeting with Jorge Arguello to analyze the U.S.-Argentinean bilateral agenda, with Kirchner confirming that during her second term she wants to revamp Argentina's relationship with the Obama administration, as one of her major foreign policy initiatives.
And Argentina continues to work to clean up the lingering debris from its 2002 default. On 9 November the Argentinean government confirmed that it would pay the World Bank's International Center for Settlement of Investment Disputes judgment against it for $500 million.
Brazil's central bank cut its economic growth forecast to 3.5 percent for 2012 and Chile's central bank is estimating a 4.5 percent growth in the nation's economy in 2012. Argentina's GDP in 2012 will expand 4.3 percent, according to Morgan Stanley.
So, despite the uneven overall picture, investors should consider Argentina, as it has honorably attempted to pay its international debts after protesting what it found to be iniquitous terms and is seeking to deepen its relationship with Washington. Last but not least, a lesson that should not be lost on investors, as the recent political brinkmanship in Washington pushed the U.S. to within days of a default and the European Union attempts to firewall the growing economic chaos from what many believe will be an imminent default by Greece as Italy, Spain and Portugal stare into the fiscal abyss, Argentina nine years ago went the default route, absorbed bitter lessons and implemented reforms, which are now bearing fruit.
Not too bad a track record for a country that nine years ago was treated as an economic outcast. Investors could consider riskier places to park their money - like the U.S. and EU.
By. Dr. John C.K. Daly of Oilprice.com
