Last Tango In Argentina?

Includes: ARGT
by: Acting Man

By Pater Tenebrarum

Vanishing Dollars

Last time we wrote about Argentina, we discussed the fact that the government had begun to try to entice 'undeclared' dollars that citizens had stashed in foreign bank accounts as well as under their mattresses back into the country and into the coffers of its inflation-prone central bank. Of course only financially suicidal morons could possibly fall for this offer, which we'll repeat here as reminder:

Argentines will need to deposit these undeclared dollars at the Central Bank, which will issue CDs for the entire amounts, Central Bank President Mercedes Marco del Pont said.The bonds will pay 4 percent interest through 2017.

You will notice that it doesn't say 'at the end of the period, citizens will get their dollars back'. That's probably because they won't. However, if they get back pesos, then they could just as well buy Argentine government bonds, which nowadays pay interest in the mid double digits. That by the way is not indicative of their good quality. Rather it is a hint that the government might default again if it isn't careful.

Argentina's 25 year bond yield has risen to almost 16% recently

(click to enlarge)

Of course there has been a sell-off in emerging market debt more generally, and Argentina has been swept up in that wave of selling as well. However, while other EM bonds have slightly recovered, those of Argentina continue to be under pressure.

It turns out that the government's dollar reserves are beginning to dwindle in accelerated fashion and are close to running worryingly low. This is in a way surprising, as Argentina is exporting a great many raw materials and is getting paid in dollars for them. It has however further come to light that what actually happened is that the government's coercive measures that were meant to keep more dollars in the country had the exact opposite effect. As is usually the case, government intervention brings about unintended consequences, which often take the shape of the precise opposite of what was intended. In addition, Argentina has the dubious distinction of having seen its yield spreads over treasuries increase the most after those of hyper-inflationary Venezuela. According to Bloomberg:

Argentina’s supply of dollars it needs to pay bondholders is dwindling at the fastest pace since the depths of the nation’s economic crisis 11 years ago.

Foreign reserves have plunged 12.2 percent this year to $38 billion, the biggest decrease since 2002. The holdings are now at a six-year low and will equal just 25 percent of Argentina’s $142 billion of foreign debt by the end of 2013, according to Credit Suisse Group AG. The financial strain is adding to the nation’s borrowing costs as the extra interest investors demand to hold Argentina bonds over Treasuries rose 2.3 percentage points this year, the most in emerging markets after Venezuela, to 12.21 percentage points, according to JPMorgan Chase & Co.

Argentina posted the worst deficit in its current account, the broadest measure of trade in goods and services, since its $95 billion default in 2001 in the first quarter as energy imports jumped and Argentines spent more abroad to skirt President Cristina Fernandez de Kirchner’s currency restrictions. After using $5.7 billion of reserves to pay debt last year, the central bank will need to spend $4.7 billion more through year-end to meet obligations, Credit Suisse said.

(emphasis added)

That passage about Argentinian citizens spending more dollars abroad to skirt the president's exchange controls is telling. Other governments should take heed: if you go too far with financial repression, your citizens could end up defying you to such an extent that you will regret the decision.

Surprise – Nationalization Fails As Well

We have also written about the confiscation of YPF-Repsol by the Argentine government and predicted quite confidently at the time that it would utterly fail to work as advertised. Utterly failed it has. Among the pretexts forwarded by the government at the time was that under government control, YPF would invest and produce more (a completely absurd idea) and thereby help the country save foreign exchange on fuel imports. It was not mentioned at the time that the reason for the admittedly subdued pace of investment by YPF were the many export restrictions and price controls the government had enacted. This is simply what happens when prices are kept artificially low by means of price controls: demand skyrockets, and supply disappears. Why would a private company invest good money in projects that promise no profits, while exposing it to the risk of losses?

The government apparently thought that one interventionist failure could be repaired by adding to the mess by intervening even more. The reasoning seems to have been “we may not be able to force a private company to produce at a loss, but we will be able to force a company the State owns to do so.”

They forgot that whenever the government takes over oil companies, their potential to produce oil practically falls off the cliff, as the lack of a profit motive combined with the inevitable political cronyism in assigning important jobs conspire against it from day one. Again, Venezuela is a recent prime example. As an aside, Saudi Arabia is not a good counter-example. We don't know how much crude oil the country would be capable of producing if ARAMCO were not state-run. Moreover, Saudi Arabia is a monarchy, not a democracy – which means that 'state-owned' companies are actually regarded as the property of the king and his family. Lastly, the Saudis are practically drowning in oil compared with other nations (even if the oil that was the easiest to produce is gone by now) and enjoy such a large spread between production cost and selling price that they would have to really make an effort to botch things as thoroughly as some others have.

In the following excerpt there is also more color on the failure to stop people from getting as many dollars out of the country as possible:

The nation’s dollar reserves are falling even after a $34 million boost in agricultural export revenue this year and stricter controls on dollar purchases. In the first six months of 2012, reserves had fallen $24 million, 0.5 percent of the decline this year.

The expropriation of oil-producer YPF SA last year has failed to limit crude imports. South America’s second-largest economy imported $4.6 billion of fuel and lubricants the year through the end of May, a 30 percent increase from the same period in 2012, according to data from the National Statistics Institute. The energy deficit quintupled from $445 million in the first five months of last year to $2.13 billion at the end of May.”

Since Fernandez banned buying dollars for everything but travel since July, the nation has posted a deficit from tourism revenue of $223 million this year through April, a 10-fold increase from a year ago, as more Argentines went abroad to buy dollars at a cheaper exchange rate and the nation attracted fewer visitors.

On the black market, a dollar costs 8.05 pesos compared with the so-called “tourist dollar,” which is the official rate plus a 20 percent tax on credit cards, or about 6.44 per dollar. The peso fell 0.1 percent to 5.3682 per dollar in official market trading at 3:34 p.m. In Buenos Aires.

Argentines bought about $2.8 billion from the central bank for travel in the first quarter, a 67 percent increase from the same period a year earlier, according to the bank.

(emphasis added)

Argentinians are used to their governments producing economic catastrophes of varying intensity. They certainly don't trust the current one to prove to be more capable than its predecessors. That is a shame, as Argentina is so rich in natural resources and such a beautiful country, it could and should thrive economically. Surprisingly enough, its governments continually fail to look across the border to see how economically much more successful Chile does things. Maybe this is because Chile is regarded as a hereditary enemy. The two countries frequently have border disputes. They fought wars over Patagonia, and to this day, along the entire 3,250 mile long border between them, there are only two paved roads that are crossing it – which kind of speaks for itself.

Below is a list of the sovereign debt issuers with the highest default probabilities as measured by their 5-year CDS spreads. Argentina is rather prominently leading the pack these days, being assessed as a considerably higher default risk than even Cyprus, and everybody knows Cyprus is as bankrupt as a country can possibly be (it is very likely bankrupt even with the recent bailout, unless the amount is raised…). A cumulative default probability of 82.53% certainly gives one pause.

Highest Default Probabilities/Sovereigns

Entity Name

Mid Spread

CPD (%)






















Illinois/State of









Argentina leads the pack in default probabilities according to the CDS market. Data via CMA's sovereign risk monitor.

Of course, Argentina's reserves are actually not so low as to not bring the country safely through 2014. Things could become dicey by 2015 however, as there are large redemption payments lying in wait. This is what has the market worried. As one analyst noted wisely:

"The reserves are fine, debt service is very manageable,” Molano said by telephone from Greenwich, Connecticut. “They’re losing them at this pace because of political reasons. You could triple the reserves but if the people aren’t confident then they’re going to continue to run out the door."

(emphasis added)

That's the thing – there can be no 'confidence' when the government institutes a Zwangswirtschaft. Solving this problem would actually be easy, but for some reason the government is stubbornly sticking with its failed economic dogma.

Chart by:, table by CMA