Just the other day, a court in the United States ruled in favor of a group of bondholders and against the country of Argentina regarding payment on some outstanding bonds. At that point, the attorney for Argentina told the court that the country was certainly going to ignore the court's ruling. It was going to continue to refuse to pay the bondholders.
This event is a good indication of just where things are heading in Buenos Aires. Argentina restructured its debt less than a decade ago, and once again, the country is going down into the depths of economic ruin. Inflation is rampant. Capital is fleeing the country, much of it in illegal ways. The government is stepping in to "control" the economy. Once again, the promise of Argentina has morphed into the nightmare of Argentina. And once again, the Argentine president, this time Mrs. Kirchner, is making things worse.
Before looking at the effect of this mess, a little history is worth repeating. Argentina has been a rich country. In the 1940s, Argentina had one of the ten most successful economies in the world. Argentina was alone among South American countries in that it was a developed country rather than a developing one. At that time, however, Argentina began decades of misrule by governments that sought at different times to make Argentina into a major industrial power, a centrally planned economy and social welfare state. The net effect of this misrule has been the repeated destruction of much of the Argentine economy. It is Brazil, and not Argentina, which today is the economic leader of South America. Even so, Argentina is still blessed with a major resource base that includes fertile farms, great land for ranching, major mineral deposits and a highly educated population. The building blocks for economic success are there but somehow, they never seem to come together.
So what is the impact of the economic catastrophe in Argentina? In the short run, we are likely to see major moves by the Kirchner regime. These could include another attempt to invade the Falkland Islands in order to distract the Argentine population from the economic misery in which they have fallen. They could also include the expropriation of properties owned by multi-national corporations which make easy targets for government action and easy scapegoats for the economic problems. After all, it is not hard to imagine the Argentine government blaming the foreign corporations for the economic woes of the country.
In the short run, it makes sense to avoid investment in any company with large fixed assets in Argentina. For example, Silver Standard Resources has more than half of its silver mining properties in Argentina. There are also enormous gold and copper mines which are similarly threatened. The mine at Bajo de la Alumbrera and its sister property at Agua Rica have reserves valued at many tens of billions of dollars; these properties are owned by a partnership of Xstrata, Yamana Gold, and Goldcorp. The property is actually owned by the government and a university, but they just get 20% of the profits; it would be easy to go for the entire 100%. There are many other companies that have similar investments.
Argentina is a great example of what happens to a country when no one wants to lend it money any more. The world knows that Argentina does not honor its bond contracts. What happened in court the other day gives ample proof of that. The world also can see that Argentina does not want to live within its means. If the Kirchner government actually takes the next step down the road to ruin by either expropriating properties or moving against the Falklands, Argentina will likely be down for the count. Sadly, there does not seem to be an Argentine leader who is both calling for a responsible course and who has a reasonable prospect of electoral success.
This event is a good indication of just where things are heading in Buenos Aires. Argentina restructured its debt less than a decade ago, and once again, the country is going down into the depths of economic ruin. Inflation is rampant. Capital is fleeing the country, much of it in illegal ways. The government is stepping in to "control" the economy. Once again, the promise of Argentina has morphed into the nightmare of Argentina. And once again, the Argentine president, this time Mrs. Kirchner, is making things worse.
Before looking at the effect of this mess, a little history is worth repeating. Argentina has been a rich country. In the 1940s, Argentina had one of the ten most successful economies in the world. Argentina was alone among South American countries in that it was a developed country rather than a developing one. At that time, however, Argentina began decades of misrule by governments that sought at different times to make Argentina into a major industrial power, a centrally planned economy and social welfare state. The net effect of this misrule has been the repeated destruction of much of the Argentine economy. It is Brazil, and not Argentina, which today is the economic leader of South America. Even so, Argentina is still blessed with a major resource base that includes fertile farms, great land for ranching, major mineral deposits and a highly educated population. The building blocks for economic success are there but somehow, they never seem to come together.
So what is the impact of the economic catastrophe in Argentina? In the short run, we are likely to see major moves by the Kirchner regime. These could include another attempt to invade the Falkland Islands in order to distract the Argentine population from the economic misery in which they have fallen. They could also include the expropriation of properties owned by multi-national corporations which make easy targets for government action and easy scapegoats for the economic problems. After all, it is not hard to imagine the Argentine government blaming the foreign corporations for the economic woes of the country.
In the short run, it makes sense to avoid investment in any company with large fixed assets in Argentina. For example, Silver Standard Resources has more than half of its silver mining properties in Argentina. There are also enormous gold and copper mines which are similarly threatened. The mine at Bajo de la Alumbrera and its sister property at Agua Rica have reserves valued at many tens of billions of dollars; these properties are owned by a partnership of Xstrata, Yamana Gold, and Goldcorp. The property is actually owned by the government and a university, but they just get 20% of the profits; it would be easy to go for the entire 100%. There are many other companies that have similar investments.
Argentina is a great example of what happens to a country when no one wants to lend it money any more. The world knows that Argentina does not honor its bond contracts. What happened in court the other day gives ample proof of that. The world also can see that Argentina does not want to live within its means. If the Kirchner government actually takes the next step down the road to ruin by either expropriating properties or moving against the Falklands, Argentina will likely be down for the count. Sadly, there does not seem to be an Argentine leader who is both calling for a responsible course and who has a reasonable prospect of electoral success.
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