Vanishing Dollars
by Pater
Tenebrarum
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.
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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 presidents 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 to 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/Sovereign
|
Entity
Name
|
Mid Spread
|
CPD (%)
|
|
Argentina
|
2783.64
|
82.53
|
|
Cyprus
|
1222.10
|
65.56
|
|
Venezuela
|
1075.48
|
53.45
|
|
Greece
|
1276.36
|
51.61
|
|
Pakistan
|
899.67
|
47.69
|
|
Egypt
|
870.39
|
46.01
|
|
Ukraine
|
840.98
|
45.36
|
|
Illinois/State
of
|
176.50
|
32.16
|
|
Lebanon
|
513.51
|
30.82
|
|
Portugal
|
406.65
|
30.62
|
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,”
“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.
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