La madre patria contra la Argentina

 War in the River Plate! Spain attacks Argentina!

OK, not really. But Spain and Argentina are really going into it over threats that the latter might nationalize Repsol’s oil holdings. In fact, things are so bad that the Spanish foreign minister needed to specify that his country’s position “is not bellicose.” But the minister also said, “Whatever attack on Repsol that violates the prinicipal of legal security will be taken as an attack on Spain.” 

Minister José García-Margallo then added, “[Spain] will take the measures that it considers appropriate and ask for the support it considers necessary from its partners and allies.” The deputy prime minister, Soraya Sáenz, upped the ante. “Spain will defend its interests with all means available.” Now the prime minister himself has threatened a boycott of Argentine soya and beef. The European Union has announced its support for the Spanish government.

The threats may have worked. President Fernández of Argentina had been expected to announce the nationalization on Thursday, but instead limited herself to an anodyne statement that she was “ready to pay all the prices that must be paid” to keep the economy growing. Se then added some words about the triumph of Argentine-made chocolate. YPF shares soared. Repsol shares, not so much.

So what is going on? Putatively, President Fernández wants YPF to invest more. YPF is reluctant, because of Argentine price controls and export restraints. In 2011, YPF’s net income was $1.23 billion, down from $1.46 billion in 2010. So the fight is over $1.2 billion per year. The move has populist appeal.

Can Argentina get away with expropriation? I suspect that most of the talk about trade boycotts is bluster. Perhaps Spanish law allows for unilateral boycotts, but it would create a mess. Spain and Argentina signed a bilateral investment treaty in 1991. It calls for arbitration; sanctions without following the process laid out by the treaty would be illegal unless Argentina categorically states that will not pay compensation ever. Moreover, Spanish consumers do buy 31% of Argentina’s primary product exports to the European Union, but without an E.U. boycott the Spanish government cannot do anything without kissing the single market goodbye. If sanctions are going to be imposed, it won’t be quickly.

Spain’s problem is that ICSID won’t be that directly effective, since Buenos Aires wants the company to increase production aimed at the domestic market. Unless YPF exports its production, enforcement efforts will be even slower than the already slow arbitration process. (The Argentina-Spain BIT slows things even more, since it requires some attempt at local remedies before going to arbitration.) Thus, I suspect, the blizzard of diplomatic threats.

On the other hand, there are some threats that Madrid can credibly make. It can push Argentina to pay its debts to other governments. It can add its voice to the U.S. against Argentina in multilateral lending organizations. It can threaten to support the U.K. in the Falklands. And it can try to eject Argentina from the G20. These are the threats that probably made President Fernández think twice.

Economically, expropriation does not make a whole lot of sense. Argentine needs $250 billion or more to develop the shale fields: tying yourself up in legal knots and wrecking your reputation for $1.2 billion a year is not worth it. Moreover, YPF is currently worth only $8.6 billion. It seems like a big risk to take for the $4.3 billion it would take to get control of the enterprise. In fact, Argentina could get control for even less by sticking to its plan to expropriate the 25.46% of the company owned by the Eskenazi family, which is Argentine. Since the Eskenazis borrowed heavily to finance their stake (at the request of the Argentine government), an expropriation for them would be a bailout ... and cost little of nothing. Of course, Argentina would also assume the Eskenazi’s debts, but half of those are owed to ... Repsol. (Default!) Argentina would still need to get the additional 24.55% needed to gain control of the enterprise, but that would cost only $2.1 billion. The central bank has $47.3 billion in reserves, and there are very few institutional barriers keeping the government away from that money.

It is not as simple as that, of course. The government would need to do some leaning on the Eskenazi family, in order to get them to refrain from exercising their repurchase agreement with Repsol. (Basically, if Repsol looses control of YPF, it has to buy the Eskenazi’s stake at $38 per share ... implying a market cap for the company of $14.9 billion.) The current share price is depressed.

What will happen? Argentina is going to nationalize: it makes political sense. The nationalization will be with enought compensation to keep Spain from going to the mattresses with sanctions. (Or going to war! Not. And not.) It might even be enough to keep Repsol out of court. Considering how Argentine provinces have been yanking concessions, Repsol will likely prefer to settle.

Caveat? President Obama met with President Fernández today. We do not know what was said, although they said that nothing was said. That may have settled things, although I would still bet on expropriation with negotiated compensation. (Yes, I just bought some YPF stock.)

Comments

[Bernard Guerrero]

Whoops! http://www.nytimes.com/2012/04/17/business/global/argentine-president-to-nationalize-oil-company.html

Any word on what the payment is going to look like? I would not have predicted a grab of 100% of the company.

[Noel Maurer]

“Whoops”? I thought I called it. “Argentina is going to nationalize: it makes political sense.”

The plan as announced is pretty much the same as the bill she introduced last week: the government will take 51% of the company.

It's going to be negotiated, though --- there were rumors that there would be no compensation. Instead, Article 12 of the decree reads as follows: “The prices of the shares subject to expropriation will be determined according to the procedures laid out in Article 10 and the clauses of Law 21499. The valuation will be carried out by the National Appraisal Tribunal.”

Here is the key part of Law 21499: “In case of appraisals for expropriation, it will be appropriate to determine the property objective value ... objective value can square with the market value when it may be determined or with the depreciated replacement cost (CRD) instead.”

The implication is the Argentina will probably offer the market value of the shares. There is a rub: the buyback clauses in the agreement with the Eskenazis could provide a judge with cover to state that the shares have no market value to Repsol. I've bet against that, however.

[Bernard Guerrero]

The "whoops" was for the purchase, which looked slightly premature this morning. Granted, it has bounced some: https://www.google.com/finance?client=ob&q=NYSE:YPF

I misread the article, though, to the effect that the the government was passing a 49% stake (rather than 49% of its new stake) to the provincial governments.

[Noel Maurer]

Point taken: if I could have timed it, I would have bought on the post-decree dip. That said, I still think the ultimate settlement will be favorable ... given the incredibly depressed value of the shares last week. It probably won't be favorable by other standards.

[Bernard Guerrero]

Broader question: You mentioned in an earlier post that Argentina had justice on its side with regards to the various ICSID cases. How so?

[Bernard Guerrero]

More pointed question: What do you think "market value" is for this purpose? :^)

[Alex]

Well, if the Spaniards are that angry, perhaps they can lend us one of those Juan Carlos-class LHDs (nice, aren't they?) to look after the Falklands, and a squadron of AV-8Bs to boot...

[Noel Maurer]

Hahahahhah hah ha! I'm glad to see somebody clicked the links labeled "not" and "not."

Great minds think alike.

In the next post above on the topic, I've got links to Argentines mocking Britain's lack of a carrier. Not that it matters, really.