The Power and the Money

And the Economist crazily says Cristina Fernández is just like Putin!

The Economist this week has an interesting essay on democracy. It ain’t bad. I recommend reading it. But it also has this insane part:

“This postmodern tsar has destroyed the substance of democracy in Russia, muzzling the press and imprisoning his opponents, while preserving the show — everyone can vote, so long as Mr Putin wins. Autocratic leaders in Venezuela, Ukraine, Argentina and elsewhere have followed suit, perpetuating a perverted simulacrum of democracy rather than doing away with it altogether, and thus discrediting it further.”

What the f--k? We have already presented the evidence that Venezuela is still democratic, albeit barely. That said, the comparison with Russia isn’t unfair.

But Argentina? Seriously? For real? Is there doubt that Argentine elections are free and fair? No. Is there doubt that the Peronistas would leave office if they lost an election? No. And if you don’t believe me, take the word of the same people who lumped Venezuela with Ethiopia. They give Argentina a polity score of 8. That is the same as Belgium and the Czech Republic, and twice Russia.

It is a headscratcher of a sentence. What was the author thinking? Or is it just cool for Economist writers to parrot Newt Gingrich?

Last hitch for Repsol and Argentina

The deal seems to be along expected lines: $5 billion in ten-year bonds with a coupon around 8.5%. The final hitch? Argentina wants the bonds to pay no interest for two years. Fine, that is understandable. But it also wants to prevent Repsol from selling them for the same two-year period.

That I do not understand. Is it to protect the price of current bond issues? That seems like thin gruel. Is there some other advantage to locking in Repsol? Help!

Apache quits Argentina, but it is probably not President Fernández’s fault

It appears that Apache just sold its Argentine assets to YPF for $800 million.

The thing to keep in mind is that this isn’t Apache fleeing an unpredictable Argentine government. Apache has been selling assets all over the world. The company is focusing back home in North America and only keeping overseas assets that are currently spinning off large cash flows. The Argentine plays were not in that category: they will require large-scale investments to develop. Moreover, unconventional fields require large continuing capital investments and often begin to decline rapidly. That is the sort of production profile Apache wants to avoid. (Although it should be mentioned that the company CEO mentions Argentine politics at the link.)

Moreover, other companies are entering Argentina. Despite the political uncertainty, the promise of tight oil is too good to avoid.

We may, however, get some more details of just how good Chevron thinks that promise is. A provincial court ordered the Neuquen government to release the details of the Chevron-YPF contract. The provincial government has appealed the decision. I doubt that we will find anything, and I doubt that there is anything interesting to find.

Observatorio argentino 24: The blue market for the peso is not long for this world

I have a huge backlog of Argentina posts. Life and work kept me from posting most of them. I will start to try to rectify that.

I earlier mentioned my first contact with Argentina’s exchange controls, in May 2012, when I saw a Brazilian couple stopped by police and arrested on Calle Florida. 

In May 2012, the breach between the blue market rate and the official rate was not serious. It was still reasonable for a tourist to avoid the hassle. The business pages had stories about companies that were having problems with a lack of dollars, but nothing particularly serious and nothing that would affect day-to-day life.

By June 2013, the gap had become more serious. No tourist in their right mind would buy pesos at the official rate. For the rest of the economy, the economic effects were relatively small but beginning to be felt. Imagine, for example, that you were an Argentine manufacturer. Some of your inputs are imported. If you wanted to import them at the official exchange rate, then you would have to apply to the central bank. The red tape was increasingly onerous. (The negative effect of the controls on trade is part of Argentina’s ever-worsening beef with Uruguay. They have also brought down a host of WTO suits.)

It was possible for firms to work around the controls, but that was costly. There were two varieties of workaround. The first was to buy or contract with an export business which would earn dollars outside Argentina. Those dollars could then be used to purchase imported inputs. Pirelli, for example, makes tires in Argentina. It partnered with a honey exporting business in order to meet its import bills. As you can imagine, the honey exporters did not provide this service for free.

The second workaround involved the blue-chip swap market, in which a company would buy foreign securities with pesos and then sell those securities for dollars. That market, however, was costly to access ... after all, you had to convince somebody who owned foreign securities to sell them to you for pesos. They would not do so at the official rate.

Still, as late as last summer, the controls were more of an annoyance than a disaster. Companies that needed to import could do so, even if they needed to pay extra for the dollars and their shipments took forever to get through customs. Moreover, many imported inputs could be swapped out for local substitutes. Inasmuch as the Argentine authorities wanted to promote self-sufficiency, the implicit trade restrictions were a feature, not a bug.

There were some weird effects, of course. For example, demand for high-end cars soared. The cars were imported at the official rate but sold at the blue market rate, providing an irresistible bargain for anyone who earned in dollars. (Luxury cars were also considered an inflation hedge, but that was just people being silly.) In addition, luxury goods began to vanish, since there was no easy way to (say) replace an Ermenigildo Zegna suit with an Argentine substitute. But that was also minor: I still have two $200 local suits that I bought in Buenos Aires back in 2005. They started to generate lintballs fairly quickly, but they have not frayed. An annoyance, not a disaster ... and for a left-wing government you could even call the disappearance of imported luxury items an additional bonus.

The problem is that the macroeconomic imbalances have continued to worsen. The costs of getting dollars (or clearing customs) have gone higher and higher.

And so, since it turns out that Argentine-sold ketchup is actually made in Chile ... McDonalds has just run out of the red stuff.

OK, that is minor, and an Argentine substitute will be found pretty easily. But these sorts of problems are starting to pile up. At the limit, you make imports impossible and wind up with Venezuelan-style shortages, only without a giant oil export machine to cushion things.

Argentina is not Venezuela. The policy is fast-approaching its breaking point. The government is terrified of an inflationary spike, but there are worse things. (Like fuel shortages.) The recent liberalization is going to continue. Soon enough Argentina will be a normal high-inflation country, rather than an odd throwback to the 1970s. The liberalization will not be easy (the government needs the dollars to pay debts!) but the alternative is politically worse.

Either that or they will have to figure out how to make do without imports.

Who won with Repsol and Argentina? Everyone!

We now have  a few more details about the deal. Reports are that the coupon on the bonds will be between 8.25% and 8.75%. It also looks to have been an intergovernmental negotiation brokered by the CEO of Pemex, Emilio Lozoya. President Fernández called President Peña to congratulate him on Lozoya’s role.

In short, it looks like something out of the 1970s. For more on what expropriation disputes looked like back in the day, go read this book!

So who won this old-fashioned intergovernmental natural-resource slugfest? Raul Gallegos at Bloomberg has a great analysis:

So, Repsol clearly lost this fight so far. But who has won?

1. Fernández: Argentina’s president can sell a deal to a domestic audience as a political victory. Forcing Repsol to accept less than half what it demanded and reportedly offering to pay the company in 10-year bonds makes the populist leader appear to be a strong negotiator. Coming close to ending the conflict not only helps counter critics who argued that the government stole YPF assets, but also suggests Fernández is serious about turning around the country's troubled energy business.
2. Carlos Slim: The Mexican billionaire, the world’s second richest man according to the Bloomberg Billionaires Index, controlled an 8.4 percent stake in YPF as of a mid-June 2012 filing. The price for YPF’s U.S.-listed shares has risen 192 percent since then and is now worth more than $989 million, according to Bloomberg data. YPF shares rose 13.3 percent from Monday through Wednesday, amid talk of a possible settlement between Repsol and Argentina’s government. Slim’s reported investment in YPF’s October bond issue suggests savvy investors buy when assets look scary and cheap.
3. Chevron: Chevron Corp.’s decision to strike a controversial deal with YPF last year gained the company a foothold in Argentina’s famous Vaca Muerta shale formation -- the world’s second-largest shale gas and fourth-largest shale oil accumulation. This may have earned Chevron a Repsol lawsuit, but the deal now looks well timed. Supporting a troubled Argentina also gained the company goodwill among leftist politicians who could remain in power after Fernández leaves office.
4. Pemex: Mexico’s decision to serve as a mediator between Argentina and Repsol is no disinterested gesture. Its troubled, state-owned oil company Petroleos Mexicanos, or Pemex, would also consider investing in the Vaca Muerta shale formation. Pemex’s 9.4 percent ownership of Repsol gave the Mexican company an incentive to help end the dispute that has hurt the Spanish company's fortunes. Bloomberg data show Repsol’s shares up 3 percent since talk of the potential YPF agreement became public.
5. YPF: YPF is the biggest winner from Argentina and Repsol’s decision to bury the hatchet. YPF plans to invest $35 billion over five years to turn business around in the energy-import-dependent country. To do that, YPF needs strong partners such as Chevron and the ability to tap capital markets relatively cheaply. Settling a major nationalization dispute gives the troubled company easier access to both.

I would, however, quibble with two of Gallego’s conclusions. First, it is not clear that Slim was really perspicacious in picking up YPF stock; rather, he got it because the expropriation prompted the Eskenazi family to default on its debt to him; debt which was collateralized with YPF shares.

Second, Repsol did pretty well. My financial analysis is summarized here. But there are other, deeper reasons to believe that Repsol did pretty well ...

Some more hints on the Repsol settlement

It looks as though the Argentine government will compensate Repsol via a marketable dollar-denominated bond. We know not yet the details, although Bloomberg suggests a ten-year term.

We do, however, know a little bit about Argentina’s two latest dollar bond issues. (I downloaded more detailed data from the Mecon website.) In 2010, the government issued $950 million in a seven-year bond issue. The coupon was 8.75%, paid twice a year. The bond currently trades at almost 93¢. (Although Puente states that it is currently trading at 97.8¢.) In 2011, the government issued a further $3.5 billion in 7-year dollar bonds, this time with a 9% coupon. (See below.)

At 8.75% over ten years, Repsol would eventually receive $9.38 billion on a $5 billion bond issue.  At a discount rate of 8.4% (the rate at which Repsol would be indifferent between waiting on its modal expected ICSID compensation and taking $5 billion now) the bond would have a present value of $5.11 billion.

Or Repsol could sell it for somewhere between $4.65 billion and $4.89 billion, although it should be kept in mind that the market is not particularly liquid, especially if the bonds are governed under Argentine rather than New York law. Repsol would have to take some time to unwind its position.

Either way, it looks like the fact that Argentina will pay in bonds is not a dealbreaker. Moreover, it is possible that the face value of the bonds will ultimately clock in a little bit more than $5 billion or that the coupon will be higher than 8.75%. As long as Repsol can sell its bondholdings within a reasonable amount of time, it should be protected.

YPF and Argentina inch towards settlement

One problem with blogging is that there are things that I do not post about, because it conflicts with teaching. Sometimes case method teaching involves laying out all the clues to a mystery and then letting the students solve it in class. That limits, obviously, what I can give away on the interwebs. The YPF nationalization has been loaded with those sorts of limits. 

The YPF saga, however, may be drawing to a close. We have growing indications that Repsol and the Argentine government may be coming to a settlement. The number being tossed around is $5 billion, which is a bit above the $4.4 billion that it would have cost to purchase 51% of YPF right before the expropriation. Now, $4.4 billion may not be fair. YPF’s price in New York peaked at $39.88 in January 2012 before sliding to $21.95 in the lead-up to the expropriation. $39.88 would imply that 51% of the company was worth $8.0 billion. In fact, the price was $28.41 as late as March 30, implying a value of $5.7 billion for a 51% stake. (By March it was clear to everyone that Repsol and President Fernández were at loggerheads, but it was not clear that she was going to expropriate.)

Repsol’s share of YPF, however, did not drop from 57.4% to 6.4% after the nationalization. Immediately after the takeover, the Eskenazi family defaulted on loans from Repsol that they had used to finance part of their share in YPF, which raised Repsol’s share back to 12.4%. Repsol, therefore, only lost 45% of YPF. 45% of YPF was worth $7.06 billion in January 2012 and ... wait for it ... $5.03 billion on March 30.

There were rumors that Sinopec (or CNOOC) was going to buy 57% of YPF for $15 billion ($13.4 billion for 51%) but those are unsubstantiated. Other sources report that the Chinese companies thought $10 billion was too high. Reports of a $12 billion sale to CNOOC later proved unfounded. (Click the first link in this paragraph.)

I doubt that the Chinese wanted to pay much more than the ~$9 billion that Repsol’s 57% stake was worth around the beginning of 2012, assuming that they really wanted to buy at all.

In short, if current rumors prove correct, Repsol will have taken a roughly $2 billion hit below a reasonable valuation of its stake. 

Will Repsol accept? Given that arbitration will take a very long time (with an uncertain outcome), taking $5 billion now seems reasonable. They could gamble on a favorable judgment, of course, but why? Rough calculation: say Repsol receives $7.06 billion in 2020, plus interest charges of $2.74 billion. (That uses the 4.188% rate that Occidental received in its dispute with Ecuador, compounded annually. See page 317 of the ICSID decision.) That means Repsol can choose between a certain $5.0 billion now and an uncertain $9.8 billion in seven years. As long as Repsol’s discount rate is above 8.4%, then it is better to take the cash now.

(FWIW, Bloomberg reports that Repsol has a yield of 5.2% and an inverse p/e of 6.7%. Those numbers imply a hurdle rate for new projects way above 8.4%. And waiting for an ICSID judgment against Argentina is at least as risky as other investment projects. This applies even though it is quite possible that ICSID would eventually award Repsol more than $9.8 billion; waiting is still risky.)

The Repsol settlement, if it happens, will not be an exception. Argentina has been recently settling its outstanding expropriation claims, even when the Argentine government has a good moral case. The reason for the sudden spate of settlements has been Argentina’s need for external credit combined with strong U.S. opposition to granting such credits unless the country settles with American claimants.

But why settle with a Spanish company? The American energy secretary announced that the United States supports Repsol, but that is not a reason to pay: the U.S. has already eased up on Argentina at the IADB. Even if the country feared ICSID (which in the long-run it should) there is no reason to pay now when you can pay in 2020 ... 8.4% is below Argentina’s borrowing rate!

But without a settlement, Repsol can throw wrenches into the Vaca Muerta development plans. Worse yet, there is the possibility that its legal actions could delay Argentina’s return to international capital markets. So that gives Argentina an incentive to settle. And if it can do so near the lower end of its plausible compensation (45% × $8.63 billion that YPF was worth the day before the expropriation = $3.88 billion) so much the better.

Not a terrible compromise, I do not think.

Observatorio argentino 23: Secret treaties, 21st-century Argentine style, are very boring

Over the past month, a giant flap in Argentina has emerged over alleged secret clauses in the YPF-Chevron agreement to develop the Vaca Muerta tight oil fields. The trigger was a New York Times article titled “An Odd Alliance in Patagonia.” The key paragraph:

Argentine oil officials said that the Chevron-YPF deal will shield the American company from financial loss connected to a change in the political winds. After the company invests $1.2 billion, 18 months later it can withdraw from operations without penalty and continue to receive net profits of 50 percent of the production from the initial wells in perpetuity.

After the Times story, other stories came out about “secret clauses” in the Chevron-YPF deal. They included:

1. Jurisdiction under foreign law;
2. Access to arbitration at the International Chamber of Commerce (ICC) in Paris;
3. A security deposit of $100 million for Chevron.

Unfortunately (but predictably) the agreement is not public. Here is the only mention on the YPF website. Below is what YPF’s latest 6-K filing has to say about it:

Investment Project Agreement

On July 16, 2013, the Company and subsidiaries of Chevron Corporation have signed an Agreement for the joint exploitation of unconventional hydrocarbons in the province of Neuquén. The Agreement contemplates, subject to certain conditions, an expenditure of up to 1,240 million dollars by Chevron for a first phase of work to develop 20 km² (4,942 acres) of the 395 km² (97,607 acres) corresponding to the area dedicated to the project, located in the aforementioned province and which includes the Loma La Lata Norte and Loma Campana areas. This initial pilot project contemplates the drilling of more than 100 wells.

Together with what has already been invested by YPF in the aforementioned area, this new input will result in a total investment of 1,500 million dollars in the pilot project, where 15 drilling rigs are already currently operating and more than 10 thousand barrels of oil equivalent per day are being extracted.

After the signing of the Agreement and once certain conditions precedent are satisfied, Chevron will make the initial expenditure of 300 million dollars (which will have the benefit of a guarantee by YPF for the following ninety days until the implementation of all associated documentation for the rest of the Chevron financing, including the contribution of 50% of the project rights by YPF).

In a second stage, after the finalization of the pilot project, both companies expect to continue with the development of the entire area, sharing the investments 50% each.

Likewise, the Agreement contemplates, in a non-binding manner, the subsequent definition of the terms and conditions for the joint exploration of unconventional hydrocarbons in the provinces of Neuquén and Mendoza.

Not too informative. The opposition has sued to make the Chevron agreement public. (In fact, the Argentine politician behind the suit, Senator-elect Pino Solanas, plans to take the issue to a higher authority.)

OK, so is this a bad deal for YPF?

Probably not. First, there is nothing weird about a clause allowing Chevron to give up its role as an operator while retaining an ownership interest. Imagine that you are the manager of company in which you own stock. You can quit your management job while continuing to hold the stock. It would, in fact, be odd if you couldn’t. The problem here is that the Times made it seem as though this clause somehow protects Chevron from political risk.

Second, the fact that the agreements are made under New York law with recourse to ICC arbitration does protect Chevron from political risk (at least as long as Argentina either exports the hydrocarbons or needs American-controlled credit) ... but the clause is also utterly standard in these sorts of things.

Third, YPF denied (as part of its SEC filing!) that any cash security deposits will be made. (More SEC info can be found here.) I tend to believe YPF. After all, $100 million is really not a whole lot of security to offer against a $1.24 billion investment.

I would believe that YPF may have included clauses to protect Chevron against legal action by Repsol in America or Spain, should such actions succeed. But even if true, that would be less-than-shocking.

In short, there is not a lot to see here. Nicaragua this is not.

Fuzzy math from Argentina, or the importance of interest

We all know that Argentina publishes dodgy economic statistics. This post is not about that.

Recently, Argentina agreed to pay dollar bonds with a face value $506 million to five companies that have successfully taken it before investment tribunal alleging expropriation. The reason Argentina wants to settle is simple. Argentina needs international credit, but unless the Obama administration relents in its determination to punish Argentina for expropriation, it will not get it. So Buenos Aires has arranged a settlement, paying five companies $506 million for claims worth $677 million. 

The thing is, when I went to the data to find out how much Argentina owed the five companies involved in the settlement, it turned out that the judgments came to only $460 million. (Except for Vivendi, the source is Table 11.1 in The Empire Trap. The Vivendi data come from page 8 at this link.)

Which means one of three things:

1. Argentina overpaid, and the $677 million number is wrong;
2. More companies are involved than Bloomberg reported;
3. The companies were collecting interest on their unpaid judgments ... at a maximum rate of 7.7%. (The actual rates are lower; the 7.7% assumes that interest started accruing in 2008, when in fact the claims started to accrue interest at dates ranging from 2005 to 2008.)

I vote for option (3).

In other words, Argentina managed to convince the companies to give up their interest claims, but paid the basic settlement. That is not a great outcome for them, but it is not terrible. And it gets Argentina back into the Obama administration’s good graces ... with the result that official credit again flows.

Still, I cannot help but think that the companies could have pushed for a harder bargain. It is true that Argentina did nothing that would have been illegal under domestic American law. But it is also true that Argentina did break its (stupid) treaty obligations. And it is true that the Obama administration had its companies’ backs.

So I am not sure why they did not hold out for interest. Thoughts?

Is American democracy doomed?

Juan Linz has gotten a lot of well-deserved attention in the blogosphere recently. Linz wrote that presidential regimes tend to break down because of irreconciliable conflicts between the executive and the legislature.

Many observers, not least Matt Yglesias, have interpreted Linz as stating that the problem is that presidential system allow for gridlock between the executive and the legislature, especially when the parties are ideologically coherent and commited. Kind of like, uh, the modern United States. So are we doomed now that our parties have become European-style organizations?

Well, maybe. The cross-country data is mildly supportive of the presidentialism = bad hypotesis, but is by no means a slam-dunk. Moreover, while presidential regimes are more likely to break down there is really rather little evidence that the reason was gridlock between the executive and the legislature.

The closest parallel to the current American situation is Chile in the early 1970s — but it is not very close. In the 1969 election, the People’s Union (Unidad Popular) got 60 out of 150 seats in the lower house. The Christian Democrats got 57 and the National Party received 33.  The next year, Salvador Allende (the People’s Union candidate) won a plurality of the presidential vote, throwing the election to Congress, where he won with Christian Democratic support. (The Nixon Administration tried to prevent his election but failed.) Allende started a program of widespread nationalizations using existing legal authority under a 1932 law that allowed for the temporary requisition of basic goods when in the public interest. (The law also allowed the executive to put companies into temporary receivership should they be closed by a strike.) In October 1972, the Supreme Court ordered the President to obey lower-court orders overturning some of the nationalizations; Allende refused.

In March 1973, the opposition won the Congressional elections. The Christian Democrats aligned with the National Party to form the Democratic Confederation, which took 55.6% of the popular vote and 87 out of 150 seats. (The People’s Union got the rest.) Congress first attempted to amend the constitution, which failed. It then tried to impeach Allende, but could not get the requisite ⅔ majority. In May, the Supreme Court again reprimanded the President. At this point, Congress went on record asking for a coup. The coup happened on September 11, and its leaders proceeded to disband Congress and jail or “disappear” many of the legislators who had called on the military.

In short, the Chilean crisis was caused by a President who overstepped his authority and disobeyed the Supreme Court and resolved by a military that believed itself above the law. Suffice it to say that this does not characterize America’s current situation.

What about Argentina? Well, Argentina has had a lot of coups since the first one in 1930. In 1930, President Hipólito Yrigoyen’s party had comfortable majorities in both houses. The 1943 coup was against a dictatorship. The 1955 coup overthrew the elected Juan Perón — but Perón’s party controlled Congress by overwhelming margins. As in 1930, gridlock was not the issue. In 1962, the miltary overthrew President Arturo Frondizi: in that case, the prompt was Frondizi’s loss of several governorships to the Peronists in the ’62 elections. Again, gridlock was not the issue. The 1966 coup kinda sorta maybe if you squint could be gridlock-related — but really had more to do with President Arturo Illia’s confrontation with American oil companies. And 1976? That one was against President Isabel Perón’s supposed inability to defeat Communist guerrillas. Her coalition controlled Congress; once again, gridlock was not the issue.

What about Brazil? Well, the Revolution of 1930 took down an oligarchical government with an extremely limited electorate. Not really comparable. The 1964 coup knocked out a left-wing government with American support. It is true that Congress did not support President João Goulart. It is also true, however, that for his first three years Goulart presided over a parliamentary system in which power resided with Prime Minister Tancredo Neves. In 1963, a referendum restored President Goulart’s executive power: the result was paralysis. In that sense, the ’64 democratic breakdown is consistent with the hypothesis that presidentialism causes gridlock causes democratic failure. The problem is that the parliamentary system tried beforehand was doing no better at resolving the country’s political conflicts.

Colombia? Well, the 1953 coup happened after President Laureano Gómez seized dictatorial power. Gómez, in turn, won the 1950 election because the opposition boycotted it. Again, gridlock not the problem.

Let’s turn then to Mexico. Uh … no, let’s not. The 1910 revolution got started against a dictatorship. Porfirio Díaz government was many things, but gridlocked was not one of them. (In fact, Congressional votes were all unanimous after 1893.)

I could go on around the other countries of the Western Hemisphere, but the pattern is similar. Divided government is not the cause of most democratic breakdowns in Latin America. Chile 1973 is the closest, but that is one event, with little resemblance to the government-by-crisis currently affecting the United States.

So breathe easy America! We will get through this. How, you ask? Well, if the GOP keeps this up, it will lose a lot of elections, even with our gerrymandered House of Representatives ... and there is a lot of ruin in the United States. The worst-case scenario on the debt ceiling is pretty bad, and I would certainly a 5-10% fall in GDP and the corresponding human suffering a failure of the United States. But in the unlikely event that the Republicans take us there, they will not be in a position to take us there again.

The United States no longer cries for Argentina

The Bush administration generally supported Argentina in its long battles against its creditors. After President Kirchner successfully played hardball with the IMF, President Bush took him aside in New York urged him to “keep negotiating firmly with private creditors.” President Bush jokingly introduced Kirchner at a U.N. meeting by saying, “Here comes the conqueror of the IMF!”At a later meeting with the Argentine leader in January 2004, Kirchner convinced the already-sympathetic U.S. president to support his position by reminding him that Enron’s creditors took an even bigger haircut (86%) than the one Kirchner was demanding (65%).

There were multiple ways the Bush administration could have supported the creditors — helping them coordinate, lending verbal support to the Global Committee of Argentina Bondholders (GCAB), supporting Congressional efforts to sanction Argentina — but it took none of them. In fact, the Bush administration (in contrast to earlier Reagan policy) actively supported Argentina against its creditors in American courts. (The link is to a 2006 paper from a conservative legal foundation, which was apoplectic about the policy.)

But now, the Obama administration is taking a much harder line! The United States has decided that it will not file an amicus curiae brief on behalf of Argentina as its latest dispute winds its way to the Supreme Court. As a result, the IMF has also decided to back away from its support for Argentina. This a reversal for the United States: you can read an April 2012 brief favoring the Argentine position here.

I have no idea how this will shake out at the Supreme Court, but the Obama administration appears to have lost patience with Argentina. My guess is that the exasperation actually stems from the Argentine refusal to pay its ICSID judgments rather than any particular sympathy for the creditors.

But regardless of the cause, it is a big change in U.S. policy, and it spells trouble for Buenos Aires.

Observatorio argentino 21: The Supreme Court keeps Argentina from importing a strange American idea

The United States has given a lot of good ideas to the world. We have also given a lot of bad ideas to the world. One of those good ideas is judicial review. One of those bad ideas is the Senate.

Argentina has both judicial review and a senate.

By a 6-1 vote, the Argentine Supreme Court just stopped President Fernández from adopting another one of our ideas: elected judges.

To be fair, she wanted indirect election: judges would still have been appointed but the body that selected them would be elected. Under Article 99 of the Argentine constitution, the President selects federal judges from a list presented by the “Council of the Magistracy.” According to the (not very good but) official English translation of the Argentine constitution, the Council is selected as follows:

The Council shall be periodically constituted so as to achieve the balance among the representation of the political bodies arising from popular election, of the judges of all instances, and of the lawyers with federal registration. It shall likewise be composed of such other scholars and scientists as indicated by law in number and form.

Meaning: Congress can write laws to choose the Magistracy Council however it likes, but it has to make sure that the resulting body represents all political parties, sitting judges, and the federal bar association.

Election for the Magistracy Council, held the Supreme Court, would not insure that all those groups would be represented. It would also, they held, violate the separation of powers and threaten judicial independence.

This has some resemblance to how New York State picks judges for the Court of Appeals. New York is not alone: you can find data on how U.S. states choose judges here; a summary can be found here. Of the 39 states with intermediate appellate courts, 21 do not hold elections. Of all 50 states, only 11 have no judicial elections; an additional seven have uncontested elections when judges are reappointed. The rest hold elections. Some even hold partisan elections.

It is pretty clear that the reason for the President’s desire to elect the Magistracy Council is that she is sick of court decisions going against her. The recent decisions against Chevron (which put the expansion of oil production in the Vaca Muerta at risk) doubtlessly play a part. She seems to be calculating that her political machine can win the resulting elections.

But are elected judges really a bad idea? Good political scientists have made the argument that judges make political decisions using unclear criteria anyway, and so we should elect them.

On balance, I think that the decision is a good one for Argentina. Argentina enjoys an independent judiciary. That is not only a recent accomplishment; it is something for which we can credit President Fernández’s husband, former president Néstor Kirchner. Elections would seem to weaken that accomplishment.

But the political scientists (arguing in the American context) make good arguments.

Should I change my mind?

Observatorio argentino 20: The blue market for dollars

I just got back from Argentina. Great country. I could get a huge filet mignon for $19 in a very nice part of town. With free champagne.

The reason I could take advantage of cheap prices in Argentina was that I bought pesos at the “blue market” rate, 7.8 per dollar at retail rather than the official rate of 5.35. (That steak, for example, would have been $28 instead of $19.) As much as a bargain as that was, however, it would have been ever better in May 2013, when the blue market rate touched 10.5. ($14 steaks!) Since then, however, the peso has strengthened enormously.

But why has the peso strengthened? Beyond Brics suggests that the reason is that the Argentine government has cracked down on the market. The crackdown is real: I should not write about how I accessed the market, but I will say that it was a great deal shadier than the last time I was there in May 2012. (And let me say that the crackdown is not starting from an easygoing level: back then I saw a Brazilian couple arrested by police with dogs because they mistakenly thought they were dollar dealers!)

But is the crackdown why the peso has strengthened on the blue market? When law enforcement cracks down on illegal drug markets, a rise in the price of illegal drugs is taken as a sign of success. After all, the point of cracking down on illegal drug markets is to make illegal drugs harder to get and thus more expensive.

So ... if the Argentine government were succeeding in combating the illegal dollar market, shouldn’t the price of illegal dollars be going up rather than down?

Argentines are still a little upset that Uruguay is a country

 A while back, Randy “Proud Canadian” McDonald expressed surprise at the terrible state of Uruguayan-Argentine relations. Well, now President Fernández has managed to add some fuel to the fire by saying this:

Transcript: “Esta bandera de Entre Ríos, cruzada por la franja roja que es el símbolo de Artigas, vivo en la tierra entrerriana, de ese Artigas que quería ser argentino y no lo dejamos, ¡carajo! ¿Cómo pudo haber sido posible? Ay, se me fue, disculpeme. Se me fue pero me da bronca cuando lee la historia y ve que desde Buenos Aires rechazaron a los delegados de la Banda Oriental. Por eso no somos una sola nación.”

Translation: “The flag of the [province of] Entre Ríos, crossed by the red stripe symbol of Artigas, alive in the land of Entre Ríos, of this Artigas who wanted to be Argentine and we didn’t let him, fuck! How could that happen? Ah, it just slipped out, apologies. It slipped out but I get annoyed when I read the history and see that Buenos Aires rejected the delegates from the Eastern Shore. This is why we aren’t one single nation.”

Hmm. As history, she has it sort-of-right. Perhaps I should say “not quite wrong”?

Artigas’ revolt against Spain was linked to the Argentine revolt (in more-or-less the same sense as the revolt against the British in Virginia was linked to the revolt in Massachusetts) but the leaders in Buenos Aires sold him out by signing a truce with the Spanish viceroy in Montevideo. Artigas fled to what is now Entre Ríos.

Uruguay might have then become the quite-literal Canada of South America, but Buenos Aires resumed the offensive and liberated the territory. (The government in Buenos Aires was hostile to Artigas, seeing him not as a secessionist but as a rival for the national leadership.) With the Spanish gone, Argentina now had to figure out how to organize its new government. Artigas was a federalist, and once it became clear that Buenos Aires was not willing to accept a federal system he organized the Federal League (which included several northern provinces) and went to war with the dictatorship in the capital.

He lost when the Portuguese allied with the Buenos Aires government. The Brazilians invaded and annexed Uruguay. Artigas fought on in what is now northern Argentina, but he was eventually defeated.

So, as history President Fernández is almost right. It wasn’t like Artigas went down to Buenos Aires and said,“Hey, great country there, let me in?” Rather, he fought and lost a civil war when Buenos Aires refused to allow for a federal system. But it is correct that he thought of himself as a citizen of the Provincias Unidas de Sudamérica. (Argentina, like America, had a lot of trouble deciding on a name for the country. The Argentines eventually picked one, however, while up in the United States the moniker “Columbia” never really caught on.) 

But as politics, well, ugh. Whatever the origin, Uruguay is in fact now a country. Moreover, it’s one whose citizens have (quite understandably, even absent nationalism) rather little interest in joining the Argentine Republic. Not only that, it’s a country that has a remarkably contentious relationship with the Argentine Republic. 

So having an Argentine president say, “Fuck, I get annoyed that we’re not one country” does not help. 

How important are property rights?

It is a bit of a truism that property rights are key to economic development. An efficient system, runs the logic, needs to be transparent, transferable, excludable, and enforceable. In a bit more detail:

1. Transparent means that it is cheap and easy to find out who owns what.
2. Transferable means that it is cheap and easy to sell or transfer property rights from one entity to another.
3. Excludable means that if you own the rights to a piece of property, then the law allows you to exclude others from enjoying those rights.
4. Enforceable means what it says.

Without those characteristics, runs the logic, you get underinvestment and confusion and commons-tragedies and all that. And the logic has some empirical backing. For example, in 1986 the Buenos Aires provincial government offered a group of landowners compensation for land that had been seized by a group of squatters. Some landowners took the offer, and the province then transferred title to the squatters. Others did not. On the assumption that the squatters had no way to know whether the landowner from whom they had seized the land would take the provincial offer, Sebastian Galiani and Ernesto Schargrodsky found that the squatters who received titles invested more in their homes and the education of their children.

Here comes the New York Times with an article about terrible land titles in Greece:

“In this age of satellite imagery, digital records and the instantaneous exchange of information, most of Greece’s land transaction records are still handwritten in ledgers, logged in by last names. No lot numbers. No clarity on boundaries or zoning. No obvious way to tell whether two people, or 10, have registered ownership of the same property.”

The article goes on to say that even the former Yugoslav states have better land rights.

One reasonable conclusion would be that bad property rights are a drag on economic recovery. “Many experts cite the lack of a proper land registry as one of the biggest impediments to progress. It scares off foreign investors; makes it hard for the state to privatize its assets, as it has promised to do in exchange for bailout money; and makes it virtually impossible to collect property taxes.”

But another reasonable conclusion would be that the evidence about the importance of clear property rights is wrong ... or at least oversimplified.

There is no getting around that fact that Greece became a rich country despite terrible property rights. The above chart tracks GDP per worker in 2005 dollars (adjusted for purchasing power) for four countries from 1950 to 2011. (The data through 2010 is from the Penn World Tables 7.1; the 2011 data comes from the OECD.) In 1950, Greek workers produced as much as Colombian ones; they were significantly less productive than in Mexico. Over the next three decades, Greece far outdistanced its Latin American counterparts. The current depression has not eliminated that gap.

Greece, of course, had many advantages that Colombia and Mexico did not, but poor property rights did not stop the country from taking advantage of them.

It has to make you wonder. Despite the micro evidence from places like Argentina, are efficient property rights really as important as we think they are?

Why I would not want to be the next president of the Bolivarian Republic

Reader Shah8 asks about the problems is Venezuela’s economy. It’s a good question.What are the time bombs waiting to go off?

Before I start, let me present the case for the defense. The linked paper argues that Venezuela’s economic expansion is sustainable. The linked paper, however, is incorrect.

First, the authors sustain that payments on Venezuela’s foreign debts are manageble. They are correct. (Figures 3 and 4.) The problem is that the interest burden is not the problem. The problem is that government of the Bolivarian Republic requires capital inflows around $15 billion every year to stay in balance. If those inflows drop, then BLAM ... sudden stop.

(The authors are convinced that China would not allow Venezuela to collapse. I am unclear as to why they believe that.)

Second, the authors argue that the bolívar is not overvalued. They base this on a scatterplot of countries. On the Y-axis they put the ratio between the official (or market) exchange rate and the exchange rate at which a basket of goods and service would cost the same as in the United States. Venezuela is not out of the pack.

The problem is that this measure has a lousy track record of predicting currency movement.

There is better measure of the bolívar’s overvaluation: the difference between the official rate and the black market rate. (The black market rate is tracked, more or less, at this website.) The gap has now approached three-to-one. It hard to see how Venezuela can sustain that without worsening shortages of imported goods or a major devaluation.

The only other country in the hemisphere in a similar situation is Argentina. When I was in Argentina in May and June of 2012, I was very tempted to blog about the controls despite a lack of time. (I wish I had; perhaps I still will.) Pesos were pegged at 4.5 per dollar, but while I was there the “blue market” rate hit 6.15.  A Brazilian couple was arrested by dog-using police teams practically in front of me; they were carrying several thousand dollars. (The papers reported that they were acquitted.) That was legal, but the dollar-sniffing dogs were hunting black marketeers. The controls made (and make) life difficult for small manufacturers, which often find it difficult to buy the dollars they needed to import specialized goods.

But Venezuela’s exchange controls are in a whole different level from Argentina’s. The Argentine blue rate is around 60% above the official rate; the Venezuelan parallel rate is almost three times the official rate. Argentine controls hurt some importers who cannot get dollars, but they are not noticeable in the shops and streets. Venezuelan controls, on the other hand, cause cooking oil, margarine, and toothpaste to disappear. Venezuela has been plagued by periodic shortages for years, but they are now becoming pervasive.

That is not sustainable. Well, it is ... but at the cost of ever-worsening import shortages. Either Venezuela will develop an extensive set of import-substituting industries (a la Mexico circa 1980) or most Venezuelans will lose access to manufactured goods. There is no sign of the first thing happening.

Both these problems — a dependence on foreign borrowing and unsustainable capital controls — come together in the electricity crisis. I blogged about it in 2009: it is not getting better. Other countries have experienced temporary shortages (Ecuador in 2009) but none have suffered ever-more-erratic service for four years. (Ecuador has resolved its problems.) Installing thermal generators requires the government to borrow to get the dollars, and the refusal to charge market prices for energy drives up the budget deficit. Then, to make things worse, the exchange controls drive up construction costs. (I explain why that happens here.)

In other words, there are three ticking time bombs waiting to hit the next Venezuelan administration. First, capital inflows could slow; at some point they will slow. Venezuela is not in a position to handle that without a severe recession. Second, at some point either the shortages will become unsupportable or the bolívar will be devalued. Shortages will not be good for the party in power. A devaluation is equally problematic. With inflation already running north of 20%, it could (oh, heck, almost certainly will) cause large price spikes with all the ensuing damage to living standards. Third, the electricity crisis shows no sign of abating. Maduro blamed the blackouts on gringo sabotage; I do not think that is an effective political strategy.

There is a fourth time bomb: crime. Hugo Chávez was seemingly immune to criticism on the topic; the next administration will not be.

And there is a fifth: Chavista foreign policy. More on that in a future post.

I make no predictions about which will blow up first or how badly. But at least one of them almost certainly will. The next administration will have to fix the problems or deal with the aftermath ... but there are no painless fixes.

“This old lady is worse than the one-eyed man”

That is what President José Mujica of Uruguay accidently said about President Cristina Fernández of Argentina when he didn’t know the mike was live. The one-eyed man, by the way, is her late husband and former President of Argentina.

“Esta vieja es peor que el tuerto.” In Mexico, in this context, the use of vieja would not necessarily be an aspersion against President Fernández’s age, meaning instead something like “The wife is worse than the one-eye.” I am told, however, that in the Southern Cone it translates to something more like “hag.”

Uruguay is not happy with Argentina. The tension goes back a long way (Canadians should appreciate the psychology) but the recent imbroglios began with this. Short version: Argentine activists blockaded a bridge between Uruguay and Argentina in anger over a big paper mill a Finnish company was building in Uruguay.

President Mujica’s predecessor, Tabaré Vázquez, considered going to war over the blockade, but quickly realized ... well, take a listen:

So much for sending the Uruguayan army over the bridge. (Plus, well, even a successful action would have worked out about as well for Uruguay as Pearl Harbor did for Japan: you don’t get a country to reopen its roads to your commerce by attacking them.)

Ex-President Vázquez is telling the truth about the seriousness of the conflict over the Botnia paper mill. In 2006, the Uruguayans told the American government that the Argentines were “fascists” and asked the U.S. for help. “A brother slapping another in the face needs a big uncle to put a stop to it,” said the Uruguayans, although they feared that Argentina would cut off gas imports. (The U.S. tacitly supported Uruguay.) In April 2007, in the face of Argentine threats, Uruguayan newspapers revealed military contingency plans should the plant be attacked, although the Uruguayan military attache in Buenos Aires later contradicted those reports.

In November 2007, Vázquez ordered the mill to start operations, with the blockade still underway. But the Uruguayans feared the Argentine response, so they secretly asked for closer military relations with the U.S. and stepped up security around the plant.

Uruguayan fears notwithstanding, war was not going to happen — the U.S. embassy in Buenos Aires wrote: “There is absolutely no indication that GOA [Government of Argentina] is considering a military ‘solution’ to this dispute, and the GOA’s own military operational capacity is very limited. Any suggestions of a military ‘solution’ here actually brings about expressions of humor or disbelief. At the recent Embassy-hosted Veterans Day event, a military contact only barely jokingly said that as a matter of fact, right now, the GOU [Government of Uruguay] probably has more active and usable aircraft and other military assets than does the GOA.”

That said, it is ridiculous that Buenos Aires let the situation get so out of hand. With the plant running (and causing little pollution) the crisis passed, but the reverberations continued to mess up relations between the two countries. Argentina blocked Mercosur from funding a second frequency converter on the Uruguay-Brazil border. The converter would have let Uruguay import more electricity from Brazil ... freeing it from Argentine pressure. (As well as occasional power shortfalls: Uruguay wanted it for economic as well as political reasons. Tenders finally went out in 2011, without Mercosur money.)

Then the Argentines blocked joint dredging operations to maintain the Martín García canal, under the treaty governing the Rio de la Plata. The problem has kept big ships out of the Uruguayan port of Nueva Palmira. It looks like the dredging might finally happen, maybe.

Buenos Aires proceeded to add insult to injury by imposing import licenses on 6 percent of Uruguayan exports to Argentina. It also went after Uruguay as a putative tax haven and denied its national airline landing rights in Chubut. Then Argentina stalled on attempts to build a regasification plant to allow for LNG imports. (President Mujica announced on April 2 that a plant will go ahead “with or without Argentina.”)

The most recent insult was not aimed at Uruguay specifically, but angered Montevideo nonetheless: Argentina limited the amount of money that Argentines can take out of the country ... sucker-punching Uruguay’s tourism industry.

Uruguay tried to shoot back by delaying Néstor Kirchner’s attempt to become the first Secretary-General of the Union of South American Nations, but they failed. Kirchner took over the organization shortly before his death in 2010.

It has become about as dysfunctional a relationship as one can imagine between two democratic and culturally-similar neighboring states. Argentina fruitlessly and pointlessly bullies Uruguay; Uruguay impotently pokes back. Things will certainly not get any worse, but they also show no sign of getting better.

The next time a Canadian complains about relations with the U.S., point to the Southern Cone. It could be much much worse.

Observatorio argentino 19: Poverty in Argentina

Argentina turns out to be a poorer country than we realized.

Argentina, like the United States, measure the poverty line against a basket of goods. The rate of absolute poverty is measured against the monthly cost of a minimum amount of food; the regular poverty rate is assessed against a broader basket which includes a bare amount of housing, energy and manufactured goods. According to the official agencies, in 2011 the monthly food basket cost ₱205 per person while the broader basket cost ₱449.

The Universidad Católica Argentina (UCA) used unofficial sources to revalue the official baskets. They found that the food basket cost ₱351 and the broader one ₱720.

As you might imagine, the mismeasurement of inflation has significant effects on the poverty figures. (The data is at the above link.) According to the Argentine statistical agency, absolute povery (“indigence”) afflicted 1.7% of the population in 2011, while 6.5% suffered regular poverty. The UCA conducted its own survery of urban areas, using the official poverty lines, and found slightly different numbers: a few more in poverty (7.8%), a few less in indigence (1.5%).

But when they used the actual cost of the basket, the numbers leaped: 21.9% in poverty and 3.3% in indigence, meaning that one in thirty urban Argentines did not earn enough to avoid malnutrition. (The survery did not include rural populations, so it is unlikely that the indigent had access to much non-market food.)

Let me be clear: the poorest Argentines are much better off than they were under the old regime. In 1998, right before the country began its grinding depression, almost a third of urban Argentines were poor and almost a tenth lived in households that did not earn enough to pay for their caloric needs. Even with the revised numbers, the situation has improved markedly.

But two things stand out. First, Argentina did not avoid the Great Recession. Well-being degenerated markedly in 2008 and 2009.

Second, the Argentine government probably played games with the indigence statistics in 2008 and 2009 (but not thereafter): the official numbers and the survey numbers diverge rather dramatically in those years, even without the inflation adjustment.

In a way, the numbers make the games the government has played with the statistics even more incomprehensible. The Kirchners have a great record on poverty: this is not the Bolivarian Republic. The uptick in 2008-09 is entirely understandable, given the Great Recession ... and I very much doubt that the families thrown into poverty were unaware of it.

Given that, what is the point of the obfuscation? 

Observatorio argentino 18: The state of YPF

How is Argentina’s nationalization of the YPF oil company panning out?

In short, the nationalization has so far had the salubrious (and rather ironic) effect of getting the Fernández administration to roll back some of the more counterproductive bits of Argentine energy policy, but its confused quasi-Bolivarian foreign policy is now coming back to bite the government via the ruling against Chevron. Fortunately for Argentina (and also ironically) an imperialist foreign court in the Netherlands seems to have tossed the country a lifeline.

Start with Argentine energy policy. YPF’s stock price jumped on November 29 ... because the Argentine government agreed to allow companies to sell natural gas from new developments at $7.50 per MMBTU, more than three times the previous controlled price. YPF shares then rose throughout December as it became clear that Argentina was going to raise the export price of oil from $42 to $70.

In one sense, then, YPF is doing well because the Argentine government has stopped doing some ... er ... counterproductive things. This validates a hypothesis I ventured about the expropriation in a case I wrote about it: nationalization gave the Fernández administration cover to lift some unaffordable subsidies. 

What about attracting capital into the oil industry? In August, YPF laid out an ambitious $37.2 billion investment plan. Most of the cash is supposed to come from the company’s own earnings. (Those earning would not have materialized without the decision to raise oil and gas prices.) But it also calls for $4.5 billion from international partners and $6.7 billion in bond issues.

And that is where it gets sticky. YPF’s chosen partner, Chevron, keeps getting bogged down in legal trouble. In part, that is due to the YPF nationalization. On November 20, YPF’s former owner, Repsol, sued Chevron in Spain. Repsol asked the Spanish court to issue a cease-and-desist order under Spain’s “disloyal competition law.” (“Disloyal competition” sounds weird in English; a better translation would be “unfair business practices” or “antitrust.”) On December 4, Repsol hit Chevron with a second lawsuit in New York.

These lawsuits were not enough to stop Chevron. It isn’t that Repsol has no case. It is that the case is uncertain; moreover, Chevron might not be liable at all unless Argentina refuses to pay some future arbitration judgment against it, and such a judgment is unlikely before 2017 or 2018.  Chevron is taking a legal risk in jumping into the Vaca Muerta oil shale, but it is a reasonable one. (For what it is worth, “reasonable” does not mean “If I were the head of Chevron, I would take the risk.” I would not.)

Chevron’s real problem is the lawsuit Ecuador launched against Chevron in Argentina. That one seems to have brought Chevron’s plans in Argentina to a halt. YPF is now on a roadshow in the UAE looking for partners. YPF has also received a pledge of $1.5 billion from Bridas Holdings. (Here is another description of the deal.) Bridas is half-owned by the Bulgheroni family of Argentina, and half-owned by CNOOC. Repsol, of course, has announced that it plans to sue Bridas.

There is something odd in the Chevron travails. The courts in Argentina are not fully independent, but as Setty has pointed out, the Fernández administration has had some trouble lately getting them to rule its way. (This Economist article gives more details.) In addition, Fernández herself is probably torn between needing Chevron’s money and wanting to support her Ecuadorean ally. What you smell is confusion.

My guess is that the Argentine supreme court will use the recent decision by the Permanent Court of Arbitration in the Hague (PCA) to overturn the lower court ruling and unfreeze Chevron’s assets. The PCA ruled that it had jurisdiction over the case and had previously ordered Ecuador to halt foreign enforcement actions until it made its final decision; it now holds Ecuador responsible for any damages imposed on Chevron by foreign courts. The ruling provides a basis for the supreme court to throw out the case. At that point, the action will shift to the courts in Spain.

That case, unlike the one in Buenos Aires, is a black box from where I sit. It will be fun to watch.

And the United Nations makes Ghana give Argentina its warship back

There is something amusingly science-fictional about the title of this post, like something that John Brunner would have written satirically in the 1960s.

The International Tribunal on the Law of the Sea (ITLOS) is an international court (loosely-associated with the United Nations) that rules on disputes related to the Law of the Sea Treaty. It consists of 21 judges elected by the governments of the states party to the Law of the Sea Convention. They serve nine-years terms; decisions are made by majority. Since it was created in 1996, the Tribunal has only seen 20 cases.

And today it released its decision in case #20! “Ghana shall forthwith and unconditionally release the frigate ARA Libertad, shall ensure that the frigate ARA Libertad, its commander and crew are able to leave the 22 port of Tema and the maritime areas under the jurisdiction of Ghana, and shall ensure that the frigate ARA Libertad is resupplied to that end.” It also ordered each party to pay its own costs associated with keeping the ship in berth to date.

Ghana argued that the ITLOS did not have jurisdiction because:

1. The ARA Libertad was in Ghanaian territorial waters (p. 4 at the above link);
2. Argentina had waived immunity under U.S. and U.K. law (p. 5);
3. Domestic appeals in Ghana are continuing (p. 6).

ITLOS declared (in paragraphs 94-100 at the link to the decision):

1. A warship is an expression of the sovereignty of the State whose flag it flies;
2. In accordance with general international law, a warship enjoys immunity, including in internal waters, and that this is not disputed by Ghana;
3. Any act which prevents by force a warship from discharging its mission and duties is a source of conflict that may endanger friendly relations among States;
4. Attempts by the Ghanaian authorities on 7 November 2012 to board the warship ARA Libertad and to move it by force to another berth without authorization by its Commander and the possibility that such actions may be repeated, demonstrate the gravity of the situation and underline the urgent need for measures;
5. The urgency of the situation requires the prescription by the Tribunal of provisional measures that will ensure full compliance with the applicable rules of international law.

And so, the decision! Argentina gets its ship back, although the two parties can continue to argue about the underlying principles. The Argentines also wanted Ghana to salute the flag and otherwise genuflect, but the Tribunal wisely seems to have ignored all that.

The decision was unanimous, but some of the judges added their own wrinkles. Anthony Lucky of Trinidad thought the Tribunal should have been more forceful in asserting sovereign immunity. Chandrasekhara Rao of India was annoyed that the Ghanaian government took a different view before ITLOS than before its own courts. He also wanted the Tribunal to state more forcefully that a state that allowed a foreign warship into its waters automatically gave up jurisdiction over that ship. Finally, Rüdiger Wolfrum of Germany and Jean-Pierre Cot of France had ... well, what seems to this non-lawyer to be a lot of hair-splitting that ends up in the same place as Lucky and Rao.

And thus, this latest attempt to seize Argentine assets comes to naught. Even in today’s world of limited sovereign immunity, it is hard to collect on sovereign debts. An expropriation case would be different (at least if it involved export industries) since foreign courts could easily go after production from the expropriated assets. But when it comes to sovereign debt, about the only leverage seems to be going after new issuances.

In short, Argentina won and Ghana lost. Sorry, LT.

Ecuador attacks Chevron in Argentina: world governance runs both ways

I hate the word “governance,” but it is useful. After all, there are things that are governed without a single government. When those multiple governments are hierarchically ordered (even if legally sovereign) then I prefer the word “empire.” But sometimes imperial institutions can run both ways.

The bilateral treaties that govern the investor-state arbitration system tend to be unequal. Consider for example the U.S.-Ecuador treaty. The United States exempts Ecuadorean investors from using anything but U.S. courts in the following sectors:

• Air transportation
• Banking
• Customhouse brokers
• Government grants
• Government insurance and loan programs
• Energy and power production
• Insurance
• Maritime services and maritime-related services
• Mining on the public domain
• Ocean and coastal shipping
• Ownership of real property
• Ownership and operation of radio and television stations
• Ownership of shares in the Communications Satellite Corporation
• Primary dealership in United States government securities
• Provision of common carrier telephone and telegraph services
• Provision of submarine cable services
• Use of land and natural resources

Meanwhile, the Ecuadoreans exempt:

• Traditional fishing (not including fish processing or aquaculture)
• Ownership and operation of broadcast radio and television stations

Quite a difference! Looks pretty damn imperial, no? You can kinda understand why President Correa wants to withdraw from ICSID and abrogate the investment treaties.

Thing is, these treaties are ultimately enforced not by ICSID or some other sort of world-government-in-drag, but national courts. And the same conventions that allow national courts to enforce foreign rulings (the way Argentina lost its ship in Ghana) can be used to establish extraterritorial jurisdiction. That can do it a bit to reduce the imperial feel to the international system that protects property rights. The Ecuadoreans, in short, can use foreign courts to enforce their laws.

Last year, Ecuadorean courts levied a $18.2 billion damage claim against Chevron for polluting watersheds in the country. Ecuador’s legal team knows that ChevronTexaco doesn’t have many assets in Ecuador, so its strategy is to go around the world looking for Chevron assets that it can attach. (You can read a copy of the plan from the legal team here. They call it the “Invictus memo.”) In February, Chevron won a preliminary victory when it got an arbitration tribunal to take its side. Problem is the ruling applied only to Ecuador.

So it was big news in October when the U.S. Supreme Court ruled [CLARIFICATION: It was not a ruling per se; the SCOTUS decided not to hear an appeal, thus allowing the plaintiffs to proceed] that Ecuador could freely continue its search for Chevron assets. A week later an Ecuadorean court let the plantiffs seize $96.3 million owed to Chevron by the Ecuadorean government (yes, that would be in effect Ecuador taking cash from itself) and all licensing fees owed Chevron from the use of its logo. And now ...

... an Argentine judge has given the plantiffs all of Chevron’s shares in Chevron Argentina, all of Chevron Argentina’s dividends, its 14% stake in the Oleoductos del Valle pipeline, 40% of its bank deposits and 40% of the revenue from future Argentine crude sales!

How much is the above worth? Well, I don’t know how much cash-on-hand Chevron Argentina enjoyed and it’s safe to assume that they won’t be paying any dividends as long as the judgment is in place, but it is possible to calculate the value of its crude production. (Oleoductos del Valle loses money.) The June domestic price of crude in Argentina was US$467 per cubic meter. (If you click the link and download the data, you’ll find that the price didn’t vary much.) Using production data from January through September of 2012, you’ll find that Chevron Argentina will produce crude worth about $833 million in 2012. 40% of that is $333 million; not a bad chunk of change. Of course, the Ecuadorean government will only get about 35% of that, since the income is actually due the plantiffs and their lawyers. Still, $117 million per year is nice, and if the precedent holds it could wind up with a lot more than that as more Chevron assets are attached around the world.

Eventually the Ecuadorean government might even net enough to pay off Occidental.

Argentina loses in the United States, but as the Rock said, it doesn’t matter

It isn’t quite as dramatic as the frigate trapped in Ghana, but Argentina lost a big one in the U.S. Court of Appeals last on October 26th. The court upheld an earlier ruling that Argentina broke its contracts when it offered to restructure the debts of its creditors on pain of repudiation for those who refused to take the deal. If everyone had taken the deal, that would be one thing; but the Argentine government can’t go ahead and pay some creditors but not others.

On October 25th, Foreign Minister Héctor Timerman provided a list of the assets that stiffed creditors have tried and failed to seize. It’s pretty remarkable:

1. In 2004, NML Capital (same fellows who have grabbed the frigate) grabbed 12 properties in the United States, including the residences of the Argentine ambassadors to the U.S. and the OAS, the residences of the heads of the Argentine army and naval attachés (in Maryland and D.C., respectively), the Washington offices of all three military attachés (Army, Navy and Air Force), the Argentina mission to the OAS (the whole damn building, at 1816 Corcoran Street N.W.), and four Air Force storage units. On August 3, 2005, the D.C. District Court ruled that all of these properties were covered by sovereign immunity.
2. In May 2007, creditors seized the presidential jet in California. A judge in California rapidly returned the wonderfully-named Tango One to Argentina within a couple weeks.
3. In September 2008, creditors went after the accounts of the Miami consulate and the New York tourism office. A New York district judge tossed that one out on September 30, 2009.
4. In May 2010, creditors grabbed Argentine funds owned by the Banco de la Nación Argentina in New York. That was overturned on September 24, 2010. To be honest, I do not understand this ruling: the Banco de la Nación is not the Argentine central bank, but state-owned commercial bank. (It is worth adding that two months earlier, in March 2010, the U.S. Supreme Court pre-emptively blocked an attempt to seize the nationalized pension funds. The Argentines quickly repatriated the funds after the SCOTUS decision.)
5. In April 2011, creditors seized an Argentina space ship. Really! They attached the SAC-D satellite. The Central District Court of California ruled against the creditors on May 25th, 2011; on June 6th the creditors announced that they would not appeal.
6. On August 1st and 9th of 2011 creditors managed to embargo central bank funds held in the Federal Reserve Bank of New York — that was overturned on June 26, 2012, when the Supreme Court refused to hear the case.
7. On May 16th, 2011, creditors claimed Argentine state-owned patents in New York worth about $1.2 billion. That failed on March 22nd, 2012. I’ll admit that I don’t understand this decision either; patents seem like commercial assets to me.
8. In December 2009, creditors went after Argentine central bank reserves in Switzerland. That took until October 17, 2012, to resolve, but the Argentines kept their money.
9. On April 3, 2009, creditors grabbed the accounts of the Argentine embassy in France. That was quickly lifted, although a final decision in Argentina’s favor didn’t come down until September 28, 2011.
10. On December 22, 2009, creditors seized an Argentine Air Force storage unit in Nanterre. The Argentines got that back on November 22, 2011.
11. Ditto, creditors tried to freeze the French accounts of the Argentine military in August 2010. Judges overturned that within days.
12. Also in France in 2009, creditors claimed the General San Martín Museum in Boulogne Sur Mer. That was overturned on March 5th, 2010.
13. In Germany, the Argentine embassy’s accounts were frozen on April 23, 2003. A court ruled against the creditors on December 6, 2006, and the German supreme court confirmed it on July 4, 2007.
14. A second attempt to grab the Frankfurt consulate’s account in December 2010 failed in September 2011.
15. In Belgium, creditors froze the Argentine embassy’s accounts in August 2009 ... and still have them frozen! The case has been appealed multiple times, with varying decisions, and is now going to be decided in early 2013. Precedent is on Argentina’s side.
16. Ditto creditors grabbed the Argentine Agriculture Commission to the European Union in Brussels. That one is still in court but the smart money is on Argentina.
17. In Italy creditors grabbed a whole bunch of stuff, but the Italian high court declared that Argentina enjoyed general immunity on May 27th, 2005.

In short, courts have gone out of their way to protect the Argentine government. In most of these cases, the decisions have been clear-cut, but even in the fuzzy cases of #4 and #7 the Argentines have won. So why should this recent decision matter?

Well, mostly it doesn’t. The decision means that Argentina can no longer make payments on its restructured debt in the United States. In December, Argentina is supposed to make $3.3 billion in coupon payments in New York, so it looks like a big deal. Thing is, Argentina has three simple options:

1. Pay the holdouts according to the original deal, while paying the holders of restructured debt the new payments. Plausible ... but in addition to the cost, it would open a host of new lawsuits and be a political humiliation. Ixnay on this option.
2. Pay outside the United States. Sounds easy, but all it would take is a few holdouts to push Argentina into technical default and trigger all the credit default swaps on the debt. Argentina could restructure the debts as domestic law with the agreement of 85% of the creditors ... but that would also trigger the credit default swaps even if Argentina remains current on all payments. Of course, the Argentine government won’t be on the hook for the swaps. Since it can’t issue new debt anyway, there really isn’t much downside.
3. Screw everybody. Just stop paying.

Me, I vote for option (2), but it doesn’t matter. Argentina is going to go into technical default, the insurers are going to lose money, and the holdout creditors are going to be no closer to being paid. Plus, Argentina is also going to get its ship back, although like Jon Rabinowitz, I kinda hope that it doesn’t.

Argentina v. Ghana, round 1½

The Argentines are going to fly their sailors home ... on an Air France plane. The reason is obvious: they are nervous that Ghanaian courts would just seize any Argentine aircraft!

It looks like the Ghanaian port authorities are going to move the Libertad. It’s clogging up a needed berth, costing the port $3,667 per day.  To be fair, that is a lot less than the $50,000 that the Libertad is currently paying in docking fees ... well, that Argentina is ratcheting up in fees. I suspect that Argentina isn’t actually paying them. After all, it has stated that it is going to claim those fees in damages in the suit it plans to file against Ghana at the U.N. Law of the Sea Tribunal in Hamburg.

Speaking of the U.N., nobody should be surprised that the Security Council is not treating this as a threat to world peace. So much for hyperventilating about an Argentine strike on Ghana ...

P.S. No, nobody in Argentina is seriously discussing war with Ghana!

Argentina loses round one in Ghana

In most countries, military and diplomatic assets owned by foreign states are untouchable by judicial action. That’s why the attempt to attack Argentine embassy accounts in France ultimately failed. But that does not — so far — seem to be the case in Ghana. The creditors are winning.

On October 11, 2012, Judge Richard Adjei Frimpong of the Commercial Division of the Ghanaian High Court held that the Argentine government had waived sovereign immunity in the initial bond contracts. (Technically, in the 1994 fiscal agency agreement attached to them.) I have not yet been able to get a copy of the ruling, but I have some idea of what the two sides in the case argued. Argentina’s lawyer, Latty Otu, argued two things. First, you can’t seize military vessels under the Law of the Sea. Second, the fiscal agency agreement only covered assets inside Argentina.  

The creditors’ lawyer, Ace Ankomah, posed several counterarguments. First, he argued that while the Law of the Sea recognizes that naval vessels are immune, it says nothing preventing states from waiving that immunity. Second, the fiscal agency agreement applies outside Argentina — the clauses specifically applying to assets located inside Argentina involved the assets that the government refused to allow to be attached.

This is not what I expected to happen. Now, there are two more appeals to go in the Ghanaian court system. The first is the Court of Appeals. The second is the Supreme Court. The fastest that these could go is three months. One thing that won’t happen is an intercession by the Ghanaian government. Government lawyers took Argentina’s side in court, but the Ghanaian government is not going to interfere with the legal process. Just yesterday, Argentina’s deputy foreign affaris and defense ministers  returned empty-handed from a visit to Ghana. Meanwhile, in Buenos Aires the head of Argentina’s intelligence services has had to resign — understandably, she should have seen the Ghana incident coming — as has the head of military strategic intelligence and the Chief of the Navy. Meanwhile, Argentina continues to rack up $50,000 a day in docking fees and around $550 per hour for a good lawyer. Still, there’s one good thing. After reports came out that the sailors on board the ARA Libertad reacted very badly to the visit by the Argentine negotiating party, Ace Ankomah’s office brilliantly announced that they stand willing to fly all the sailors home immediately at no charge.

If the Ghanaian court decision surprised me, the reaction of the Libertad’s crew to a visit by the Argentine negotiating team has me completely stonkered. From Clarín:

The team announced, “We want to bring the greetings and support of the Argentine people.” The sailors’ cold anger was visible. Witnesses to the visit stated that the team spent no more than 15 minutes on board before abandoning the ship for the Ghanaian capital. After the [pair of Argentine officials] left, the Libertad’s sailors dropped the pretense: they confessed to their superiors that they wanted to “punch them.”

 Oh, my.

I suspect that Argentina is going to get its ship back, but now it is just a hunch. Argentina is going to the International Tribunal for the Law of the Sea (located in Hamburg) for a judgment. Does anyone know anything about law to make a prediction about the Ghanaian appeal or the Tribunal’s ruling? If this one sticks, and a naval vessel really can be seized to force repayment of debt, we really will be in a revolution.

UPDATE: Argentina will evacuate the crew of the ship. No word on whether they will take the creditors’ offer to pay for their flights home.

Las Malvinas no serán ... oh, just read the post

President Kirchner has recently tried to raise a ruckus about the Malvinas. The reasons have to do with domestic politics, but recent changes have done two things: they have made the islands far more tempting for Argentina and made it far less likely that the country could retake them.

The first thing is oil. On May 6, 2010, Rockhopper discovered oil on its infelicitously- named Sea Lion block just north of the islands. (Then again, Sea Lion was impossible, so maybe it’s a good name.) So far, seven of nine Rockhopper appraisal wells have come up positive. Production will start in 2017; estimates are that Sea Lion will eventually produce somewhere between 85,000 and 120,000 bpd. At $80 per barrel wellhead and $10 lifting cost, that would be about $3 billion per year in rents to scrap over. (Even fully costed at $50 per barrel, that would be a cool $1.3 billion.)

So there is something to fight about besides national pride. Of course, Argentina would need to have international backing if it was to sell that oil ... but the country has a big enough domestic market.

Nonetheless, any planning for a war would need very careful diplomatic preparation these days, much more than in 1982. Back then, Argentina was following a long line of actions that held that the “1945 line” did not hold for European overseas territories. Morocco could invade the Spanish Sahara, India could fight a war with Portugal for Goa, Indonesia could march into East Timor and Dutch New Guinea. Given this history, it was not (completely) crazy for the Argentine generals to think that the world would accept their victory. (And to be honest, I suspect that they were right: if they had won, las Malvinas hubieran sido argentinas.) 

But that is not the case today, even though plenty of countries support the Argentine claim. So problem #1 would be to secure enough backing to prevent the imposition of U.N. sanctions.

And problem #2? Well, military technology has advanced:

You got it. The Exocet, so devastating in 1982, is not worth much against a modern British destroyer. It gets worse. The U.K. keeps four modern Typhoons on-station at the Mount Pleasant air base in the islands; Argentina would need to take it out somehow with an air force consisting mostly of outdated Mirages and Super Etendards. (The Mirages are scheduled to be withdrawn from service this year, leaving a few Skyhawks ... a 1954 design acquired in 1997.) Add to all that the 1,200 men at the airbase and British access to intelligence. The result? No chance of success.

Well, there are always people ready to concoct James Bond-like plans where Argentina packs in a bunch of special forces into a civilian airliner, assaults the base from the ground and then dares the U.K. to take it back without access to an aircraft carrier. That scenario is silly. And even if it happened, expect the Argentines to be pounded from the sea and air.

In other words, even if Argentina assembled the necessary diplomatic support, a war will not happen because a war could not be won.

Observatorio argentino 17: Where do we stand in the courts?

As debtors attempt to use U.S. courts to collect on Argentina, the verdict is mixed but mostly negative. Good luck with that ship thing.

The biggest blow occured on March 1, 2010, when the U.S. Supreme Court ruled that Argentine pension funds in the United States could not be attached. Actually, there was no ruling as laymen understand it, but the Court denied an appeal, and so that was that. The next day the Argentine pension agency repatriated $200 million. (The actual chain of events was an attachment order by Judge Griesa in New York, that the Second Circuit Court of Appeals tossed out in October 2009.) Soon afterwards, on March 8, Griesa ruled that billions in pension assets were “immune from attachment, restraint and execution.” A second attack on $105 million in Argentine central bank assets failed in June of this year for different reasons: central bank reserves are immune under the Foreign Sovereign Immunity Act of 1976 (FSIA).

Thing is, all hope is not lost. The Second Circuit tossed the decision not on the grounds that pensions are an essential state function and not commercial activity, but because the Argentine government had not had a chance to use the recently-nationalized funds for any purpose at all. (Really, it makes sense: read the decision.) 

Still, it looks grim for creditors. The Second Circuit declined to interfere with Argentina’s payments to creditors who accepted its restructuring deal: so much for the court orders I referred to in the last post. And that ship in Ghana? Argentina is gonna get it back.

In other words, the creditors are gonna keep going around the world hassling Argentina but it amounts to a hill of beans ... unless two things happen. One, Argentina suddenly needs to borrow on world markets again. Two, ICSID rules against Argentina. It is weird for ICSID to take on a debt case, but it seems to have done so ...

Ghana declares war on Argentina, seizes naval vessel! Or not.

Argentina, like a lot of countries, keeps a few old-line sailing vessels in its navy. They use them to train sailors and show the flag. They don’t fight, they don’t get involved in disputes. So imagine how surprised 200 sailors must be to find themselves trapped in Ghana, their ship being held as if war had just been declared!

The ARA Libertad pulled into Tema, Ghana, on graduation tour down the West African coast. A hedge fund with a legal claim on Argentina had been monitoring its movement. The ship docked to find a bailiff from the Superior Court of Judicature waiting there with a court order to hold the vessel. “The Accused (the Foreign Ministry of Argentina), its officials, agents ... including the captain of the Ship, Pablo Lucio Salonica, and the crew are prohibited from moving the frigate ARA Libertad from Puerto Tema without a new order from this court.” The crew then had to surrender to the court. Argentina can release the ship by paying a bond: the local press has mentioned $10 million; technically, the bond will have to be equal to the value of the ship.

Elliott Capital is chasing money it claims Argentina owes it. Argentina defaulted on its debts back in 2002, and then essentially repudiated most of it. Most creditors accepted the deal, but Elliott did not. (More accurately, Elliott bought Argentine debt on the secondary market after the default but before the repudiation.) Elliott owns bonds with a face value of $630 million; including past-due interest, they are now worth $2.3 billion. (That is a lot of interest!) Elliott has done relatively well in New York courts, getting judgments worth about $1.6 billion. That is what the Ghanaian seizure is about.

The thing is, the New York courts have been pretty strict about what the creditors can actually seize. They have ruled out going after Aerolineas Argentinas, stating that it is in receivership and not really a state entity. Ditto for state funds held in New York. On the other hand, the court only just declared in favor of the bondholders in these two orders here and here, which changes things from the days when creditors were just looking around for assets without a legal decision in their favor.

Anyway, I predict that the Argentine ship is released: it is a naval vessel, protected by sovereign immunity. But I also predict that Argentina is going to find itself in a gigantic heap of trouble, particularly as the economic situation continues to deteriorate. It will be basically locked out of foreign markets, although it might be able to raise dollar funds at home. (Maybe. And at high cost.)

Any interest in a post on the state of Argentina?

Argentina beats ICSID! Seriously, Argentina beats ICSID. Regularly.

In April, I had the honor to attend a conference on international investor-state arbitration held at the London School of Economics. (Below is a picture of me on the roof of the LSE after the conference. Yes, the weather was as bad as it looks.)

There I had the good luck to meet a law professor from William and Mary named Susan Franck. Susan has done a lot of excellent work, but what struck me the most was the time and effort she’s put into verifying all the “stylized facts” that people believe about investor-state arbitration. A stylized fact is a fact assumed to be true for the purposes of argument. Economists love ‘em. So do politicians. (Frex, the sylized fact that most U.S. federal spending fits the normal conversional definitions of wasteful.) But stylized facts aren’t always actual facts.

One big stylized fact about investor-state arbitration is that governments always lose. It isn’t hard to see where that comes from. By most reasonable standards, international investment law is an ass. Companies can freely renegotiate contracts with governments, but governments cannot renegotiate with companies. There are few outs for contingencies short of foreign invasion, and maybe not even then. On the other side, it isn’t hard to believe that most of the time the governments are wrong (like, you know, these guys) and deserve to lose.

Only they don’t lose most of the time. Susan found that governments won 58% of cases. Investors won 38%, and the remainder were settled. (She also found that the average claim was for $343 million, whereas the average award came to only $10.4 million. Go figure.)

So how’s Argentina doing? Well, not too badly. Of its post-2001 cases, 33 have been decided. Argentina won eight, or 24%. Of those eight, it won five in arbitration. Two were annulled and one was overturned by a U.S. district court. It lost nine (27%) ... but annulment hearings are pending in five of those nine. If you put those five into the net-yet-decided category, Argentina’s win percentage goes up to 32%, against a lose percentage of 16%.

Of course, 32% + 16% = 48%. Argentina settled a remarkable 52% of its post-2001 cases! Of these 16 settlements, five (31%) were in electricity, three (20%) in natural gas production and distribution, two (13%) in water and sewer systems, and an additional two (13%) in telecoms. The final one was the Unisys contract mentioned in an earlier post.

The settlements aren’t public,  but we do know a little, thanks to Wikileaks. AES owned several power plants, and dropped its suit once the Argentine federal Congress and the Buenos Aires provincial legislature ratified new rate agreements. Pan-American Energy (a subsidiary of BP) sued at ICSID over the pesification of domestic hydrocarbon contracts and the imposition of an oil-export tax. It dropped its claim after Chubut province agreed to renegotiate its E&D concession, presumably by enough to compensate it for the federal takings. If I may take the risk of presenting my own stylized fact, the other settlements were likely similar: rate hikes or other informal compensation, in exchange for a suspension of the international suits.

The bottom line is that Argentina has not done too badly at ICSID and other arbitrations. Its wins outnumber losses two-to-one, and it settles half its cases, as far as we know without direct compensation. What this implies about the unwillingness of the Fernández administration to pay up in its five unequivocal losses, including one pre-2001 case (for a total liability of $427 million) is left as an exercise for the readers.

Internal devaluation does not work very well

So I read in the New York Times that Greek private sector salaries fell a punishing 22.5% in 2011 in real terms.  That stunned me. So I went to Eurostat. Their figures for nominal labor costs were slightly less impressive, but still shocking. (2008 = 100.)

Internal devaluation at work! Sure, Greece is still working off earlier excessive wage gains, but that should presage an export boom, right? Cheaper workers, cheaper vacations for foreigners, more tourism, more exports.

Except ... well, according to OECD data, output is declining along with wages. (See below; 2005 = 100.) Unit labor costs are down, but not when seasonally adjusted, and really not relative to Germany or the rest of the Eurozone. Maybe that’s not relevant. After all, as long as output per worker in potential export sectors isn’t falling, then economy-wide unit labor costs should not matter ... but only for those industries. They will matter a lot in other industries, which are seeing demand (foreign and domestic, as proxied by the value of output) drop as fast as their wage bill.

Add to that (1) rising debt burdens for Greek workers, since debts aren’t indexed to wages; (2) rising taxes on Greek workers; (3) people’s desire to save in euros (outside Greece or in cash) in the face of a possible Grexit; and (4) the awful awful feeling that comes with people as they watch their nominal incomes plummet.

Put it together, and it isn’t clear to me that the rather surprising unstickiness of Greek wages is going to produce much of a quick recovery even if wages fall substantially more. (There have been a lot of reforms to Greek labor law in the last few years.) Of course, the Argentine experience implies that a Grexit won’t be better ... Argentine GDP plunged 15% in the year after the devaluation, and recovery took place in the context of strong external demand.

I am not optimistic.

Postscript: see “Is Increased Price Flexibility Destabilizing?” by Brad Delong and Larry Summers. (Also found here.) See also “The Barber of Buenos Aires.”

It is not unreasonable to cry for Argentina in most of its cases at ICSID

Bernard Guerrero asks: “You mentioned in an earlier post that Argentina had justice on its side with regards to the various ICSID cases. How so?”

An excellent question! Short answer: most of Argentina’s cases are a direct result of the 2001 devaluation. The Argentine government acted prudently and responsibly in the aftermath of that economic collapse. In the face of 1.2 million job losses, and riots in the streets, it was entirely reasonable to freeze rates, cancel contracts, default on debt, and pesify dollar-denominated bank accounts. (The scale of the turn-of-the-century Argentine depression is immense.) Such actions were legal under Argentine law, and would have been legal in the United States. (FDR confiscated gold back in the day.) Unfortunately, the Washington Convention and associated bilateral investment treaties are more restrictive, which gave foreign companies operating in Argentina the right to sue for damages from the price freezes.

In other words, until Repsol, none of the Argentine cases at ICSID involved straight-up opportunistic property seizures without fair compensation. Rather, they involved emergency measures taken in the midst of a Depression-scale crisis. The companies could not have possibly expected the real value of their tariffs to quadruple in the middle of a 20% crash in GDP and 10% plunge in employment, which is what sticking to the original contracts would have meant. Argentine law sees things that way. American law sees things that way. European Union law sees things that way. But international law, as codified in the Washington Convention of 1965, does not. That is unjust.

Longer answer: Of Argentina’s 46 post-2001 arbitration cases, 32 are a direct result of the 2001 devaluation. If you add in the three cases brought by bondholders, that number rises to 35. Most of the remainder are contract disputes, which also come out of the turn-of-the-century Argentine depression: frex, a cancelled contract with Unisys to modernize the judiciary’s IT systems, or an abandoned project with Impregilo S.p.A. to build a highway. 

It is not hard to find the texts (or at least decent summaries) of the ICSID decisions. Latin Arbitration Law is a good source. UNCTAD also maintains a good database. The Investment Treaty Arbitration site has a list of cases, with all intermediate and annulment decisions. Finally, an easy-to-use list with summaries of the outcome can be found at the IIAPP website. I also recommend the Kluwer Arbitration Blog and (if you can get access) the Investment Arbitration Reporter.

All of the Argentine cases reject expropriation claims, but provide compensation for lost revenues due to contract violations. You can see the frustration by the Argentine lawyers when they argue that expropriation law should not apply in these cases. In fact, most of the arbitral decisions have a very sympathetic tone towards the Argentine arguments. But the law is the law, or at least what the arbitrators say that the law is, and that is that.

To be fair, Argentina has not done badly at ICSID. (If there is interest, I will put up another post with some data about that.) But it is understandable that the government feels that most of the post-2001 cases should not have been brought at all. This is not to support the YPF nationalization, or to claim that Argentina is run by a saintly government interested only in the public good. (To give one egregious example, Argentina settled the Unisys claim for $8 million in April 2007 ... but made no move to actually pay.)

It is to say that there is something wrong with the international system. It was designed to protect natural resource investors against predatory states without the need to call on their home governments. It is becoming a system of unlimited liability which essentially locks governments in to the letter of their initial contracts in a rigid way with no parallel in any domestic legal system on the planet.

In fact, the standards have been getting stricter, to the point where governments are required to grant a “guarantee of stability in a secure environment, both physical, commercial and legal” that may, for some countries, be impossible ... and is certainly more protection than that granted to domestic investors.

Practical upshot? Hard to say ... but the illegitimacy of most of the claims against Argentina will make life much harder for companies with a decent case in a straight-up expropriation. (You can guess which firm I might be talking about.) That is not, I think, a good thing ... but I may be wrong.

Observatorio argentino 16: The plot thickens, as does the oil

 This will be a quick post. I’m running on fumes, and will be for at least another month. (Then a brief respite, with serious fume-running to follow after August. But for excellent reasons!) That said, there are two things happening in the Argentine gas fields, which are related to the YPF expropriation saga and time-sensitive. So read on!

First, you can expect the Argentine government to announce in the next few days about $20.3 billion dollars in new shale gas investments in the Vaca Muerta fields. Eleven different companies — Chevron, ConocoPhillips, Ecopetrol, EOG, ExxonMobil, Shell, Sinopec, Statoil, Talisman, Vale do Río Doce, and Venoco — are supposed to drill more than 12,000 wells in an area covering 2,400 square miles. For reasons unknown to me, the traditional comparison seems to be Rhode Island: that’s an area twice the size of said state. (It’s also roughly eight New York Cities.) The biggest investors are ConocoPhillips and Talisman, who will jointly put in about $4.3 billion. Together, the projects are expected to produce 11 mcf per day, which is roughly what Argentina currently imports.

The companies are negotiating the deals with the government. YPF, the newly nationalized company, owns roughly 40% of the 12,000 square miles covered by Vaca Muerta. It will be a majority partner in the new fields. So, negotiations with provincial governments, the federal government, and the federally-owned YPF. But ... the companies are also negotiating with Repsol. Directly. Even though Repsol now is only a tiny minority partner in YPF. Which brings us to development #2.

Second, Repsol is suing Argentina in New York. It has now declared that it is looking for punitive damages. On one hand, this makes little sense. American judges will have little reason to bring action against the country unless and until there is an adverse ICSID judgment. But when you look at through the eyes of some unnamed French oil executives, who are willing to explain why they would have done the same thing, the strategy becomes clear.

Their explanation? The lawsuits aren’t aimed at YPF or the Argentine government. They are aimed at anyone who might want to do business with YPF or the Argentine government ... because they will be wandering into a legal minefield. And if they (including even Sinopec) do business in the United States, that is something that they would seriously want to avoid.

Thus ... negotiations with a company that technically no longer controls its Argentine assets, and owns only a 5% stake.

Yes, it is legal terrorism. It is fighting dirty. But heck, it makes for fun watching.

ADDENDUM: The lawsuit will also make it almost impossible for the nationalized YPF to raise funds in the United States. Considering the mess that Argentina is in regarding foreign exchange, that is going to be a serious problem. The Argentine government may not need foreign financing to fund its activities, but the businesses and people resident in Argentina increasingly do. Thus, capital controls ... and a headache for YPF if it cannot borrow in hard currency.

A dissenting view on Argentine resource nationalism

 I am often quite left-wing, especially when it comes to resource nationalism. That said, it is probably clear to anyone who reads this that I think the Argentine seizure of YPF is silly. Justice? No sir, you sold it fair and square ... and for a price much higher than YPF’s most ridiculous claim. Revenue? There is that $1.2 billion per year, and you can raise taxes if that is the problem, and anyway the government says the reason for the expropriation was to increase investment. Investment? Argentina has an export policy that makes development unprofitable, even at sky-high prices ... and the reason YPF paid such high dividends was because of the deal with the Eskenazis forced on them by President Kirchner. And then there is the threat of sanctions. (To be fair, the latter threat is a small one, given the European Union’s fetishization of legal authority, something that, say, would concern much less the United States or People’s Republic.)

In short, nationalizing YPF was a dumb idea.

But here is a counterargument from Mark Weisbrot. I like Mr. Weisbrot, but it seems to me that he has recently become a bit knee-jerk in his defense of Latin American heterodoxy. Still, he might be right, and since this blog has implicitly assumed that the nationalization was a silly idea, we should present the opposing view. And here is another.

What say you?

A question for the readership

 How can the fact that Repsol was on the border of selling its stake to Sinopec be reconciled with the fact that it was contractually obligated to buy back the Eskenazi’s stake at $38 per share?

Oligarcas argentinas

 Now Bloomberg Businessweek reports that Repsol is obligated to buy back the Eskenazi shares in the event that it loses control of YPF. I have not gotten direct confirmation of this, but the lawyers interviewed by Bloomberg do not believe that it will be enforceable in the event of expropriation.

It also seems that the Eskenazis borrowed a lot more for their YPF shares than the initial reports indicated. They owe $560 million on a loan put together by Credit Suisse, Goldman Sachs, BNP Paribas and Itaú – worse yet, according to the Financial Times, the balance is due next month. They also owe $700 million to a syndicate of Itaú, Credit Suisse, Citibank, Standard Bank and BNP Paribas.

It is not clear how Enrique Eskenazi gained control of the Petersen Group. The story, perhaps apocryphal, is that he met the owner in a psychiatrist’s office, which would be a very Argentine way of receiving an opportunity. He told an interviewer that he somehow got from that meeting to become “an adviser, then a director and finally ending up with the company.” In Santa Cruz province, he met Governor Néstor Kirchner, who helped Eskenazi take control of the Banco de Santa Cruz and steered construction contracts his way. “Then came what must have seemed a wily business deal to move into YPF without having to stump up the cash.”

We still do not know why they have fallen out with Cristina, but according to Lucio di Matto, she became angry at Sebastián Eskenazi’s “salary and purchase of a $5m helicopter at a time when YPF was paying hefty dividends instead of ploughing profits back into boosting production.”

It can’t really be that petty, can it?

Play it again, Cristina!

 What will happen? Well, Setty pointed out that we have seen this movie before. In general, I think he is correct ... with a wrinkle. 

1. Nationalization;
2. Giant compensation claims from Repsol ... say, I dunno, $10.5 billion;
3. Long loud wait;
4. Long drawn-out arbitration;
5. Payment from Argentina ... well after Cristina’s term ends in 2016!

There is, however, a wrinkle. That wrinkle is that Argentina is the first country to try to stick it to ICSID. They have just said no. That has, shall we say, annoyed other countries. Consider that the Obama Administration has imposed sanctions on Argentina ... the first time that an American president has used the 1974 authority. The diplomatic reaction from Spain ... and Britain, and the European Union, and Mexico and Chile and (OMG!) Bolivia ... has been ferocious. This is looking much more like 1968 or 1938 than it is like more recent expropriation events.

It might play out quicker than we expect. The big if is the European Union. If it uses its muscle, regardless of legality, then Argentina is going to hurt. If it does not, then the Setty calendar will play itself out.

Either way, it will be a show.

Observatorio argentino 15: CFK throws the Eskenazis under the bus

 In our last installment, there were some questions about how badly the YPF expropriation would hit the Eskenazi family, old allies of the President’s late husband. Federico suggested that there had been a falling out. I responded that it really depended upon the details of the loan contract.

When in doubt, go to the source! The SEC is a marvellous organization (write your Congressman and tell ‘em that it needs more money!) and the 20-F is a marvellous form. From Item 7 in the appendix:

Pursuant to the share purchase agreement entered into by Petersen Energía and Repsol YPF in 2008, Petersen Energía purchased 58,603,606 ADSs, representing 14.9% of our outstanding capital stock, from Repsol YPF for a total purchase price of U.S.$2,235 million, or U.S.$38.13758 per ADS. Petersen Energía’s purchase of our securities was financed by the drawdown of U.S.$1,026 million under a senior secured term loan facility provided by certain financial institutions, borrowing of U.S.$1,015 million under a seller credit agreement entered into with Repsol YPF and equity provided by Petersen Energía’s shareholders. The seller credit agreement matures on February 21, 2018. Principal payments are required to be made at certain periodic intervals commencing in 2013 until the maturity date. The loan under the seller credit agreement bears interest at 8.12% per year until May 15, 2013, and thereafter at 7.0% per year, and contains other customary terms and provisions.

Securities purchased by Petersen Energía are pledged as collateral under the senior secured term loan facility and the seller credit agreement. The seller credit agreement is subordinated to the senior secured term loan facility.

The same applies to the loans made in 2011 to finance further purchases. OK, the Eskenazis are on the hook if they cannot pay. What about the buyback clauses? Page 126:

Lock-Ups and Transfer Restrictions

Petersen Energía has agreed not to sell any shares of our capital stock for a period of five years, subject to certain exceptions, including the condition that Repsol YPF continues to hold at least 35% of our outstanding capital stock. In addition, if our dividend payments are insufficient for Petersen Energía to meet its obligations under the senior secured term loan facility, or if Petersen Energía repays the senior secured term loan facility in full, Petersen Energía may sell shares of our capital stock ...

Repsol YPF has agreed to hold at least 50.01% of our capital stock for a period of at least five years, unless Petersen Energía repays the senior secured term loan facility in full.

In other words, there is no buyback clause: the contract just lets the Eskenazis dump their stock if dividends fall low enough to make the loan no-longer self-financing.

The Eskenazis would have been much better off if the Argentine government had expropriated them along with Repsol. Federico is right! Something is rotten in the state of Argentina, it seems. I wonder what they did to get President Fernández so angry at them?

Observatorio argentino 14: clientelismo político

 It seems that Argentina will be nationalizing only Repsol’s stake in YPF. The Eskenazi family won’t be directly affected. This was not what I expected.

Some facts: the Petersen Group, owned by the Eskenazis, owes Repsol $1.9 billion which it borrowed to purchase its stake in YPF. It owes an additional $680 million to various banks. Early reports stated that the debt contracts had conditional buyback clauses that made me think the Argentine government would want to take them off the Eskanazi’s hands. Now it seems that the loans were collateralized by YPF shares. At $38 per share, the purchase price reported by the Financial Times, that comes to 50 million shares, or 12.7% of YPF.

Under the terms of the Eskenazi deal, YPF is supposed to pay dividends equal to 90% of net income. The government wants to stop those payments, of course: the point of the exercise is to increase reinvestment. In that case, the expectation is that YPF will default ... and according to Reuters, Repsol will get the shares.

I am surprised because it means that the Eskenazi family will still have to deal with the banks while holding shares that will only have an option value. I thought the government would have wanted to bail out the Eskenazis via expropriation. Right now, they stand to lose. They own 24.55% right now, or 96.6 million shares. A default on the Repsol loans will probably knock that down to 46.6 million shares. They spent (at $38 per share) $1,769 million to acquire them. They borrowed $680 million and put up $1,089 billion of their own money. Those shares are currently worth $907 million at $19.50 per share. $907 million − $680 million < $1,089 million = a dilemma for the Fernández administration.

It seems to me, based on the limited information so far, that the government has decided that its easier to let the Eskenazis unwind half their stake via default and make the rest up to them in some other way ... that will be cheaper than paying them for their stake.

The other possibilities are (a) the Eskenazis paid less than $38 per share for their non-Repsol-financed stake, but since the price of YPF never went below $34.49 in 2011, that seems unlikely; or (b) they borrowed more than $680 million to somebody against whom they can easily default. But absent those things, the Fernández administration will either need to make them whole ... or risk alienating a very wealthy family that has been a strong supporter.

Perhaps Cristina has decided to cash in those chips. That seems unwise, but sometimes in politics it makes sense to screw over your old friends. Somebody more plugged into Argentine politics should weigh in here. Anyone?

UPDATE: If ... and this is a big if ... courts find in favor of the Eskenazis, then there is a way that this could sort itself out in their favor. The Repsol loans included a buyback clause, as noted above. If YPF cuts its dividend, then the Eskenazis could, in theory, activate that clause. Repsol, obviously, won’t follow through. If a court then declares the contract null but lets the Eskenazis keep the shares, then the family would hold 96.6 million shares worth $1,883 million dollars. Even after subtracting the value of their bank debts, they would avoid losses on the deal.

That, however, is a big if. It depends on the country whose law governs the contract. If it’s Argentina, then I can imagine the above scenario. If it’s the United States or somewhere in Europe, then President Fernández will still have a dilemma.

Observatorio argentino 13: hechos sobre la expropriación petrolera

 I did not expect my prediction to come true so fast! The Argentine government moved to nationalize 51% of YPF today. You can find the text of the expropriation decree here.

What are the key points? First, the decree creates a National Hydrocarbons Council. The Council will have representatives from the both the national government and the provinces, directly. This is less important than it may sound.

Second, the national government will take 51% of the state share of YPF (51% × 51% = 26% of total equity); the other 49% will be distributed among the provinces that currently produce oil and gas. This is also less important than it may sound.

Third, for the time being the federal goverment will run the show. (See Article 9.) In fact, it will run the show for 50 years. Ah.

Fourth, there will be no reprivatization without a 2/3rd vote of Congress. (Article 10.) Do not bet on the Argentine courts holding that constitutional. Future Argentine governments and congresses will do what they will do.

Fifth, compensation will be decided according to Article 10 of the National Expropriation Act, aka Act Nº 24,199. “Compensation will only consist of the property’s objective value and any damages that are a direct and immediate consequence of expropriation.” The National Appraisal Council makes the decision according to a set of published norms, which you can find here and (in more detail, and in English!) here. Key quote:

“In case of appraisals for expropriation, it will be appropriate to determine the property objective value, understood — according to the Act Nº 21,499 — as the sum of money which permits the party subject to expropriation to get compensation for the value of the affected property and for the damages which are a direct consequence of the expropriation, in equivalent conditions to those which were previous to the expropriation, without taking into account personal circumstances, emotional values, hypothetical profits or the greater value which the works to be carried out may confer. Therefore, the objective value can square with the market value when it may be determined or with the depreciated replacement cost (CRD) instead.”

It is easier to parse if you redact it, but I want to post the full text. The upshot is that the law says market value is the correct value. Market value, to answer Bernard’s second question, is “The net amount which reasonably could receive a seller for the sale of a property on the date of valuation.” Given that the book value of YPF’s fixed investment is $9.8 billion, and its total assets are worth $13.7 billion, it seems unlikely that the Argentine government will try to use replacement costs for a company that had a market value of only $8.6 billion on the eve of the decree. That said, it is conceivable that the Argentine government will argue that the company is worth only $4.6 billion, which is the book value of shareholders’ equity.

Under the Spain-Argentina BIT, the compensation standard is simply “adequate.” If the dispute goes to arbitration, it is very unlikely that the panel will use net worth as a standard, rather than market value as either an NPV calculation or, uh, actual market value.

The thing is, arbitration is sloooooow. Article 10 of the Investment Treaty gives the two governments six months to hash things out if Repsol asks for it. Then Repsol has to go through local courts for 18 more months. At that point an arbitration panel can be convened (either under ICSID or Unictral), but there is a three-more-month cooling off period. In other words, unless Argentina makes Repsol an offer it can accept, decisions won’t even start to be made until July 2014. Right in time for the World Cup!

My money is still on a settlement that give YPF shareholders at least the Friday, April 13, value of the company. (Yes, its value on Friday the Thirteenth.) Argentina has the money, and even if Spain isn’t about to park one of its aircraft carriers off the coast (that’s Britain’s job! Although some Argentines are mocking the “English” for lacking a carrier to send) it does have points of leverage. Plus, Argentina needs foreign investment, and lots of it. It is in everyone’s interest to settle.

My next post will go back to the cases that Argentina is currently fighting in ICSID. In those cases, justice is on Argentina’s side. Here, though, not so much ... not that it matters.

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.)

The empire strikes back, weakly, and after long delay

 “With regards to provisions in several FTAs that give foreign investors the right to sue governments directly in foreign tribunals, I will ensure that foreign investor rights are strictly limited and will fully exempt any law or regulation written to protect public safety or promote the public interest.”

—Senator Barack Obama, on the campaign trail in 2008

The Argentine decision to avoid paying ICSID expropriation judgments is finally coming back to haunt it. A few weeks ago, the Obama administration announced that it would begin to vote against credits for Argentina from multilateral lending organizations. A few days ago, the administration announced that Argentina will no longer be eligible for duty-free access to the U.S. market under the Generalized System of Preferences (GSP).

Argentina exported $477 million to the U.S. under the GSP in 2011, mostly cheeses, candy, leather, strawberries, wine, and lithium. Removing GSP will cost Argentina $17 million per year, assuming, of course, that it continues to export the same amount.

The Presidential authority comes from the Trade Act of 1974, so named at a time when Congress did not give legislation stupidly cutesy names but called laws what they were. Subchapter V mandates that a country which “has nationalized, expropriated, or otherwise seized ownership or control of [American-owned] property” and “fails to act in good faith in recognizing as binding or in enforcing arbitral awards in favor of United States citizens or a corporation” will not qualify for the GSP unless ...

1. “Prompt, adequate, and effective compensation has been or is being made to the citizen, corporation, partnership, or association”;
2. “Good faith negotiations to provide prompt, adequate, and effective compensation under the applicable provisions of international law are in progress”;
3. “A dispute involving such citizen, corporation, partnership, or association over compensation for such a seizure has been submitted to arbitration under the provisions of the Convention for the Settlement of Investment Disputes, or in another mutually agreed upon forum.”

No country has ever been punished for expropriation under the Trade Act. That may be because no country before now has ignored ICSID rulings. In 2005, CMS Gas received $133.2 million. In 2006, Azurix received $165.2 million. (The awards will accrue interest as long as they are unpaid.) In September 2007, Argentina lost its petition to annul the award against CMS. In May 2008, CMS sold its claim to Bank of America. (More accurately, it sold the claim to a subsidiary of BofA called Blue Ridge Investments.) By then, the $133 million award had grown to $180 million, counting interest. (That is a lot of interest!)

We don’t know how much Blue Ridge paid , but the State Department estimated that it paid around $54 million for the claim and CMS’s 23% stake in the TGN pipeline company. Blue Ridge’s original plan was to flip the claim as quickly as possible. (The Wikileaks cable is fascinating in that regard: Blue Ridge wanted to threaten Argentina with the possibility of selling its claim to a vulture fund that would take them to court in the United States; Argentina apparently planned to use its control over pipeline rates to force Blue Ridge to sell its claim to a government crony.)

About 16 months later, the Azurix case reached the end of the line when an ICSID appeals panel refused to annul the judgment against Argentina. Soon after, in September 2009, Azurix filed a petition to suspend Argentina’s GSP preferences. Blue Ridge signed on. The petition then ground its way through the USTR bureaucracy ... and finally, now,  Argentina is facing sanctions.

There are two points to make about Argentina’s recalcitrance. First, the country has done remarkably well at ICSID. Several decisions have been annuled by ICSID review panels. In at least one case, against a British company, the D.C. Circuit Court ruled that since the contract specified that the company had to first exhaust all local remedies, their decision to go direct to arbitration vacated a $185 million award. Second, in terms of justice, pretty much all the companies going up against Argentina are in the wrong. But that’s a subject for a different post ... as is the question of whether President Obama is living up to the position stated in the epigraph of this post. (He is.)

Do the companies have options other than getting the U.S. government to go to bat for them? If they were natural resource exporters, then the legal remedies would be fairly powerful: ultimately, Argentina would lose the ability to sell production from the expropriated assets. These are service companies, however. It isn’t clear that the courts will rule their way, and it isn’t clear that Argentine has many assets that the courts can seize. (Short version: since the Argentine central bank was not using its New York funds for commercial purposes, creditors could not go after them. I am not a lawyer and cannot say if that would apply in an expropriation case, but I suspect that it would.) Getting the U.S. government involved in muscling Argentina may be their best way forward.

But it is a sign that the arbitration system may crack when used for cases other than natural resource companies. Back to the 1970s!

Angela Merkel finds her inner Teddy Roosevelt: Lessons from Santo Domingo

 It appears that the German government has just announced that it wants Greece to renounce its sovereignty in return for more credit. (Well, at least in return for the release of existing credit lines.) The idea isnt new: in 2002, two prominent economists seriously proposed that Argentina give up its sovereignty for five years. Of course, Argentina has done quite well for nine years by breaking all the rules, but it is far from clear that Greece could copy that, or that Argentina will continue to do well.

There is a historic parallel: the U.S. and the Dominican Republic in 1905. (Actually the U.S. and lots of Latin American countries, ranging as far afield as Peru and Bolivia, plus Liberia ... but let’s wait on that.) Short takeaway: Washington was way more generous back in those benighted days, with very little at stake, than Berlin is being today, despite massive repercussions for Germany if things go wrong.

The backstory was about what you might expect. The D.R. had defaulted; its government was facing multiple armed revolts; and the Germans were nosing around. This latter made Washington nervous that a rebel force (or one of the rapidly-changing governments of the day) might transfer a naval base to Germany in return for aid. In fact, after U.S. intelligence captured a letter from General Demetrio Rodríguez openly requesting aid for President Carlos Morales, Captain James Miller “invited” Rodríguez on board his ship, where he explained: “Neither he [Morales] nor anyone must think for a moment that Germany or any other foreign power could be situated in any portion of the Dominican territory.”

President Morales saw an opportunity. If he could convince the United States to take over his country’s customhouses, using the German threat as motivation, then he could kill three birds with one stone. First, having U.S. troops in the ports would remove them as strategic targets for rebel forces. Second, U.S. officials could manage the customhouses far better than corrupt Dominicans, thereby increasing revenue. Third, if the Americans could be convinced to skim a bit off the top and use that to guarantee debt repayments, then the D.R.’s borrowing costs would go down, and Morales could borrow more on top of the increased revenue. Win win win! Who needs sovereignty? (Two out of the three points, one might think, would apply to Greece today.)

Uncharacteristically, President Theodore Roosevelt (in his own words) chose to  “put off the action until the necessity became so clear that even the blindest can see it.” He was a bit worried that American public opinion might not be thrilled with the idea of involvement in somebody else’s civil war, not while the Philippine War had only just ended two year previously, and not with U.S. troops still fighting in Mindanao. So Roosevelt waited, and the Dominican situation got worse, and the Europeans kept nosing around, and American investors kept screaming, and finally in May 1904 the President proclaimed his famous corollary to the Monroe Doctrine. It read:

Any country whose people conduct themselves well can count upon our hearty friendship. If a nation shows that it knows how to act with reasonable efficiency and decency in social and political matters, if it keeps order and pays its obligations, it need fear no interference from the United States. Chronic wrongdoing, or an impotence which results in a general loosening of the ties of civilized society, may in America, as elsewhere, ultimately require intervention by some civilized nation, and in the Western Hemisphere the adherence of the United States to the Monroe Doctrine may force the United States, however reluctantly, in flagrant cases of such wrongdoing or impotence, to the exercise of an international police power.

Thing is, it still took a while to build support, and there was, you know, an election to win. President Roosevelt didn’t agree to Morales’s request until December 1904, a month after the U.S. presidential vote. The Senate, it turns out, had other ideas. Roosevelt decided that with the election past, that wasn’t a problem, and so the U.S. took over the customhours without a treaty on March 31, 1905.

Under the agreement, the U.S. directed 55% of customs revenue towards debt payments, but it did not do so mindlessly or automatically. Rather, it banked the money until February 1907, when it finally forced the D.R.’s creditors to accept a 50% haircut on their outstanding principal. (The average coupon was reduced to 5%.) In fact, if expropriation claims are excluded, creditors accepted a 57% haircut on their debt.

Moreover, the agreement worked: there was no austerity. Even after the U.S. took 55% off the top, government spending did not fall. Moreover, the D.R. managed to go to the capital markets as early as May 1907, when it refinanced its outstanding post-haircut debt of $15.8 million and borrowed an additional $3.9 million. ($3.9 million is, as a share of U.S. GDP, the equivalent of $1.7 billion in 2010.)

And therein lies the rub. Or rubs. First, the D.R. was not a democracy in 1904; Greece is one in 2012. Second, the D.R. asked for the receivership; the Greek government is not. Third, the U.S. used its good offices to obtain a very favorable debt restructuring; the E.U. (meaning the Germans, really) is letting Greece hash things out with its creditors on its own. Finally, in the case of the D.R. the U.S. really was able to improve custom collection; I’m not sure that anyone believes that a foreign administrator will be able to easily improve the Greek internal revenue service inside a culture of widespread evasion.

In other words, the U.S. was much more generous to its dirt-poor neighboring nondemocracy than the Germans are being towards their not-as-poor fellow democracy. Good luck with that. Unless, of course, failure is the plan.

Argentina beats a dead cow, and finds oil

 Argentina has oil! Lots of oil. The problem is politics. More specifically, high export taxes that effectively cap the price of oil for producers.

In November, Repsol YPF found a billion barrels at Loma La Lata. (That’s “Tin Can Hill” in English, which I really like.) Loma La Lata is in the Vaca Muerta region (yes, Tin Can Hill is in Dead Cow) which has seen previous shale oil discoveries. In December, it made another discovery.

How fast can the oil be pumped out of the ground? Shale oil (also called “tight oil”) is produced by hydraulic fracking, where you drill a vertical well, turn it horizontal through the shale, blast explosives into the rock, and then pump pressurized fluid in to break it up further and liberate the hydrocarbons.

Shale oil wells have hyperbolic decline rates. A typical well might initially produce 900 barrels per day, declining to 200 by the end of the first year, and well under 100 by five years. Wells are generally spaced at 160 acres. So, back of the envelop: YPF is prospecting 428 square kilometers, or 661 160-acre blocks, which at an average daily production (over five years) of 260 bpd translates to about 170,000 barrels per day. Multiply that by two (for the second field) and you have just increased Argentina’s production from around 800,000 bpd to 1.14 million! Actual exploratory wells in the Vaca Muerta have started at 500 bpd, which would still leave you with 990,000 bpd after just these two discoveries.

Existing production will decline, but Argentina is lucky in the sense that it can adopt technologies from elsewhere: oilfield surveillance is two decades behind the U.S. Better oilfield surveillance means better use of secondary recovery techniques. As far as those techniques go, YPF is a world leader. Combine new surveillance technology with YPF’s existing expertise, and there is a good chance that existing fields will continue to produce for some time. In 2010, YPF managed to replace all of its reserves entirely through secondary recovery.

(In terms of gas, the picture is even brighter: Argentina looks to have the second-largest shale gas reserves on the planet, after the United States. But that is for another post.)

The production tax regime is fairly light, as these things go. The provinces charge a 12% royalty, plus a 2% revenue tax on upstream companies. The feds then charge a 35% income tax. Taxes have to be relatively light, because production is expensive! Operating costs in shale plays in Texas are around $8 per barrel; in Argentina they are likely to be around $10. Capital costs are even higher: wells cost about $12 million in Argentina. Total costs, then, could range as high as $56 per barrel. Now that is a worst case scenario: a more-likely number is $27 and it could be as low as $19 ... but the high number is not outside the realm of possibility. Certainly marginal costs will go that high once production ramps up.

And therein lies the rub. Argentina controls oil prices. Well, no, it doesn’t quite control them; it only does that for gas. (And that is why shale gas development is not going to go very fast.) But it has very high export taxes which effectively cap the price of oil at $42 per barrel ... which is a bit of a problem for high-cost shale plays. 

The system actually works as follows: when the international price goes above $42, the export tax kicks in at $18.90 per barrel. When the international price hits $60.90 ($42 + $18.90), the tax effectively becomes 100% of all revenues above $42. Argentine firms have managed to get around that by selling at higher domestic prices: in 2011, some companies realized crude sales as high as $60 per barrel, with an average around $55. (See page 14.)

This is going to be a mess to change. Shale oil could get a special rate, of course. (In practice, that would probably be a rebate of some sort.) Domestic oil prices could be allowed to rise. (Probably not a terrible idea, although who knows? Maybe there are giant increasing returns to oil consumption in the agricultural sector.) Export taxes could be lowered in general. (Which also, of course, means allowing domestic prices to rise ... and would deprive the government of much-needed revenue.) But it is still going to be a mess. No American has any business these days criticizing foreign democracies for having sclerotic political institutions, but President Fernández has a tricky political situation at home. I would not be that optimistic.

And then, of course, there are the Mapuche. As Setty has pointed out, early statements from the industry do not bode well.

I wish Argentina luck. But I think it might take a little longer than the analysts believe.

This would be a painful way to end European union

 Over the last two months, family business has kept me away from blogging. Before that, I was in the throes of finishing a first draft of a book manuscript. The family business is over and I’m now in the far more relaxed process of fixing the manuscript, so this time I think I think we’re really back!

In December of 2010, I made a bet with Doug Muir and Omar Serrano that the eurozone wouldn’t make it to March 25th, 2013. If any of the big eurozone economies leave the single currency, I win. The bet is structured so that I will lose even if Ireland, Portugal, and Greece all abandon the euro; it has to be Spain or Italy. The loser will either fly across the Atlantic to meet the winner, or pay for the winner to fly to meet them, and then buy them a steak dinner, with port and cigars.

The big question, of course, is how a government could leave the eurozone. Now, Nick Rowe has proposed a way. “Eurozone governments and banks that cannot pay their obligations in euros may end up paying their obligations in a scrip that is not pegged to the euro. A scrip issued by each national government that is worth whatever people think it is worth. And if people start using that scrip as a medium of exchange, and medium of account, it becomes a new money. Sure, Greek supermarkets might prefer payment in euros, but if their customers can only pay in New Drachmas, then it’s either accept New Drachmas or let the vegetables rot on the shelves. And the supermarkets’ suppliers might prefer payment in euros, but it’s either accept New Drachmas or let the vegetables rot in the fields. And the workers picking the vegetables might prefer payment in euros, but it’s either accept New Drachmas or nothing.”

Sounds almost painless! Matt Yglesias implied so. But it wouldn’t be! It would be a mess and cause the economy to cycle the drain until the government defaulted on its debts anyway. Moreover, it would not cause the scrip to drive euros out of circulation.

Consider, for a moment, what Spanish obligations consist of. In part, they are debt payments. Spain’s debts, however, are denominated in euros and will remain denominated in euros no matter how many nuevas pesetas are printed unless the Spanish government withdraws altogether from the European Union. Rather, the obligations which the Spanish government can insist on paying in nuevas pesetas are the obligations that it owes to its own citizenry: salaries, pensions, unemployment benefits, etcetera. The nueva peseta would trade at a discount against the euro, of course, but that is the idea.

Except ... the incomes of Spaniards would drop in terms of euros. They would be increasingly earning in discounted nuevas pesetas. The problem, of course, is that they would then be paying less taxes in terms of euros. But the Spanish government owes debts denominated in euros! The debt burden would rise. The more the debt burden rises, the more the government needs euros to pay it. The government would, of course, trade nuevas pesetas for those euros. That would increase the discount on nuevas pesetas, further driving up the size of the debt burden, further increasing the discount on nuevas pesetas. (While this is going on, the interest rate on Spain’s euro debt would skyrocket, of course, unless it is by then owed to the European Union rather than private investors. In that case, however, it is very unlikely that Spain would be going around issuing scrip to pay salaries.) At the end of the story Spain’s income in euros falls enough to force the government to default on its euro debts, but only after setting off an inflationary spiral.

There’s a second problem. Rowe wrote, “Greek supermarkets might prefer payment in euros, but if their customers can only pay in New Drachmas, then it’s either accept New Drachmas or let the vegetables rot on the shelves.” That, however, isn’t correct. Government employees might be paid in new drachma, or nuevas pesetas, but they can exchange those pesetas for euros. The supermarket cannot be required to accept those pesetas unless Spain leaves the eurozone. If the owner insists on being paid in euros, then the customers will swap their pesetas for euros in the market and he or she will be paid in euros. This is a process that has occurred in many high-inflation countries, where people abandoned the local currency for the dollar ... and in most of those countries, the dollar was not legal tender! In short, the logic breaks down at that point: it is not clear why the pesetas would replace the euro as a medium of exchange ... except, of course, to make tax payments.

Of course, it isn’t clear that Spanish government employees (or pensioners, or students, or the unemployed) would want to receive devalued nuevas pesetas in lieu of euros. They would, quite rationally, perceive it as a pay cut. Anyone who owed money would be doubly hit: their debts would still denominated in euros.

Finally, such an action would be perceived (correctly) as a prelude to formally leaving the eurozone, precipitating the mother of all capital flight. Without leaving the eurozone (in fact the country would have to leave the European Union altogether) the government would have no way of combating that flight.

In short, introducing scrip would be a terrible way to exit the eurozone. It would run a high risk of triggering a depression, and it would certainly worsen the country’s debt burden. Professor Rowe is, I think, incorrect. History bears this out: the issuance of patacones (or créditos) in Argentina around 2000 did not result in the creation of a new Argentine currency or stave off default. Rather, they contributed to the depression, and quickly inflated away.

There are many ways in which the eurozone could fail. The issuance of a parallel currency for any length of time strikes me as one of the worse ones. Is there a hole in my logic?

Happy July 4th, and some thoughts on Diego Maradona

 My wife and I just saw the fireworks from our roof. Wow! The sight, and a lot of hard work trying to nail down the details of the Salvadorean revolt of 1932 and subsequent debt default, have almost been enough to get my mind off the Argentine defeat at the World Cup.

That game really got me down, much more than the U.S. defeat or the Mexican loss. Of course, Mexico lost to Argentina, which might have mitigated things, although the people in the Cambridge bar hearing me lead a chorus of “Mexicanos, a grito de guerra” and shouting “Me-xi-co, Me-xi-co!” probably would not have believed that. Nor would my friend Kerry, or the fellow in the middle, an old Cantabridgian named Mike who stopped us on Massachusetts Avenue to talk about the match and the Cup.

But it’s true! The Argentine defeat feels more like the Yankees’ defeats in 1997 and 2001, while the U.S. loss is more like the Yankees beat-down in 2004 ... or, to be honest, every year between 2001 and last year. The question is: why the difference? The Argentine collapse, in fact, superficially bears more resemblance to the 2004 Yankees. After some reflection, I think I know, but I’d be interested in the thoughts of others from more soccer-mad countries.

Basically, I backed the U.S. from national pride and loyalty. That’s a strong emotion! And to a lesser extent, my loyalties towards Mexico and the madre patria are similar. The line-up of players on the squad, the identity of the coach, those could make me more connected to a U.S. team if they’re very good and they could greatly annoy me if they’re bad, but they aren’t why I’m a fan.

Argentina, though, that’s different. I like the squad. I like the way Messi and Tévez play, not mention Gonzalo Higuaín and (seriously!) Juan Sebastián Verón. I enjoyed watching Maradona’s borderline-insane all-attack strategies. “Permanently on the attack,” is how he described it himself. It was fun! It was, in fact, the complete reverse of the Paraguayan strategy ... which I will also cop to immensely enjoying, an opinion in which I seem to be almost unique. (Note here that I am Furia Roja supporter, madre patria and all that.) I did not care about Argentina in 2006, and I probably will not care much about them in 2014. But this squad I liked, and I am still sad that I will not see them again.

I am a huge Yankees fan, but I loved the squad that played between 1996 and 2002. Of course, the difference between Joe Torre and Diego Maradona is that Torre had style and was very good at his job. Diego, more just the former. But still, it was immensely entertaining. And, well, Maradona is impossible for me to dislike. (Which is not to say that I do not understand why opinions on that may differ.)

On the international level, have any of my readers ever fallen in love with the style of a squad, even if it isn’t conventionally good soccer, or whatever else?

Bolivian energy and the neighbors

 The New York Times has an article today entitled, “Neighbors Challenge Energy Aims in Bolivia.”  It is quite informative.  But it gives the wrong impression about the effects of Bolivia’s energy policy under Evo Morales.  The article makes it seem as though Bolivia shot itself in the foot by nationalizing the gas.  That is probably not true.  Rather, Bolivia has shot itself in the foot by refusing to build a pipeline to Chile.

Argentina’s energy policy has nothing to do with Evo.  In fact, inasmuch as Argentina has a coherent energy policy, it currently revolves around importing more Bolivian natural gas. Its roots lie in the peso devaluation of January 2002.  The government froze the peso-price of natural gas, in order to protect Argentine consumers who were already suffering an economic downturn considerably worse than the Great Depression.  The effect was to knock down the residential gas price from $1.88 to 66¢ per MMBTU. 

That wasn’t a problem until the southern hemisphere winter of 2004, when gas companies cut supplies to large industrial customers. After all, they could get much higher prices from exporting the gas to Chile.  Well, the Kirchner administration reacted much as you’d expect:  they banned gas exports. The Interior Minister of Argentina apologized to the Chilean government for the interruptions — but in May 2005 the Argentines once again slashed exports to Chile. The story repeated itself in 2006, when Argentina cut exports altogether for two weeks.  In fact, Buenos Aires added insult to injury when the government raised export taxes from 20% to 45%.  

Eventually, however, as the economy recovered, Argentina stopped being an exporter.  So the Fernández administration began to walk back the policy.  First, she allowed prices to rise to around $2.50 per MMBTU. Second, she created incentives to increase the domestic supply.  Finally, she moved to try to lock-in relatively low gas prices from Bolivia. Argentina imports LNG, but it costs twice as much as Bolivian gas.  The country’s LNG terminal offers a useful hedge against any Bolivian attempts to renegotiate the contract, but both parties would prefer to buy Bolivian gas for $5 instead of Trinidadian gas at $10.  (In fact, the terminal goes unused for long periods.)  

What about Brazil?  Well, what about Brazil?  It is true that the nationalization provided some impetus for the country to become self-sufficient, but less than you might think.  First, the Brazilians pushed back hard, even threatening to dismember Bolivia if it messed with the price or volume terms of the contract.  And Brazil won.  So while Petrobras may have been disillusioned, the situation worked out well from Brazil’s point of view. 

In fact, Brasilia had a good reason to want to allow Bolivia to retain more of the rents from resources, as long as Brazilian consumers weren’t affected.  Simply put, the bet was that a wealthier Bolivian government would result in a more stable Bolivia, and it’s politically easier for Brasilia to aid La Paz by resisting pressure to defend Petrobras profits than it would be to write checks.  The logic is identical to that behind the 2009 renegotiation of the Paraguayan hydropower contract — the primary difference being that since Brazil initiated the hydropower deal, it has been able to extract more political benefits from Asunción than it has been able to receive from La Paz.

Now, many people in Brazil say that Petrobras is upping domestic production in response to Bolivia’s tax hike. It may even be true.  But we don’t know!  Domestic exploration was good business with or without  Evo Morales.  The increase in Bolivia’s government take made it more so, but we don’t have the numbers to say that domestic supply would not have increased regardless.  I’m not faulting the article;  it’s a subtle point. I am faulting them for getting Argentina backwards ... but with Brazil, we just don’t know if Evo really mattered.

Chile is where the article is spot on.  After Argentina cut the taps, the Chilean government attempted to strike an agreement to build a pipeline from Bolivia, but the negotiations ignited a firestorm in Bolivia.  The anger surged over the fact that the pipeline would pass through territory that Chile had seized from Bolivia in 1878.  Horrors!  The Chilean government periodically floated a trial balloon of transferring a strip of land along the Peruvian border to Bolivia, but Lima protested, since Chile’s far far north had been originally seized from Peru. 

Nobody in Peru seriously contested the border ... but accepting a century-old annexation and allowing the annexed land to be transferred to a third country were very different things.  After a brief and goofy Bolivian flirtation with the idea of building an underground pipeline that would surface far out to sea, the idea died. And thus Bolivia lost a natural market, and whatever possibility it had of producing LNG. 

The article makes no effort — not that it should! — to produce a cost-benefit analysis of Bolivan policy for Bolivia. The country lost opportunities in Chile and it may have lost opportunities in Brazil ... but it got a lot more revenue at a politically-dicey time. That, I have to say, is not nothing. 

What should Evo do now?

Trills, warrants and kickers

  This post is not about organized crime. This post is about a proposal from Robert Shiller and Mark Kamstra featured in today’s New York Times. (Sanchez got the first down! At the opposing 46.)  The idea is for the government to issue bonds whose payout is linked to GDP. (Sanchez sacked!  Commentator yells, “Are they trying to kill Sanchez?”) In the case of Shillers proposed “trills,” the payout would be directly linked:  each one would yield one-trillionth of quarterly GDP every three months.

It’s a fine idea, although I suspect that the benefits would be, well, limited. They protect against inflation, but so do inflation-linked bonds, and investors would presumably demand some sort of equity-ish premium. That said, they’d offer an easy way to diversify ... you get to buy a security linked to the income of every single income-earning entity in the country! On the other hand, the income stream won’t come directly from those entities, but via the tax revenue that they generate for the federal government. 

(Holy s--t! Did that just happen? Challenge. Why yes, it did. Two-point conversion, 18-15.)

But that is not what this post is about. This post is just to point out that Argentina issued something not unlike the trill back in 2004. The “GDP kicker,” pronounced “keek-air,” aka a warrant, offered creditors payments equal to one-twentieth of the dollar value of all GDP growth above a threshold of 4.2% per year. Bosnia, Bulgaria, Costa Rica, and Singapore have issued similar securities. None of them are as simple as the trill, of course, but still. When have you heard of Argentina being a financial pioneer, in a good way?  (Field goal! 21-15.)

Of course, there are some people who think that Argentina gave away the store with the kicker. And they may be right! Which is what worries me about the trill. It might turn out to be a rather expensive way to finance the borrowing needs of the government ... and that, ultimately, is what I tend to think government debt is for. Although Alexander Hamilton would not agree.

This movie looks really bad

  Well, I guess I'm not really all that much of a lefty, all things considered.  This movie looks really really bad.  Although what Raúl Castro says in the below clip is true.

Caray.  I am not sure that Stone is doing Lula or Lugo any favors with this film.  And I find it sort of amusing that he lumps President Fernández in as a Venezuelan ally.  Very ironic portrayal, considering her government's reaction to Venezuela's nationalization of Argentine-owned assets. 

Revolutionary comrades-in-arms they are not.

Is America in decline?

  I don't mean as a world-bestraddling empire and all of that; I mean as a polity with a government capable of responding to the needs of its citizens. Here you can see a moderately-libertarian fellow worrying that the United States is headed the way of Argentina. In comments you can read the counterarguments proposed by my friend and colleague, Carlos. Or you can read this post on the same blog, which summarizes Carlos’s arguments.   

The above picture is of a beautiful woman in the most American part of America, the old stomping grounds of the Chase boys. Clearly not Buenos Aires. Could it become Buenos Aires, without the charm?  Could American political institutions cease working? Read the links, then read the below, and tell me what you think.

CARLOS FOR THE DEFENSE:  And to be fair, I should put up some indicators that I think would disconfirm my idea [that the U.S. is well within historical norms, and looks to muddle through quite well]. There might be too many “veto points” in the Federal system to resolve new problems of government in a timely manner. The military might not accept civilian authority. The monetary and regulatory agencies might be too slow or too unwieldy to deal with unexpected changes in the global economic system. The U.S. population might become apathetic and gullible to the point of civic dysfunction.

Out of those four indicators, I see maybe one-half (and it’s not the last one). I won’t count the experiences of the states, since the Federal system allows them a level of moral hazard that the U.S. as a whole doesn’t have.

Though that would be an additional failure mode: enough states go dingo that the Federal system can’t deal. That hasn’t happened since the 1850s.

A real anti-imperial triumph

  It seems as though the Argentine ambassador in France will no longer need to pay embassy expenses out of his own pocket.  A French judge lifted the freeze imposed on April 3rd.  More importantly, a German judge released the funds that German companies owed Argentine tax authorities.  Interestingly, Judge Wölber did not base his decision on sovereign immunity.  Rather, he ruled that since the tax payments were owed by the companies’ Argentine operations, German courts had no authority.  It remains to be seen if this precedent will be followed by other European courts, but the Argentine government is optimistic.

Interestingly, U.S. courts have taken the same position.  In 1999, the New York-based Leucadia National Corporation sued Nicaragua over $26 million in defaulted debt that it had purchased for $1.14 million.  A New York court granted the company $87 million.  (No, I don’t know why.)  It tried to collect by attaching Nicaragua’s share of the ticket and landing fees paid by U.S.-based airlines that flew to that country.  U.S. courts, however, refused to uphold the judgment.  But don’t cry for Leucadia.  Eventually the World Bank paid off the debt at 4.5¢ on the dollar, including accrued interest.  By my calculations, Leucadia received about $7.8 million, for a nice return of 584%. 

I am increasingly unsympathetic to Argentina.  But I am also relatively unsympathetic to the vulture funds that try to use the judicial system to impose sanctions on defaulting governments.  I may change that position if we start seeing more ploys like President Correa’s brilliant gamble, but that’s still a hypothetical fear, not a real one. 

P.S.  It seems like I was wrong about Ecuador.  I’ll discuss why, but only if there’s interest.  No reason to admit error if nobody cares ...

Big dumb error, but an interesting bit of history anyway

  That flag that perplexed me? Well, it's the Entre Ríos provincial flag. In Uruguay they call it the Artigas flag and you can see it outside museums and the like, although the shade of blue is rather darker. In Argentina, it seems to mean nothing other than the flag of the province. 

I really should have known that it was the provincial flag. My excuse is that I've never actually been to Entre Ríos. Route 9 skirts it, but never actually enters the province.

So much for there being some sort of living historical symbolic connection across the Uruguay River. Nope. Now, in historic terms it makes sense that Entre Ríos would pick a flag based on the old Liga Federal, but I'd bet not one in fifty people (on the Argentine side) could explain its origin. (Leticia?) 

And we get a hit from Uruguay just as I make the mistake! Ah, ni modo.

Anyway, I need to rent a car and spend a week or two driving aimlessly around Argentina. That would be a dream vacation. I just need an excuse to do it. My wife just nixed heading there in June. Too cold.