Posted on 09/20/2012 6:56:11 PM PDT by blam
Crisis Replay… Soon Argentina Will Be On Sale Again
By Ronan McMahon
September 20,2012
Just over a decade ago Argentina spectacularly unraveled with the biggest default in history — $100 billion. Dollar deposits were converted to pesos. Then, overnight, the peg of one-to-one with the dollar was broken. The unpegged currency immediately devalued. Savings were wiped out. Banks were set alight and locals took to the streets in protest.
That crisis created the biggest buying opportunity of a decade. During the fire sales you could have picked up a historic, high-end property in Buenos Aires or a vineyard in Mendoza for a song.
Today, Argentina is back in a bind. There is a strong possibility of another crack-up within the next year. And then we’ll have the same opportunity we had a decade ago. The signs are all there. The streets of Buenos Aires have recently seen the return of the backstreet currency exchange.
According to the official exchange rate, which is subject to capital controls, 4.4 pesos buys you a dollar. But on the street people are happy to pay up to 6.7. Inflation runs at 25%. The purchasing power of an Argentine’s peso savings is going down by one-quarter each year.
The government claims inflation is 9.9% and has outlawed calculating or quoting any other inflation rate. Forty percent of dollar deposits have been withdrawn from Argentina since last October. Now there are capital controls. You need special permission to move your dollars overseas.
To take a foreign vacation, Argentines have to apply to a bureaucrat for permission and explain where they got the money for the trip. And there are rumors that it will be made illegal to talk about the existence of the shadow market exchange rate for dollars.
But a lot of Argentines’ dollars and pesos don’t reside in bank accounts. Property transactions typically take place in special rooms in lawyers’ offices, and they’re a cash deal. There’s that much distrust of banks. They are fine for day-to-day things like paying your electric bill. Not for your savings, though.
And these transactions more often than not take place in dollars…if you pay in dollars you could get 25% off the price of property. The government has outlawed this, making the buying and selling of real estate in dollars illegal. Just one more rule Argentines will find their way around.
By some reports, if an Argentine company complied with all the taxes and tariffs it faces, they would eat up more than the company’s pretax profits. So the shadow economy thrives. By necessity, it seems, rather than greed to pay less tax. Middle-class day-trippers take the ferry to Uruguay to put their savings in deposit boxes. The rich spend millions on condos in Punta del Este, Uruguay.
For Argentines, real estate is their bank. They understand inflation and expropriation from bank and pension accounts. If they have some spare cash, they’ll buy an apartment. Or a beach home across the Río de la Plata in Uruguay. Or a condo in Miami.
Now fewer Argentines are using local real estate as a hedge against inflation. New construction and permit applications have fallen off a cliff. They just want their cash out.
The government claims that the rate of outflow has slowed. But with every passing week, companies and individuals figure out new ways to get their cash out. For instance, companies buy financial instruments locally in pesos that they immediately resell in New York for dollars.
Argentines have seen it all before. When a government and a banking system take your life’s work with the stroke of a pen, you don’t forget. If you’re lucky enough to rebuild your savings, the next time you will be ready. And the harder the Argentine president, Cristina Kirchner, tries to keep assets in the country, the more they’ll be siphoned out.
Meantime, Argentina is all but frozen out of international debt markets. The government hasn’t reached a settlement with the group of creditors (known as the Paris Club) since its last default. So the country and the banking system desperately need these deposits to stay afloat.
But they continue to do incredibly dumb things. Two years ago President Kirchner seized private pension accounts. Now she is going to lend $4.4 billion of this money, at a rate of one-tenth the inflation rate, to new home buyers. A lottery will decide who gets the loans — not capacity to repay.
Argentina has major competitive advantages in beef production. But land under beef farming is contracting. Beef producers face large and complicated export tariffs and are forced to sell cheaply to the domestic market. Many have moved operations to Uruguay or switched to soya.
It’s one crackpot idea after another. And the cycle repeats. Expropriating your citizens’ savings or international companies like YPF (a subsidiary of Spanish oil company Repsol), which President Kirchner nationalized last April, might buy you some time. But not much. The writing is on the wall.
In the last crisis, the trigger event was Argentina’s massive default on its sovereign debt. This time around Argentina doesn’t face that scenario. Government spending has to be funded from printing presses, taxes, and expropriation of personal or company assets. It’s hard to see how the government can collect more taxes. The printing presses are already causing the inflation and the rush to backstreet currency-exchange brokers. There’s a limit to what you can expropriate.
This time around the trigger event for a full-scale crisis will be the country’s running out of hard currency. There will be no money to pay for imports. Argentina can make do without more Porsches and Gucci handbags, but the country will grind to a halt if industry and energy-producers can’t get their hands on crucial imports. The factories will shut. Things will have to get really bad before we’re in a “buy” situation. Pay attention if you turn on your TV and see news flashes of burning banks and of factories that don’t have hard currency to buy raw materials, locking out their workers. If you turn on your TV a second day and see similar reports, then book your flight. Your dollars will go a long way.
Comparisons between the high-end neighborhoods of Paris and Buenos Aires are correct. It’s a world-class capital with a wealth of cultural activities, fine dining, and shopping. Buy when the Argentine capital is in turmoil and you’ll be sitting on prime real estate in one of the world’s finest cities.
If you’ve ever dreamed of owning your own vineyard, I can think of no better place than Mendoza, Argentina’s most famous wine-producing region. Mendoza sits at the foot of the Andes, 600 miles west of Buenos Aires. Soil and climate are perfect here for wine production.
Argentina long held promise. In 1900 it was the world’s sixth-richest country — richer than the US. Immigrants flooded from Europe. The British came to build the railways. They brought along Irish and Italians. The Spanish came. What followed is text-book mismanagement. When it comes to a head again, we’ll have a full-blown crisis. And an opportunity to pounce once more.
Pinging Ferfal.
I once led an acquisition team buying an oil company in Argentina. To clean up the target company, it had to divest a marble mine in Uruguay. The transaction document to sell the mine was typed on a single piece of paper, and the consideration was a wrinkled up brown paper bag full of dollars. Everybody acted like that was normal.
Anybody who has been to Uruguay? What is it like? The people? It is listed as a Constitutional republic.
Britain should buy it all up, Change the government. Change the language. Canada South. End of Falklands problem.
Argentine manufacturing and other production were moved by traitors to the hands of foreigners. The private sector was unemployed. Incomes and prestige were increased for government employees.
Because of those evil activities, there weren’t enough real revenues—only debts that came back to bite the political/regulator class there. See what’s coming to our USA now, and why?
There will be a large manufacturing base on our own soil, as there will eventually be in Argentina. And it will be done by new families in truly private sector business (not government-linked).
How much are the women going for?
“Anybody who has been to Uruguay?”
I spent a week in Uruguay in Jan of 2011. It was 6 days too many. If you want a beach place, go to another country. Uruguay is relatively cheap but it’s a relic of the 1940’s, it must have been big back then when all the money was spent to dress it up. Since then, Rio and Buenos Aires (they bracket it) have sucked up all the tourists and all the money and Uruguay has deteriorated. Just my opinion.
They banned ownership of foreign currency and gold too
My long-time associates in Argentina visit Uruguay quite often. They've always spoken quite highly of it.
I would certainly invest in Uruguay befoere I'd invest in Argentina.
The capitalists in that part of the world are very fine people. if you want to start making money (and connections) in Argentina let me know and I'll hook you up! :)
In that country it probably is normal
FerFal Redux. (He lives in the UK now, I believe.)
"Brebner and Xiao are pretty frank about how levered up the financial system is at the moment, and they warn that the next shock will be totally involuntary and unexpected. "
Is FerFal the guy who writes the “Surviving in Argentina” blog?
widely predicted but unexpected
I think so!
Yup, the socialist Kirchners have wrecked Argentina. Sadly, what they did pales to what obastard is doing to us...
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