Daily Archives: April 18, 2012

Despite its president’s fiery rhetoric, Argentina’s decision to renationalise YPF was not part of any overarching strategy. Cronyism, rifts between rival oligarchs, political expediency, populism and the wish to please a public resentful of the privatisations of the 1990s all played into the decision – which came in the context of a rapidly deteriorating economic and political situation.

Argentina suffers from high inflation, slowing economic growth, ballooning subsidies, price controls, capital flight, decaying infrastructure and a less than welcoming environment for foreign investors. Sooner or later the situation will become unsustainable. If Ms Fernández keeps postponing reform, her last years in office will be a nightmare – and YPF will be the least of her problems.

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Policy makers act when they feel the pressure of the markets – but as market pressure abates, they start thinking that the worst of the crisis is over. Decisions are postponed, measures are watered down. As the political process stalls, markets start having doubts about policy makers’ determination and lose confidence again, which gives rise to new turbulence. Such a system, in which policy makers act mainly under market pressure, while thinking that markets are myopic, is not only unstable; it is inefficient.
Trying to regain market confidence, having once lost it, requires much tougher actions, which cause economic pain and are unlikely to be the best way to consolidate domestic political support.  Continue reading »