Daily Archives: April 18, 2012

Pemex, PDVSA and YPF. These three large oil companies have more in common than the fact that they are state-owned. Or that their home countries, Mexico, Venezuela and Argentina, are rich in hydrocarbons. Their most surprising similarity is that during a period in which oil prices are booming, these three companies are declining. Their production, reserves and potential are lower than they used to be and their performance is far poorer than it could be, given the rich geology of the areas over which they enjoy a virtual monopoly.

Underinvestment, mismanagement, limited access to new technologies and the mistreatment of foreign partners are some of the ills they share. These ills are, of course, manifestations of the politicisation that has infected them. And the political meddling goes beyond the cronyism and patronage that undermine their ability to operate efficiently. Their governments impose taxes, regulations and price controls that cripple them and, in some cases, force them into activities that have nothing to do with their core mission.

Venezuela’s PDVSA, which used to be a paragon of a well-run state-owned company, is now an ineptly managed behemoth also engaged in large-scale import and distribution of subsidised food, social programmes, agriculture, housing and a huge foreign aid programme. Inevitably, rumours of corruption and suspiciously bad deals swirl around these companies.

Their decline is brought into even sharper focus by the rapid ascent of Brazil and Colombia as oil-producing countries. Brazil’s Petrobras, while state-controlled, has a governance structure designed to protect its management from political interference. The company has become a global player in the same period that its less fortunate Latin competitors were falling. Petrobras’ discovery of large Brazilian offshore reserves may well propel it to the top of the industry leagues once production there starts. Colombia, a nation that until recently had no significant presence in the oil industry, is also growing very rapidly.

This is part of the context in which Cristina Fernández de Kirchner announced on Monday that her government was taking over YPF, which was privatised a few years ago and acquired by Repsol, a Spanish company. Repsol “pursued a policy of pillage, not of production, not of exploration,” the Argentine president thundered. “They practically made the country unviable with their business policies, not resource policies.”

John Paul Rathbone explained in these pages the convoluted reasons behind the Argentine government’s decision. Objective observers agree that, despite the president’s fiery rhetoric, it was not part of an overarching development strategy, nor a manifestation of resource nationalism, nor any other carefully crafted initiative forming part of a broader design. 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.

Given Argentina’s track record with nationalisations, there is widespread scepticism that the government will run YPF efficiently. In the past decade, the Buenos Aires water company, the national airline, Aerolineas Argentinas, and several electricity companies that had been privatised in the 1990s have been re-nationalised with politically charged arguments similar to those now used to justify Repsol’s takeover. As Jorge Colina, an economist at the Institute of Argentine Social Development in Buenos Aires, explained to the journalist Charles Newbery, these three government-run companies are accumulating colossal losses. Last year, the state subsidy for them was 80 per cent larger than the spending on a child welfare programme.

Moreover, Ms Fernández took the decision to nationalise Repsol in the context of a rapidly deteriorating economic and political situation. Economic imbalances and distortions have been accumulating and will inevitably reach a boiling point, forcing the government to make the painful adjustments it has so far been able to avoid. 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. It has had limited access to the international financial system since defaulting on its debts in 2001. Many of the president’s erstwhile supporters are abandoning her and labour unrest is becoming more frequent.

The question is not if but when will Argentina make the changes in its economic policies that will put the nation on a more sustainable path. The country needs to adjust and sooner or later the situation will become unsustainable and force the government to undertake what will surely be unpopular reforms. If Ms Fernández keeps postponing the reforms, her
last years in office will be a political and economic nightmare. At that point, nationalising yet another company will achieve nothing and YPF will be the least of her problems.

The writer is senior associate in the international economics programme at the Carnegie Endowment for International peace

Eurozone financial markets are again on a roller coaster. After a sharp fall at the start of the year, spreads between peripheral and core countries’ government bonds are increasing. The reasons may lie in the interaction between financial markets and the way policymakers act in democratic systems.

In its circular nature, this interaction looks something like a cobweb. Policymakers act when they feel the pressure of the markets, which gives them good arguments to convince voters and stakeholders that the time has come for unpalatable decisions that avert disaster. When these tough decisions are taken, they reassure investors that the authorities are indeed determined to solve the problem. Sentiment improves, spreads come down. However, as market pressure abates, policymakers start thinking that the worst of the crisis is over and that some of the measures they had designed may not be needed after all. 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.

This cobweb behavioral pattern seems to explain quite well what happened over the last few months. In the autumn of last year, as spreads hit new highs – in particular between Italy and Spain on one side, and Germany on the other – the former announced tough budget measures and structural reforms aimed in particular at improving the functioning of labour markets. Governments justified the measures by the need to avoid becoming like Greece. The European Central Bank helped to reduce market tensions by undertaking two longer-term refinancing operations, which eased banks’ funding problems, and by broadening the list of assets that banks could use as collateral. European leaders made commitments to strengthen the eurozone’s rescue funds further, including increasing their overall funding. Supervisors set stringent deadlines for bank recapitalisations.

The markets reacted positively to these measures: spreads fell more than 200 basis points in the case of Italy, a bit less for Spain.

As tensions eased, the pressure for implementing the policies that had been announced abated. Governments in peripheral countries started flirting with the idea that the worst of the crisis was over. Contingency plans, to be applied in case of budgetary shortcomings, were dismissed. Privatisations programmes to reduce public debt decisively were abandoned. Structural reforms were designed primarily to avoid domestic political tensions, rather than to restore competitiveness and improve growth potential. Some central bankers started talking openly about preparing for “exit strategies” and setting limits to balance sheet exposures and expressed aversion to further non-standard measures. The European Council decision to increase the funds available to the European Stability Mechanism fell short of expectations. National supervisors raised the possibility of postponing deadlines for bank recapitalisations, citing improved market conditions.

Against this background, it is no surprise that international investors reassessed countries’ sovereign and bank credit risk. It’s also no surprise that policymakers reacted by blaming each other, and the markets, for the new instability. However, investors’ confidence will return only if national and European authorities show, in a credible manner, their determination to address the problems.

A system in which policymakers act mainly under the pressure of markets, while thinking that markets are myopic and can be fooled, is not only unstable; it is inefficient. Indeed, trying to regain market confidence, having once lost it, requires much tougher actions. This causes economic pain and is not necessarily the best way to consolidate domestic political support.

The writer is a visiting scholar at Harvard’s Weatherhead Center for International Studies and a former member of the European Central Bank’s executive board

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