ECONOMY-ARGENTINA: Spanish and Italian Firms Feel Impact of Crisis

By Tito Drago Reprint | | Print |

Tito Drago and Jorge Piña

MADRID/ROME, Jan 4 2002 (IPS) - The shares of Spanish firms with major investments in Argentina were down Friday, while the Italian government created a new crisis unit and an office to provide support to Italian companies with interests in the crisis-stricken South American country.

Argentina has strong social and economic ties with Spain and Italy, with most of the Southern Cone country’s population of 36 million descending from Spanish and Italian immigrants, and large investments there by companies from the two southern European nations.

In fact, Spanish investments in Argentina generate 12 percent of that country’s Gross Domestic Product, according to Spain’s chambers of commerce.

The shares of Spanish companies with sizable investments in Argentina – Telefónica, the Repsol-YPF oil company and the Santander Central Hispano (SCH) and Bilbao Vizcaya Argentaria (BBVA) banks – slid two percent on average Friday on the Madrid stock market.

That led to a one percent overall fall on the Madrid stock exchange, while the rest of the European markets continued to rise, due to the public’s strong reception of the euro, the new common European currency.

In the past few years, large Spanish firms have invested 45 billion euros in the purchase of privatised companies and private banks in Argentina.

That country’s unprecedented political, social and economic crisis, which led to the fall of president Fernando de la Rúa on Dec 20, as well as the measures proposed by the new president, Eduardo Duhalde, who swore in Wednesday after being named by Congress, have thus triggered great concern in Spain.

Those worries were expressed by Spanish Foreign Minister Josep Piqué on a visit to Buenos Aires last week, and were transmitted by phone to Duhalde by Prime Minister José María Aznar hours after the new president’s inauguration Wednesday.

The economic measures proposed by Duhalde are pending approval by the Argentine Congress. But they are expected to include a 30 to 40 percent devaluation of the peso, which has been pegged to the dollar for a decade.

The government is also expected to allow all debts of less than 100,000 dollars contracted prior to the devaluation to be paid off in pesos, and to set ceilings on the rates that private utilities like phone companies will be permitted to charge.

The Spanish company that is likely to be hit hardest is Repsol, which acquired Argentina’s then-state-owned oil company Yacimientos Petrolíferos Fiscales (YPF) under the government of Carlos Menem (1989-99).

According to a report by the SCH bank, a mere 20 percent devaluation of the Argentine peso would lead to a five percent drop in the earnings of Repsol-YPF in 2002, not to mention the impact of a new Argentine tax on oil exports.

Around 40 percent of the Spanish oil company’s shares are in Argentina, the source of the largest proportion of its profits.

Repsol-YPF sources in Spain declined to comment, and said the company’s branch in Argentina would release an official statement after Duhalde’s plans were made public.

The SCH and BBVA banks, meanwhile, would suffer around 3.3 billion dollars in losses with a 40 percent depreciation of the Argentine peso.

However, the two banks were apparently prepared for what was to come, and have taken measures to ease the effects of the crisis. Both institutions say Argentina will once again be a good country for investors in the medium-term.

In addition, six percent of the revenues of Telefónica, Spain’s phone company, and 12.5 percent of its sales currently depend on the Argentine market. The firm foresees a sharp fall in earnings if the peso is devalued, a Telefónica executive in Buenos Aires told the Madrid economic daily Expansión.

If the Duhalde administration forces Telefónica to maintain its current rates in pesos, the company’s profits will depreciate along with the peso, he added.

Another factor that will affect Spanish firms in Argentina is the plunge in the purchasing power of Argentines that will result from devaluation and the rise in prices of consumer goods.

Although Spanish corporations, whose investments are long-term in nature, are not withdrawing capital from Argentina, they do not plan to increase their investments this year, according to Spain’s chambers of commerce.

Businesses and investors in Italy are also worried about the situation in Latin America’s third-largest economy. According to Italy’s Exchange Office, large, medium and small Italian investors hold more than 17 billion dollars in Argentine debt bonds.

However, traders in Lugano, Switzerland, and in Luxembourg say Argentine bonds in the hands of Italian investors total as much as 26 billion dollars, if transactions that take place outside their country are taken into account.

The drop in the returns of Italian government securities, which last June were paying just three to four percent interest, led many Italian investors to purchase Argentine debt bonds in dollars, which were bringing 12.75 percent interest at that time.

On Thursday, Italy’s under-secretary of the Ministry for Productive Activities Adolfo Urso said a new crisis unit would be set up to study measures for providing assistance to Italians residing in Argentina.

Urso also announced the creation of an office that will provide free assistance to Italian companies, in the Buenos Aires department of Italy’s Foreign Trade Institute.

Italian economist Luigi Ruggerone recommended that anyone who purchased Argentine bonds should wait on trading them until the political situation in that country gets back to normal, because selling today – if a buyer could be found – would mean a 70 to 80 percent loss of the nominal value of the bonds.

He warned, however, that things would not return to normal in Argentina for at least a year.

But he added that large Italian firms with interests in Argentina are not likely to pull out, “because they have backs that are broad and strong enough to endure, although no one knows how long.”

Ruggerone said, however, that small and medium Italian investors who were drawn to Argentina by the “miracle” promised in the early 1990s by Domingo Cavallo, the architect of the peso- dollar peg and then-economy minister of Menem, would have a hard time weathering the crisis.

Among Italian financial circles, rumours have begun to circulate of an exodus of Italian businesses from Argentina.

There is a sense of panic among small and medium Italian companies doing business in the South American country, admitted the director-general of the Foreign Commerce Institute, Gioacchino Gabutti.

But one of the large Italian firms that pulled out before the collapse was Fiat, which had opened a new plant in the Argentine city of Cordoba in 1996. As part of a global restructuring plan, Italy’s biggest car-marker announced its withdrawal from Argentina on Dec 10.

Other large Italian corporations in Argentina, meanwhile, are closely following the situation there, like dairy products giant Parmalat, Telecom, which holds 33 percent of the shares of Telecom Argentina, and Olivetti, which manufactures computers and typewriters.

The Italian government is also pushing for concrete support from the European Union, which expressed its solidarity with Argentina through a communique issued by the Foreign Ministry of Spain, which currently holds the bloc’s rotating presidency.