The Close-Fisted Argentine Government Needs to Pay its Dues
Some eight years after Argentina expropriated Spanish company Repsol’s controlling stake in the energy firm YPF, the situation at the energy giant is once again alarming foreign investors. The Argentine central bank is so low on dollars that it is refusing to sell YPF the amount required to pay notes coming due next month. With default looming large, the country’s flagship oil company has rolled out a plan to restructure its debt in such a way that will impose substantial losses on creditors. The scheme, abruptly announced in the middle of the night, went way beyond the simple refinancing of short-term debt which investors were anticipating, and a number of YPF’s creditors are refusing to accept the restructuring plan, raising the spectre of a full-scale default.
The YPF debt kerfuffle is just the latest red flag for overseas investors in Argentina. Indeed, Buenos Aires has a long history of reneging on contracts and expropriating foreign firms’ property. In total, the nation faces claims for $1.6 billion in no less than five ongoing International Centre for Settlement of Investment Disputes (ICSID) cases. To make matters worse, it has also garnered a reputation for failing to pay up after losing international arbitration cases brought following these strong-arm methods. Argentina is, in fact, the most-sued country in the world for international investment claims, many dating back to Argentina’s national “great depression” at the turn of the millennium. The harsh measures taken to rebuild Argentina’s shattered economy, including ditching the peg pinning the Argentinian peso to the U.S. dollar, and converting certain foreign-currency debts into pesos, devalued the currency and left hundreds of overseas firms severely out of pocket.
Just take the example of the French company Saur, which signed a water and waste contract with the province of Mendoza in pesos, back when the peso was pegged to the U.S. dollar. As Argentina spiraled deeper into financial crisis and the peso lost much of its value, the provincial government in Mendoza decided that the contract would remain in the local currency. This posed major problems for Saur, whose operating costs remained denominated in U.S. dollars. Negotiations between Saur and the local government failed to dig up any serious compensation for the losses the French company had suffered as its costs soared and its payment remained roughly the same, and Saur eventually brought a case against Argentina to the ICSID.
The arbitration court found that Argentina had violated the fair and equitable treatment standard under the Argentina-France bilateral investment treaty, and illegally expropriated Saur’s investment. The court ordered Argentina to award the French company $39.99 million in compensation, plus court costs and 6% interest backdated to 2007. Despite the unequivocal decision, Argentina has dragged its feet on paying up for more than a decade—a stubborn refusal to honour its obligations that has both sent a warning sign to potential investors and had a negative impact on relations between Paris and Buenos Aires more generally.
The Saur case is of course only one of many in which Argentina is failing to pay its obligations—indeed, Buenos Aires is sitting on a mountain of unpaid arbitration awards. Argentina’s intransigence on the Saur award, however, is particularly mystifying. For one thing, the award is relatively small, raising questions about whether Argentina’s obstinate refusal to pay up as ordered by the ICSID is costing the country more in lost goodwill and investment than the award is worth. The decision in the case is also set in stone at this point, as Argentina has run out of legal road to contest the award after the ICSID ruled against its appeal. Settling this particular sore point as soon as possible should be a low-hanging fruit allowing Buenos Aires to begin rebuilding investors’ shattered trust.
There’s a long road to walk in that regard. The staggering sums that Argentina owes pursuant to international judgments is the legacy of years of policies of appropriating international investors’ property or abruptly terminating their contracts. The figures are a concrete symbol of the damage that consecutive governments have done to the country’s relationship with foreign investors—and the stubbornness of the current populist government. The fact that investors, whose wallets represented a lifeline for the afflicted Argentine economy, are steadily leaving the country, is the consequence of Argentina’s actions writ large. The ones to suffer will be the people themselves, since the tax deficit from these departing businesses will only further damage the beleaguered public sector.
Argentina’s government will need to rebuild trust with overseas investors by paying what it can on arbitration disputes that have already been decided, such as the Saur case, and by avoiding further ill-advised moves to renationalise firms or tear up existing contracts. The country’s current predicament is a lose-lose situation: the mounting debts are showing no signs of evaporating and are spooking foreign investors in the meantime. The current government will need to change its attitude towards defaulting on its obligations if it is to encourage much-needed injections of foreign direct investment in the wake of the newest economic crisis catalysed by the coronavirus pandemic.