Peso collapse and inflation force Spanish companies and banks — second largest investors in Argentina, behind US companies — to tally their losses.
By Nick Corbishley, for WOLF STREET:
Having learnt their lesson, most European companies and banks have limited exposure to Argentina’s crisis-prone economy. One exception is Spain’s corporate sector, which, after the U.S.’s, has the most exposure to the South American economy, with almost €6 billion invested by its companies there, down from around €9 billion in 2011 after some divestments.
For many of those companies, Argentina is still an important source of revenues and profits. But those revenues and profits are getting slammed by the double whammy of a rapidly deteriorating economy and rampant inflation. Now, there’s the potential risk of yet another Argentine default to contend with.
The Argentine peso has slumped 25% since the primary election on Sunday. Stocks have crashed. The risk of default has surged to above 75%, based on the latest credit default swap levels. The peso is worth just 1.7 cents, having lost 68% of its value against the U.S. dollar in the last year and a half.
In June, before this latest episode of political and economic turmoil, annual inflation in Argentina was already over 55%. The lower the peso falls, the worse the inflation gets. Argentina was already deemed to have entered hyperinflation in 2018, meaning that overseas companies operating in the country that report in Argentine pesos now have to reformulate their financial statements, depreciating the value of assets in line with the rapidly soaring prices.
This restating exercise has already cut €1.34 billion from the profits that large listed Spanish companies earned in Argentina over the past four quarters. The brunt (85%) of that impact has been borne by three big companies:
- Telefonica, which over the last five quarters has had to restate (lower) its global profits by €467 million in order to take account of soaring prices in Argentina, which provides roughly 5% of its global earnings;
- Spain’s second largest bank, BBVA, which has had to write down its global profits by €360 million due to inflation in Argentina.
- Banco Santander, Spain’s largest bank, which had to restate its global earnings by €239 million for 2018 and €74 million in the first quarter of 2019.
Other Spanish companies that have been hit by hyperinflation write-downs in Argentina include the energy giant Naturgy (€67 million in 2018), the insurance firm Mapfre (€21 million), and Dia (€45 million), the heavily indebted, loss-making supermarket group that came close to collapse earlier this year and is still not out of the woods despite being acquired at the last minute by the scandal-tarnished Russian corporate raider Mikhail Fridman. Argentina is Dia’s third biggest market.
Prosegur Cash, which handles transportation and management of cash, is, pound for pound, the Spanish company most exposed to Argentina, employing nearly 5,000 staff there. Its parent, Prosegur, employs about 18,000 people in Argentina. Its shares have tumbled 15% since Monday while the shares of Prosegur Cash are down 20%.
But it’s in Spain’s banking sector’s exposure to Argentine assets where the biggest risks lie. That exposure amounted to $22 billion (€19.6 billion) in the first quarter of this year, according to the Bank of International Settlement’s figures. That’s 21% less than a year before, but it’s still the equivalent of 52% of total foreign banking investments in the country. The second and third most exposed national banking sectors are the U.S. and the UK.
Only four months ago, Swiss megabank UBS warned about the contagion risk posed by Spanish banks’ outsized exposure to Latin American markets, not only to Spain but the entire Eurozone. A mind-boggling 80% of the Eurozone’s total banking exposure to the region is channeled through Spain whose banks have around €384 billion of counterparty claims in the region. That’s the equivalent of over a quarter of Spain’s GDP.
Given the relatively small size of Argentina’s financial market, a default on its debt may not be enough to trigger a major crisis for Spanish banks. But it could shatter investor confidence in other Latin American markets where their exposure is much greater, including the region’s two mega economies, Brazil and Mexico. It’s here where the biggest danger lies, with Spanish banks, mainly Santander and BBVA, holding Brazilian and Mexican assets worth $158 billion and $165 billion respectively, the equivalent of 45% and 42% of total foreign banking investments in the two countries.
Both Brazil and Mexico, which account for just over half of Latin America’s GDP, are already at risk of recession. The Brazilian real and the Mexican peso have both borne up fairly well this year despite the rallying dollar, but they’re beginning to show signs of strain. The real, feeling the heat from events in neighboring Argentina, fell 2% on Wednesday to below 4.05 against the dollar, its lowest level since May. Stocks are also sliding, with Mexico’s main index sinking to its lowest in more than 5 years, while Brazil’s main index plunged 3% on Wednesday, its worst day in 4-1/2 months.
A region-wide economic crisis would pose a serious risk to Spanish banks, in particular Santander and BBVA, for which Latin America has been a massive boon, allowing them to diversify their operations away from a stagnating economy in Europe. By Nick Corbishley, for WOLF STREET.
They had it coming. Read… Brain-Dead Investors Get Crapped on Again by Argentina
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I dont know why anyone is surprised considering the country’s financial history.
What seems to be different now is the large exposure of Spanish banks . Ultimately this translates into more of a story of how disastrously the immigration policies and the bureaucratic regulations of the Eurozone and the flooding of liquidity by the ECB has guaranteed a stagnant (at best) economy . And now the ECB has stated that even more irrational liquidity is going to be provided soon.
The Eurozone is headed toward a breakup with all of its consequences. That is the real reason why the 10 year Bundt yields a negative .60%
I find your thesis attractive, as it implies there will be consequences for the massive profligacy of the ECB and the member states.
But wouldn’t the negative government interest rates, which allow continued irresponsible spending, act as a ring of Sauron to bind the weak countries together?
Until of course everything relying on interest rates such as pensions are completely destitute, and the strong countries pull out.
In 2012 Argentina nationalized the oil company YPF by seizing most of Repsol’s stock in the company. Repsol sued and was awarded half of the money they were seeking. Argentina has a long record of nationalizing companies.
More recently multinational oil companies have taken on risks by investing in the Vaca Muerta shale oil field in Argentina. They reported lack of infrastructure and difficulty dealing with unions as obstacles to progress.
I have always wondered what had got inside the heads of Repsol executives.
Besides the well-known tendencies of local politicians (and their electors), YPF already had a long history of deeply ingrained corporate corruption at all levels. Provincial governments started to wage war on Repsol the minute the Spanish company announced they intended to run YPF to turn a profit, not to fatten local crooks: prospecting leases were blocked, police sent to shut down operations for no discernible reason… standard fare in Argentina, and it’s all on Repsol for deluding themselves and their shareholders that something had changed.
I know a Swiss businessman who’s married to a woman from Argentina. He summed up the country fully well. “Argentina is split in two camps. On one side you have those who won’t believe a single word a politician says. On the other you have those like my in-law’s, who believe everything politicians tell them”.
The Kirchner’s and their allies mounted an all-out offensive against Repsol using all the standard tools of local politics including allegations that Repsol, gasp!, intended to restructure YPF as to turn a profit!
Their electors ate it all up with a passion, sadly confirming the best argument against democracy is a five minute conversation with the average voter, and now we are back at square one.
Exploitable reserves are on a steady decline because YPF is investing the absolute bare minimum in new recovery technologies and foreign firms are finally becoming wary of the local toxic environment. As soon as the Kirchner’s are back in power it will be open season on those poor sops (American Enery Partners, Petronas, Total, Shell etc) who signed contracts with YPF for Vaca Muerta. Luckily these are small contracts but hopefully the lesson will be learnt fully well this time around.
Very true: the Left believers just swallow everything, and ignore the blatant corruption when they aren’t in on it themselves – purely partisan thinking, which afflicts Spain just as much, in my experience.
Kirchner can no doubt put everything right raising funds selling those cute little dolls she had made of herself and sold from the Presidential Palace……
Nick,
Many thanks for the details. Much appreciated.
Spanish banks could be pushed over with a feather, it seems.
But now let’s take another step further out. Spanish 10-year government bonds yield a whopping 0.03%! No risks here, move along.
Do we know which entities are the largest holders of Spanish sovereign debt? Is the ECB at the top of the list?
Also, how much Spanish corporate debt does the ECB sit on?
Thanks.
Some 2000 years ago, Cicero observed that if there was a credit problem in the eastern provinces it would inevitably hit Rome. The financial center.
Until a month ago, i thought that the back and forth on the China currency was about policy deliberations.
No.
It is an outlying financial market suffering the early stages of what could be a severe global credit contraction.
Earlier in the year, it was Argentina and Turkey, Then it has hit India.
And now China. And Argentina is even in worse duress than a few months ago.
London and NY next.
Great insight.
I read that China started to ban gold imports in their effort to further restrain capital flight. A strengthening US dollar really puts pressure on the world’s financial systems.
I wonder how long the lag will be and how far it will spread.
From the stock charts it looks like a sector rotation away from energy, finance, tech, and consumer discretionary into staples, utilities, and stable stocks with decent dividends is underway.
That is indeed transpiring, and the UK is terribly shaky and not fit for any serious impact…..
Couple things, watching SDR, that Argentina was able to access the equivalent of 1000% of their quota in the SBA. Tells me SDR is a monetary expansion scheme (and that we are going to pay for it). China ‘floating” their currency, they stopped manipulating it, is a positive for their economy. Period. Analysts are bullish on the EM. Doug Noland says contagion goes from “periphery” to “core.” What if it doesn’t? What if the EM, which has the resources (labor), the ethic, and the brain trust, and plenty of blue sky above, what it they manage credit better? What if Argentina finally enacts austerity and turns it around, while the corruption and greed on Wall St just keep going? What if it’s their century?
Bob,
Not to detract too much from your point, but’s worth noting that Rome at the time of Cicero was not what we today envisage as an empire of The Med coloured in Imperial Purple all around.
At the time of Cicero, the Asia province was a very wealthy part of what today is Western Anatolia, and was a milking cow for the Senate (largely) from selling the provincial taxation to the highest bidder. So naturally any tax downturn in Asia (if the publicani found themselves unable to round up the promised taxes, and were unable to provide the shortfall from their own pockets…) would also be felt in the treasury in Rome about as quickly as a ship sails from Lydia to Ostia.
The 800lb elephant contenders concerning finacial calamity concerng ancient Rome included currency debasement, financial mismanagement, and the seldom spoke of trade deficits with the East. By some estimates, Rome had a trade deficit of about 100 million sesterces a year.
Byzantium would deal with trade deficits in centuries to follow.
Careful there, elephant (ahem, Raymond), you’re in a China shop!
Currency debasements are, as you elaborate, nothing new. Instead they are the normal path of all currencies.
And yet our every day perception of debasement is out of whacks with reality… We are certifiably nuts, I guess!
Hey, Ray, just have to add that trade was actually generallt settled in those days…
Indian counterparties would not in those days just sit around and take empty promises or clipped coins of dubious alloys in exchange for spices and minerals and statues and whatnot. (Today they take computer generated digits in exchange for those things….)
A friend and I visited Buenos Aires and San Rafael Argentina earlier this year. We had a great time and enjoyed the people, scenery and the strong dollar. That said, I noticed all the real estate prices are in US dollars and the prices for hotels and restaurants in tourist areas were similar to US prices. However, if we went off the beaten path, we got a great lunch with a bottle of malbec for $20.
Given the recent currency devaluation, I’m not sure how long they keep demanding US dollars for their real estate.
Probably about until Cristina Fernández de Kirchner gets re-elected.
NO
WHEN she gets elected, they will simply demand settlement is $ OFFSHORE.
Excellent Article!
I was in Argentina during their great crash of the early 2000’s. One minute prosperity, next minute total disaster. It was heartbreaking to see the destitution it left in its wake. Unfortunately, it is being repeated. My great fear is when the world’s crazed debt bubble bursts, we will be in the same boat as the Argentines were then and now. As to “crazed”, we see the international banks keep going back to Argentina to get cleaned out every ten years or so…..of course there are lots of talking heads and arm chair experts, talking about the opportunities in “emerging markets” and “great buying opportunities”, even now. I guess all the BS will stop when they have got everyone’s currency the value of wallpaper.
Considering how infamous corrupt most of those Spanish companies are, I say is Karma stricking back.
Telefonica, now called Movistar, is the best example.
It might be worth throwing something else into the Spanish financial debate.
As of end-May, Spain had a deficit of EUR 405bn with the Euro Area’s Target2 clearing system. Italy owes EUR 487bn. De facto, these are owed to Germany (whose position is +ve EUR 935bn).
Will Germany ever get to collect?
Argentina post WW II is an excellent example of the flaw in modern democracy.
That lets a party (generally the left) buy the electorate with: their own, their childrens, and their great grandchildren’s, projected lifetime tax contributions.
BORROWED and Spent in the first year of the new administrations term in power.
which is why Argentina and greece are the modern queens of national defaults.