Argentine Move Hits Spanish Stocks

BUENOS AIRES —  Spanish stocks dove in Monday trading as the market absorbed the impact of the Argentine devaluation on multinational companies that made billions of dollars in investments in Argentina during the 1990s, investments that have now lost value.

This capital, which was racked by civil disturbances in December, was calm Monday. Banks and exchange houses observed the first day of a forced two-day holiday, with business set to open Wednesday when pesos will start trading at 1.40 to the dollar. It will be the first time since 1991 that the peso’s official value has been weaker than one dollar.

Markets elsewhere were turbulent as the significance of the devaluation sank in.

Shares of Spanish energy giant Repsol, which paid $15 billion for Argentine oil giant YFP in 1999, lost nearly 8% on the Madrid bolsa after the Argentine government said it would tax oil sales to create a fund to help businesses withstand the devaluation. Spain’s economy minister complained about Argentina’s economic plan before the European Union in Brussels on Monday.

“If some of the conditions under which Argentinans and foreigners have invested in your country must change, it should be done with the consensus of those affected,” said Spanish minister Rodrigo Rato. Spanish banks alone are looking at losses of as much as $4 billion, sources say.

Spanish, U.S., French and other foreign investors poured more than $35 billion into Argentina in the 1990s to acquire businesses including water and electric utilities, banks and telephone companies. Many were former state-owned utilities sold at auction when they were privatized. Part of their lure was that customer payments were indexed to the U.S. dollar.

Now those investments have in one fell swoop been rendered less valuable after Argentina announced Sunday it was devaluing the currency by nearly 30%, abandoning the peso’s 10-year link to the dollar, and converting all dollar-denominated debts and contracts of up to $100,000 to being payable in pesos.

The country has also announced it is defaulting on the $135 billion it owes to foreign institutions and other creditors. The debt grew as the government borrowed to pay for social services while the economy went into recession and tax revenues dried up.

The government is converting the denomination of loans and other obligations from dollars to pesos to ease the pain to the middle class of the peso’s loss in value. The government at the same time has promised dollar depositors whose accounts are now frozen they will recover all their funds.

Thus, banks’ loan assets have been devalued, but their dollar liabilities in deposits remain dollarized, creating a “balance-sheet problem,” said SCH economist Omar Borla in New York. The many Argentine corporations that have borrowed dollars abroad are also in a vise: the devaluation makes servicing that debt more expensive.

The predicament caused shares of Spanish banks Santander Central Hispano and Bilbao Vizcaya Argentaria, which between them control roughly 20% of the Argentine banking system, to fall 4.4% and 3.3%, respectively, Monday on the Madrid bolsa.

The Spanish market overall fell 3.4%, as measured by the IBEX index. Among Latin American markets, Brazil’s main share index inched up 0.3% Monday, while Mexico’s eased 0.7%.

Although generally positive about Argentina’s decision announced Sunday to bite the bullet and devalue, economists expressed disappointment that President Eduardo Duhalde’s economic plan unveiled Sunday night wasn’t comprehensive enough. He still has not released details of his new currency policy, nor has he presented a 2002 budget, they complained.

Others such as Gustavo Canonero of Deutsche Bank in Buenos Aires had hoped that the Agentines would announce Sunday some sort of tentative aid agreement with the International Monetary Fund. “It delays the benefit of what they are trying to do,” said Canonero.

Although the government said it will print more money to add liquidity to the parched money supply, the government hasn’t yet said how much. Printing too much money can stoke inflation fires, so analysts are keen to know how much new currency will be printed. That question mark, plus the uncertainty surrounding the 2002 federal budget, which Economy Minister Jorge Remes Lenicov said Sunday would be balanced, makes economists uneasy.

“The measures are quite vague,” said Bruno Boccara, director of Latin American debt ratings at Standard & Poor’s in New York. “Until you present a coherent strategy in this situation, confidence will remain a problem.”

Argentina devalued Sunday because of three critical problems: a crushing debt load, a growing economic depression and an overvalued currency that made Argentine goods uncompetitive in domestic and foreign markets.

President Duhalde assumed power Jan. 2 after civil disturbances caused the resignations of two previous presidents, Fernando de la Rua and Adolfo Rodriguez Saa, over the previous two weeks.

Although the default will ease the government’s fiscal deficit by eliminating the need to make $7.5 billion in annual interest payments, Deutsche Bank’s Canonero said it will compound its problems in the sense Argentina will find it impossible to attract foreign investment or loans, which stimulate growth.

Duhalde also needs to impose structural reforms that De la Rua and his predecessors left undone, including the habit of Argentina’s provinces of spending more money than they take in taxes