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May 14, 2012 | by  | in Opinion |
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C.R.E.A.M. – Oh, What A Circus!

Argentina has been an interesting economy to study over the last twenty years, unfortunately for all the wrong reasons. With the news last month that the government has nationalised their largest oil company, they look set for a return to banana republic status.

In 2002 Argentina had a major economic crisis and was forced to float its dollar. It lost over 70 per cent of its value. But until recently things looked good; soaring export prices in particular had generated high economic growth and with it the ability to pay down public debt. In 2007 popular former first lady, women’s advocate and forceful public speaker Cristina Fernández (reminiscent of Eva Perón) was elected President on a left wing platform.

She inherited a country facing problems. The proliferation of arcane price controls on oil and gas resulted in prices 75-80 per cent below other South American countries. This led to overconsumption, and the government responded by forcing businesses to ration power use, taxing oil exports and importing expensive foreign oil. Once a net oil exporter, it now uses 15 per cent more hydrocarbons than it produces. Artificially low prices led to a slowdown in the international investment necessary to develop new domestic energy sources.

The President’s latest response to this problem looks more like a primaddona’s rage than an idea. In what was partly a play for cash to finance growing budget deficits she nationalised the country’s largest oil company (YPF) by simply passing a bill saying that the government owned 51 per cent. The medium term effect of this is obvious: private investors will lose confidence in Argentina as an investment environment and further starve Argentina of the capital necessary to develop its shale fields. It’s part of a ploy to distract voters from the country’s growing economic problems by blaming foreigners; on the day the bill was passed posters were plastered around Buenos Aires declaring “Sovereignty is taking back what’s ours”. It’s no coincidence that the age-old Falkland Islands conflict has come up again recently.

But that isn’t even the most embarrassing of Argentina’s economic policies. Christina has turned to the printing presses to finance her spending. Argentina now has inflation of around 25 per cent, a fact the Government has tried to cover up by corrupting the statistics office and falsifying inflation figures: officially inflation is only 10 per cent. Furthermore there is a crackdown on the use of foreign currencies, and authorities are persecuting any economists who try to report accurate inflation figures. That’s not a good state to be in, and the parallels with failed states like Venezuela grow increasingly obvious.

This can only end badly, and I for one will be crying for Argentina.

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