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No matter how bad it gets here in the United States, we can all take solace in one simple fact: At least we don't live in Argentina.
This is not to say Argentina is a terrible place. The kayaking in the Parana Delta is some of the best in the world, and the wine and steaks are not to be missed (we recommend La Brigada in the San Telmo neighborhood of Buenos Aires). The weather, the people, and the wine and steaks (yes, they're worth mentioning twice) are quite accommodating.
Argentina's problem is its government.
"Dear Argentina: We hate you."
It's a bit of a strange phenomenon that news services often refer to Argentine President Cristina Fernandez de Kirchner as "center-left," given her government's incredibly statist economic policies. In its latest demented move, the Fernandez government announced plans for the state to take over management of Argentina's private pension programs, into which some 3.6 million people make monthly payments.
Argentina's private pensions contain roughly $29 billion and are run by a consortium of banks, including HSBC (NYSE: HBC ) . Since Argentina's bond default in 2002, the country has been shut out from access to international credit, and as its financial crisis this time around has worsened, the government has become increasingly desperate to find a source of capital to fund its budget deficit.
Well, it found one, but this move is going to severely harm equity holders, bondholders, and pensioners in the process. Argentine sovereign debt dropped on the news and yesterday traded for less than $0.25 on the dollar with an incredible 30% yield. Argentina's MERVAL stock index has dropped about 20% in the past two days as well, since the country's pension funds -- which had been big net buyers of equities -- will no longer be around to support the market if the country's legislature approves this plan.
"Love, your government"
In the past year, as Argentina sought to keep both its economic renaissance and its government's penchant for massive public spending on track, the government mandated that the pensions must keep the majority of their money in Argentine debt and equities to prevent capital flight. Meanwhile, this same government's economic policies, including taxing farmers and limiting exports at a time when commodity trading would have netted them billions in foreign currency, kneecapped the same domestic private industries that could have provided real, long-term wealth generation for this magnificent country.
Reminiscent of the boy who killed his parents and then lamented his plight as an orphan, the government forced the private pensions to invest in Argentine bonds and equities, and then it criticized their managers for poor returns when those same bonds tanked -- because of the government's inability to control its own spending.
These criticisms are but a smokescreen, though. What we believe is happening is that Argentina is having trouble servicing its debt and meeting maturities -- note its recent payment renegotiations with debtholders Citigroup (NYSE: C ) , Deutsche Bank, and Barclays -- so the government is going after the largest pool to which it has access: the pensions. And just as Argentina renegotiated with these banks on the heels of the pension takeover, so, too, will there probably be a "renegotiation" of the terms between the new pension manager (the Argentine government) and the debtor (uh, the Argentine government). It's an understatement to say that's a conflict of interest, and the folks who will get the short end of the stick are the Argentine people.
More rumblings south of the border
Last week, we reported on the havoc that the recent rise in the U.S. dollar is wreaking on emerging markets. Like any good telenovela, the story continues this week. In the past month, the Mexican peso has depreciated by nearly 19% relative to the U.S. dollar, with most of that slide occurring between Oct. 3 and Oct. 8. In an effort to stop the slide, the Mexican central bank spent 11% of its foreign reserves in three days. To add to the drama, Mexican financial regulators have launched investigations into some of the biggest corporate names in the country.
The massive liquidation of emerging-market assets by U.S. investors looking for security played a large part in the peso's decline. However, a significant portion of the decline appears to have been homegrown. A number of Mexican corporations had bets against the U.S. dollar (anticipating the continued fall of the dollar relative to the peso) and thus contributed to the massive selling of pesos (lower demand for the peso means it is worth less) as they tried to close their positions.
In all, Mexican companies realized more than $2 billion in losses, with Mexico's third-largest supermarket chain, Comercial Mexicana, declaring bankruptcy as a result. Other major Mexican companies, including Cemex (NYSE: CX ) and Gruma (NYSE: GMK ) , have reported mark-to-market losses on derivatives of more than $500 million.
For companies with large amounts of debt denominated in foreign currency, using derivatives is a way to protect against a weakening of their local currency and the rising debt costs that would result. However, it becomes a far more sinister affair when companies get greedy and venture outside their areas of expertise to speculate on currency movements simply to try to boost earnings.
Finally, a wee bit of good news
What do Coca-Cola (NYSE: KO ) , 3M (NYSE: MMM ) , and Apple (Nasdaq: AAPL ) have in common? Each U.S. company posted better-than-expected earnings this past week -- amid a painful economic slowdown -- thanks in large part to strong growth abroad.
Coca-Cola CEO Muhtar Kent noted that "the emerging markets continue to drive our growth, more than offsetting the challenges that we are addressing in North America." 3M's record third-quarter revenue of $6.6 billion was driven by a 26% increase in sales in Latin America and a 13% boost in Asia (excluding the effects of a business realignment). And Apple revealed that fully 41% -- or $3.2 billion worth -- of its record quarterly sales came from abroad.
This is not to say it's all doorbells and sleigh bells and schnitzel with noodles out there in the world. In fact, the world is facing a significant economic slowdown, and emerging economies are dealing with the fallout (see above) just as we are in the United States. But as 3M CEO George Buckley told his shareholders this week, "Our diversified global business model has enabled us to weather many economic storms and also to take advantage of opportunities when our competitors could not."
That same lesson applies to investors. Today, despite the risks, it's more important than ever to make sure you diversify across a hefty allocation of international stocks. As these multinationals proved this past quarter, you'll weather this downturn better and put yourself in a position to make more money when the global economy picks back up.
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