Monday, December 08, 2008

Argentina Moves to Expropriate Spanish Airlines: Investors throughout Latin American Grow Wary

“Spain’s Bets Sour in Latin America,” The Wall Street Journal, Dec. 4, 2008 at A13
“Argentine House Passes Airline Expropriation Bill,” The International Herald Tribune
“Argentina One Step Closer to Expropriating Airline,” Financial Times

In the wake of the Argentina’s seizure of private pension funds from banks, as addressed in a prior blog, new nationalistic actions of the leftist Argentinean government continue to surprise spectators and concern investors. Last week Argentina’s President Cristina Kirchner, with the approval of the lower house of Congress, pushed plans to expropriate two airlines owned by Group Marsans SA, a travel company based in Spain. The measure now heads to the Senate, where it is expected to pass easily. The confiscation of Aerolíneas Argentinas and a smaller airline, Austral, comes with a transaction of $1 peso (.30 USD) to be paid by the Argentinean government to Marsan. The governments of former President Néstor Kirchner and now of his wife Cristina Kirchner have followed a strategy of renationalizing key public services since 2003. To legally expropriate, or “nationalize,” a company or property in Argentina, the Argentinean the government needs to show only that the expropriation is “of public utility.” The two Spanish airlines operate approximately 80 percent of domestic flights in Argentina, and President Kirchner argues that those airlines are “for public use.”

This expropriation is yet another step for Kirchner in her vow to reverse free-market policies, largely at the expense of foreign investors. Spain-based companies have been hit particularly hard populist economic policies throughout Latin America. The Wall Street Journal lists Repsol YPF, SA, Banco Bilbao Vizcaya Argentaria SA and Banco Santander SA as a few of the Spanish companies whose assets have been nationalized or contracts torn up in Argentina, Venezuela, Bolivia and Equador. Critics of these populist policies warn that such actions revive tensions regarding the “Conquistador” sentiment towards Spain – leaders like Venezuela’s President Chavez use the centuries old “Conquest” of Latin America by Spain to blame Spanish and other foreign investors today for economic ills. Such “Conquest” rhetoric is strategically used by Latin American populist leaders and is triggering greater nationalism throughout the region. Companies from the United States have also fallen prey to Latin American “Conquest” rhetoric. For example, Venezuela forced U.S.-based Verizon Communications, Inc. to sell its stake in a Venezuelan telecommunications company to the government.

Said nationalization actions propel a divergence between Latin American countries when it comes to reception of foreign direct investment (FDI). Companies from Spain and other countries continue to invest heavily in the region. However, investors have grown wiser and warier through their experiences with countries that advocate state intervention in industries. In 2007 FDI in Latin America reached a record USD $106 billion, and nearly 80 percent went to pro-business countries nations such as Mexico, Brazil, Chile, and Colombia.

1) How might the populist policies of countries like Argentina and Venezuela affect other, more pro-business countries in Latin America?
2) How do you perceive nationalization of private companies? Might it be the best move for a country's citizens at the time, or is nationalization an unacceptable interference with private property?

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