Spanish businesses in Argentina: Gored
Jan 5th 2002
From The Economist print edition
Spain's leading companies stand to lose heavily in Argentina
AFTER years of boasting about their expanding empire in Latin America, Spain's biggest companies are now suffering because of it. BBVA and Santander Central Hispano (SCH), the country's two biggest banks, Telefonica, the former state telecoms monopoly, Repsol-YPF, an oil concern, and Endesa, a power giant, all derive significant slices of their profits from Argentina, where they have invested tens of billions of dollars. These groups, whose shares together account for three-quarters of the trading volume on Madrid's stock exchange, now face a double blow: default on Argentine government debt and a devaluation of the country's currency.
The banks will be the hardest hit. Through the subsidiaries of BBVA and SCH—they own respectively Banco Frances and Banco Rio, Argentina's second- and third-largest banks—the Spanish banks control a fifth of Argentina's banking system. They are exposed to over $2 billion-worth of government debt apiece. On top of that, a devaluation of the peso would lead to a rise in bad debts, since over two-thirds of the loans to Argentine companies and individuals, most of whom receive income in pesos, are denominated in dollars. The banks maintain that they are cushioned against bad times. Together, they have put aside over $1 billion in provisions over the past year, and they will add more. Their Argentine subsidiaries are well-capitalised, they say, and the worst scenario would be no profits from them for two or three years.
Not everybody is convinced. Vasco Moreno of Fox-Pitt Kelton, a stockbroking firm in London, says that SCH and BBVA could face charges of up to $4.6 billion and $3.6 billion, respectively, thanks to Argentina's default. Mr Moreno says that the parent banks would not recapitalise Banco Frances and Banco Rio if their losses ran that high. As for fund managers, their fear, hitherto unfounded, is that Argentina's troubles could spill over to Brazil, where Spanish companies have a lot more at risk.
Argentina's latest president, Eduardo Duhalde, can expect an immediate visit from Spanish ministers eager to shield their country's companies from losses. In December, Felipe Gonzalez, a former Spanish prime minister, rushed to Buenos Aires to lobby for Spanish businesses. He told Fernando de la Rua, who stepped down as Argentine president shortly afterwards, that an uncontrolled devaluation would be fatal for both Argentine and Spanish companies.
For Telefonica, Repsol-YPF and Endesa in particular, such a step would sharply cut the value of the pesos they earn. Argentina accounts for at least 10% of profits at Endesa, two-fifths of revenues at Repsol-YPF, and at least 15% of profits at Telefonica. Some executives of Spanish multinationals fear that, in addition, they might come under popular attack as the presumed beneficiaries of Argentina's privatisation programme. When Endesa bought Edesur, the electricity distributor, the Argentine government allowed it to peg its tariffs to the dollar. Will it be able to insist on that peg after a devaluation?
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