The Week That Was… 38

Argentina: The $50-bn-Man

Axel Kicillof, 51, is justifiably proud of his reign as finance tsar in the two successive administrations (2007-2015) of Peronist president Christina Fernández de Kirchner. He managed to slash the Argentina’s debt-to-GDP ratio from 166 percent to just 73 — while implementing numerous social assistance programmes.

But the golden boy of Peronism has lost some of his shine after a New York judge ruled that the country owes $16 bn (£12.8 bn) in compensation to two shareholders of YPF (Yacimientos Petrolíferos Fiscales), the oil company expropriated and nationalised by Kicillof in 2012.


The plaintiffs argued that the Argentine government had failed its obligation, under the company’s bylaws, to make a tender offer to other investors after it acquired a majority of YPF shares from Spanish oil company Repsol in 2014, for $5bn (£4bn). This, the plaintiffs said, forced them to serve as Argentina’s creditors for over a decade.

Eying upcoming elections, and Kicillof’s role as kingmaker, a few economists set out to evaluate his impact on Argentina’s finances. It transpired that Kicillof’s decisions cost the country an estimated $51bn (£41bn). After years of ignoring bondholders in the restructuring of Argentina’s debt, the “ostrich policy” collapsed in April 2016, when Argentina succumbed to reality and paid $16.7bn (£13.4bn) to its creditors.

On the campaign trail, Kicillof shows no regrets, and quips that “only someone stupid” would have followed YPF bylaws. The former minister also said that that he is searching for 16 “big ones” to pay off the overlooked YPF shareholders. The New York District Court ruling comes at an inconvenient moment: Argentina’s net forex reserves have dipped into the red, with short-term bridge loans and credits exceeding cash-on-hand by an estimated $7bn (£5.6bn).

Spain: A Call from Riyadh

The cabinet of Spanish caretaker prime minister Pedro Sánchez is up in arms over the acquisition by a Saudi company of a sizeable stake in the country’s flagship Telefónica telecom provider.

Saudi Telecom Company (STC), listed on the Riyadh Tadawul exchange, but with the kingdom retaining a 70 percent of its share capital, reportedly splashed €2.1bn (£1.8bn) on a 9.9 percent stake in the Spanish company, divided between shares (4.9 percent) and financial instruments that may be swapped for shares.

Several politicians came out in opposition to the Saudi “assault” on Spain’s corporate crown jewel. Among them was the number two in the Sánchez cabinet and Minister of Labour and Social Economy, Yolanda Díaz. She swore to move heaven and earth to stop the Saudi bid. “A company that manages our data — the oil of the 21st Century — cannot be allowed to fall into foreign hands,” she said. “We need better protection for corporates that represent strategic value.”

STC is seeking government approval to swap the Telefónica bonds it holds for shares. Because it provides services to the defence establishment, non-EU investors are limited to a five percent stake. The management of Telefónica has no objection to the Saudi plan.

Sánchez, who has three months to decide the fate of the company, doesn’t want rule out Saudi participation or offend Riyadh. Spanish construction companies and defence contractors have secured orders in Saudi Arabia worth billions of euros.

STC embarked on an international shopping spree in 2020 when it bought a 55 percent stake in Vodafone Egypt. Earlier this year, the company’s infrastructure subsidiary, Tawal, paid $1.34bn (£1.15bn) for 4,800 towers in Bulgaria, Slovenia, and Croatia operated by United Group, a telecom provider and media company. Domestically, STC claims a market share of 80 percent. The company maintains subsidiaries in Kuwait and Bahrain.

‘Naked Protectionist Act’?

Beijing is upset at European Commission president Ursula von der Leyen after she announced a probe into Chinese subsidies for electric vehicle (EV) manufacturers which are “distorting” EU markets.

Von der Leyen dropped the bombshell in her State of the Union address. She said that European companies are too often excluded from foreign markets and undercut by competitors benefiting from state subsidies.

During the recent G20 summit in New Delhi, Von der Leyen expressed the EU’s concerns to Chinese premier Li Qiang. Beijing has vowed to protect the “legitimate rights” of its car manufacturers. In a statement, the Chinese commerce ministry called the investigation a “naked protectionist act” that could disrupt automotive supply chains. It said the probe would have a negative impact on trade relations between China and the bloc.

Commission president Von der Leyen was under pressure from French, Italian and German vehicle manufacturers to “do something” about the flood of Chinese EVs reaching European shores: 20 brands are now found there.

The European Commission suspects that the EU has become a dumping ground for cars that Chinese manufacturers are unable to sell domestically due to oversupply. It wants to avoid a repeat of the 2012 solar panel debacle, in which the EU slapped only punitive tariffs on the state-subsidised Chinese photovoltaic cells — even after most domestic producers had folded. The tariffs failed to revive the industry and were soon scrapped.

UAW Strikes Big Three

For the first time in its 88-year history, the United Auto Workers union (UAW) has called for strike action against the big three Detroit automakers.

UAW members walked out at three assembly plants in Wentzville, Missouri (General Motors), Toledo, Ohio (Stellantis), and Wayne, Michigan (Ford). Almost 13,000 workers downed tools.

Union president Shawn Fain said the strike could spread to other locations. The International Brotherhood of Teamsters, representing truck drivers, instructed its members not to cross UAW picket lines, a move likely to disrupt supply chains and deliveries. Kevin Moore, president of Teamsters Local 299 — former roost of union boss-cum-mobster Jimmy Hoffa, who disappeared in 1975 — warned that all Detroit locals are ready to back the auto workers.

The four-year contract negotiated by the UAW in 2019 recently expired, opening the door for industrial action. Talks broke down over the union’s demand for a 36 percent pay rise, spread over four years, and an end to the two-tier wage system separating newer and longtime workers. The union argues that the demanded increase in hourly pay is roughly equal to the compensation packages of the three companies’ CEOs.

While the big main manufacturers are raking in record profits, management argues the cash is needed for the transition to electric vehicles. According to UAW numbers, profits jumped 92 percent between 2013 and 2022 to total some $250bn (£201bn). This year, another $32bn (£25.7bn) has been added to that. Over the past decade, the big three spent $60bn (£48bn) on share buybacks and dividends.

The union points out that the concessions made in the wake of the 2008 industry-wide crisis were never reinstated. Since then, average hourly earnings, when adjusted for inflation, have dropped by 19.3 percent.

Ford CEO Jim Farley said that his company would go bankrupt if it accepted the UAW proposal. While General Motors and Stellantis refuse to comment, GM chief of manufacturing Gerald Johnson has said that the pay and benefits demands would cost the company $100bn (£80bn) —more than twice its market capitalisation.

ECB on a High

The European Central Bank (ECB) upped its deposit rate for the 10th consecutive time to a record high of four percent. The move had been anticipated in a bid to cool inflation. ECB president Christine Lagarde said that the benchmark deposit rate may stay at the current level for a “sufficiently long” duration — which markets interpreted as a sign that the bank is done with hikes.

After a hitting a spike of 10 percent in Q3 2022, Eurozone inflation descended to 5.3 percent in August, still some way from the two percent target. Lagarde noted that the contribution of rising labour costs to eurozone inflation has increased over the second quarter.

Governor Klaas Knot of the Dutch central bank, Nederlandsche, alerted his colleagues in Frankfurt to the pay rises of 10 percent or more won by unions in his country. Lagarde said she had spotted early signs of companies absorbing higher labour costs by squeezing profit margins instead of raising prices.

Analysts expecting the rate hike questioned the wisdom of the decision considering the weak outlook for the eurozone economy. Germany is on the brink of recession, and retail sales and industrial production are down across the bloc. Italian Prime Minister Giorgia Meloni expressed dismay over ECB policy. Her coalition partner of the combative Lega Nord, Matteo Salvini, was less diplomatic. “Lagarde lives on Mars,” he sneered. Raising the cost of money was “uneconomic, antisocial, and anti-historical” in his view.

Anticipating an end to the cycle of rate hikes, investors pushed global stock markets higher. The US Federal Reserve is expected to leave borrowing costs unchanged, while the Bank of England may yet decide on a last hurrah. The ECB forecasts inflation to drop to 3.2 percent next year, and 2.1 percent in 2025. The bank expects eurozone GDP growth to slow to 0.9 percent this year before a rebound to 1.5 percent in 2024, and 1.6 percent in 2025.

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