Argentina’s Point of No Return

The most important development this week in Latin America is the decision of the Argentine government to seize control of Yacimientos Petrolíferos Fiscales (YPF), the country’s largest oil company. On Monday, President Cristina Fernández de Kirchner announced the expropriation of the controlling stake of YPF that is owned by the Spanish company Repsol. The Spanish government, backed by the European Union, has announced that it will take retaliatory measures against Argentina, noting that “all options are on the table.” The Economist Intelligence Unit has a very good analysis on the case and the implications for Argentina.

The big question after Fernandez’s overwhelming reelection last fall was whether she would deepen the economic model she and her late husband (and predecessor) implemented since arriving to power in 2003—marked by high government spending, tight economic controls on industries, and selective nationalizations of businesses—or instead change course given the growing signs of exhaustion: high inflation, growing fiscal deficit, increasing capital flight, fall in foreign direct investment, the weakening peso, etc.

Any doubt is now gone. With the nationalization of YPF, Argentina firmly joins Venezuela, Ecuador, and Bolivia in the club of Latin American nations that espouse high-octane economic populism. In the upcoming months, we can expect more protectionist measures, further controls on the economy and, once the government runs out of the money that it seized in the past three years from the private pension funds and the Central Bank’s reserves, we should not be surprised if it moves to take control of the banks.

Things will only get worse for Argentina.