CFK Sells Argentina to the Chinese…on the Cheap

CFK Sells Argentina to the Chinese…on the Cheap

Post date : 01.29.2015 2:24 pm

Vaca Muerta now behind the pawn shop glass

Amidst increasing domestic turmoil President Cristina Fernández de Kirchner plans to embark next week on a grovel-fest to China, where she will bow and scrape for the only financing deal now available to her.

Both the timing, and the China-centric terms she will reportedly accept,underscore once again the extent to which Kirchner’s decision to default on the Republic’s loan obligations has isolated Argentina from international capital markets.  Despite possessing the power at any time to alleviate the economic plight of her country and its people by negotiating a final resolution of its outstanding defaulted debts, Kirchner is poised anew to cede both Argentine sovereignty and vast natural resources in “agreements directly tailored for China.”

These lopsided, China-favored agreements have been examined within this blog several times, most significantly here and here.

Kirchner tried to rush the arrangement through the legislature in the waning days of 2014 to preclude dissent. In fact, a quorum was achieved in the Senate by only one vote, and then, only after former President, and convicted arms smuggler, Carlos Menem, was dragged in to cast it. The accord has not been approved by the Chamber of Deputies.  Despite enjoying a majority there, President Kirchner didn’t even bring it to the Chamber, indicating a well-spring of hostility for the accord, even among Kirchner’s political allies.

None of this should be surprising because the accord – a “battery” of agreements including a $2.9 Billion renovation of the Belgrano Cargas freight rail system, an $11 Billion currency swap, and a $4.7 Billion lending facility to fund two hydroelectric dams (one of them named after Kirchner’s deceased husband, former President Nestor Kirchner) in Patagonia – was swiftly assailed during its forcible penetration of the Senate, because it “would give the cash-strapped Argentine government access to Chinese financing in exchange for sweetheart contracts that would allow the Chinese firms to import their own labor [into Argentina].”

Those “sweetheart contracts” refer to long-term, low-rate credits that are not subject to the rules of the tender… in other words, China is free to offload poor quality merchandise, while Argentina is compelled to pay artificially high prices for them.

José Ignacio de Mendiguren, the Secretary of the Argentine Industrial Union and national Deputy, penned a compelling op-ed in El Cronista, in which he established the following salient point…“In a context where unemployment is reaching more than 1.4 million Argentines and at least 4 million compatriots are in a precarious situation, assuming the inevitability of theagreement with China will make these figures worse.”

Additional scrutiny has revealed that the accord doesn’t just subvert Argentina’s labor force in favor of Chinese workers…

And, it doesn’t just require Argentina to spend the money it borrowed on Chinese goods and services…

The hydroelectric deal appears specifically to mandate that Argentina contribute its own $1.3 billion, which will go directly to China.

As this blog has earlier documented, La Nacion conducted its own examination of the loan agreement between Argentina and China, discovering a cross default clause in that contract. The clause expressly states that an Argentine government default on other debt constitutes an Event of Default on the Chinese loans themselves…which means Argentina is currently in default on the terms of those agreements based on its ongoing exchange bond default.

Significantly, the hydroelectric deal was signed in mid-July of 2014, which means Argentina went into default on that contract within a few weeks of signing it…the moment President Kirchner committed to defaulting on her loan obligations, July 30. This default on the Chinese obligations could be construed as a willful misrepresentation of the terms of the contract.  It is that contract that specifically compelled Argentina to stipulate no imminent event was on the horizon…

This serves as another egregious example of President Kirchner’s irresponsible management of the government’s contractual obligations and the Argentine economy in general. Her unwillingness to resolve the existing default has placed fresh and heavier burden on the Republic’s finances.

Other La Nacion investigative nuggets regarding the accord emphasize the hypocrisy of the Kirchner administration in its manufactured narrative about the holders of its pre-2001 defaulted debt:

 – In the China agreements, Argentina waives its immunity and “submit[s] itself to foreign courts,” prompting La Nacion to observe, “the government of Cristina Kirchner ended up giving the Chinese banks foreign jurisdiction, submission to other courts and everything it wants to take away from the holdouts.” (Chinese insistence that the credit facilities be governed by English law suggests that they assign Kirchner/Argentine promises something less than face-value…)

 - The “contracts with China also appear to contain clauses that the Government…repudiate[d] in the cases against the holdouts,such as ‘acceleration’ of debt maturities, which are carried out if the country goes into default on a payment…the creditor is entitled to demand immediate payment of the total principal, even if many years to maturity remain.”

It is also worth noting that the railroad and hydroelectric dam contracts with China contain pari passu clauses. It is well-known how Argentina views its obligations under that provision.

And so, with the Argentine benefits of the accord seemingly illusory, investigative journalist Jorge Lanata devoted an entire show to the “small print” of the so-called “million-dollar” deals with China.

Among Lanata’s findings?  The Belgrano Railroad deal required Argentina to buy 2,800,000 railroad ties from China, even though there are at least 5 factories capable of producing these that already exist in Argentina. 

And the Argentine levy for this obscene charity to Chinese companies, at the expense of Argentine industry and its employees? An estimated 30%-35% more than it would customarily cost…

Lanata and other informed observers have made the point that this relationship is a classic model for the deteriorating terms of trade:  Argentina provides the commodities and China provides the manufactures.

Could this have any bearing on an Argentine economy “struggling to avert a recession”?  Oddly, President Kirchner’s “narrative” seems never to indulge this vein of analysis…

Neither are any of Kirchner’s narratives expected to indulge the topic of China’s well-documented degradation of the region, as documented by many, including the UK’s The Guardian.  It ran an in-depth piece, entitled, “China’s exploitation of Latin American natural resources raises concern,” with an equally compelling subhead, “Economic benefits countered by environmental damage and fears over lopsided nature of trade relations with Beijing.”

A few choice excerpts:

 – An “Amazonian forest cleared in Ecuador, a mountain leveled in Peru, the Cerrado savannah converted to soy fields in Brazil and oil fields under development in Venezuela’s Orinoco belt…These recent reports of environmental degradation in Latin America may be thousands of miles apart in different countries and for different products, but they have a common cause: growing Chinese demand for regional commodities.”

 – “The world’s most populous nation has joined the ranks of wealthy countries …that have long consumed and polluted unsustainably.”

 – “Even more than Africa, Latin America has become a major focus of Beijing’s drive for commodities.”

 – “A study last year by Enrique Dussel Peters, a professor at the National Autonomous University of Mexico, found that the region has been the leading destination for Chinese foreign direct investment – mostly for raw materials and by big government-run companies such as Chinalco and CNOOC.”

 – “Since the 2008 financial crisis, China has also become the main lender to the region…in 2010, it provided $37 Billion in loans – more than the World Bank, Inter-American Bank and the US Import-Export Bank combined.”

 – “Trade between China and Latin America was just $10 Billion in 2000.  In 2011, it had surged to $241Billion.”

The Guardian goes on to say, “Repayments to China are guaranteed by long-term commodity sales, which means a commitment to push ahead with resource exploitation – often with dire consequences for the environment and indigenous communities.”

From Argentina’s perspective, the expose’s conclusion seems particularly prescient (written 14 months or so before the Argentine/China flirtations that spawned the accord):

“The lopsided nature of China-Latin America trade is also questioned because while it is good in terms of GDP quantity, it has not been so beneficial indevelopmental quality.  Commodity suppliers are delighted at the Chinese demand for their exports, but manufacturers complain of a flood of cheap Chinese imports that undermine their competitiveness.”

For certain, it is a description that should embolden opponents of the accord, especially if they hope to safe-guard Argentina’s crown jewel, her national patrimony, the gigantic Vaca Muerta shale formation in remote Patagonia that represents the world’s second biggest shale gas reserves and the fourth largest shale oil reserves…as well as a perpetual dream-source of Kirchner revenue…

Kirchner’s long-harbored desire to transform the Vaca Muerta from crown jewel to fungible asset came a step closer yesterday on news that Argentina’s state-run energy division, YPF, had signed a preliminary agreement with China’s Sinopec to extract oil and gas from the region.

We remind readers that a transfer of patrimony remains preventable. If Argentina negotiated a resolution in good faith with its creditors, it would not need to be on the short end of such one-sided financial arrangements.