Crisis in Belgium

  Wallonia versus Flanders

On Nov. 5, Belgium surpassed its previous record, set in 1987, for a party failing to form a government. Elections were held on June 10, and to date, the winning Christian Democrats have been unable to form a governing coalition. The problem is Belgium is linguistically divided, which works against the compromises required to form governments. The current crisis threatens Belgium’s existence.In his report, Bill O’Grady discusses the history of the country and the importance of the linguistic and cultural divide to the current crisis. He also examines the chances of a breakup, the broader issues a breakup would bring, why the resolution of this crisis is important and the potential financial market ramifications.

Belgium’s history: the linguistic and cultural divide
Belgium declared its independence in 1830 in the aftermath of the Belgium Revolution. The region became part of the United Kingdom of the Netherlands in the wake of the Napoleonic Wars. However, the Walloons, French-speaking Catholics in the southern part of the country, felt particularly oppressed by the Calvinist Dutch. Even the Belgium Dutch, known as the Flemish, were mostly Catholic and resented the Calvinist king of the Netherlands. European powers were generally divided on creating Belgium; the French, still smarting from the post-Napoleon losses, supported the creation of the new state, but other nations were opposed, fearing the French would annex Wallonia. Eventually, most of these nations decided to go along with the new nation, seeing it as a primarily buffer state between France and the Netherlands.The Walloons, although a minority in the new nation, dominated the political system. The French-speaking Walloons treated the Dutch-speaking Flemish as second-class citizens. The Walloons made French the language of government, and education denied the Flemish the right to teach their children in their native language. During World War I, the Belgium army’s office corps was primarily French-speaking, whereas the non-officers were Flemish. Not only did Walloon officers order thousands of Flemish soldiers to march to their deaths, some of the orders were misunderstood because of the language differences. Needless to say, these events led to significant Flemish resentment.Into the 1960s, Wallonia provided most of Belgium’s economic growth, as its coal and steel industries supported European rebuilding and expansion. However, since then, rising competition has sent this region into decline; at the same time, Flanders, with its robust technology and trade sector, has become the most economically viable region. Currently, unemployment is running 5% in Flanders and 14% in Wallonia. Part of the current tensions between the regions is because Flanders wants to keep more of its tax revenue “at home” and resents sending transfer payments to the economically challenged Wallonia.

A nation in three parts
Belgium is a nation with three distinct parts.  The northern part of Belgium, Dutch-speaking Flanders, represents 58% of the population. The southern part, French-speaking Wallonia, represents 32%. There is a small German-speaking part near the German border, which joined Belgium by plebiscite after World War I. The capital, Brussels, is multilingual.Among the population, 59% of primarily Dutch speakers can also speak French, whereas only 19% of primarily French speakers can converse in Dutch. The political system is designed to preserve these cultural and linguistic differences. There is no system of bilingual education or laws; instead of seeing work to integrate the two regions, we see them becoming increasingly separate.

The current crisis
The elections on June 10 gave power to the Flemish Christian Democrats. Yves Leterme, the party’s leader, has been unable to form a coalition government. His party’s platform was to further devolution, putting more power into the regional governments. Needless to say, the Walloons, dependent upon transfer payments from Flanders, opposed the policy direction and have failed to participate in coalition building. At the same time, there is strong support in the Flemish parties for Leterme’s policy recommendations.Tensions have increased dramatically during the past two weeks after the Flemish parties brought a bill to the parliament that would prevent French-speaking voters living in the Dutch-speaking suburbs around Brussels from voting for candidates in French-speaking precincts. Belgium courts have ruled that such exceptions violated the constitution, but Walloons expected some sort of accommodation. Instead, when the bill was presented to parliament, French-speaking lawmakers refused to participate and walked out. This has hardened positions between the two groups and threatens to further delay the formation of a government.

What will become of Belgium?
Recent events have raised the specter that Belgium could break apart. Polls indicate that 66% of Belgium Dutch speakers expect the country to break apart “someday.” There are some difficult issues that would come with a breakup, however.
• Would a separation be “easy” like that of Czechoslovakia or “hard” like that of Kosovo? Given Belgium’s position in civilized Europe, it is difficult to imagine a shooting war developing over separation, but there could be legal skirmishes over property and shared institutions. Thus, separation may be simple in concept, but the actual execution may be very difficult.
• Would the separation of Belgium, one of the founding members of the European Union, prompt other ethnic groups to press for greater autonomy and perhaps independence? Would, for example, the Basques use this separation as a precedent for removing the Basque region from Spain? Or Scotland from the United Kingdom? The European Union would likely be very concerned about the instability that could develop from such trends.
• What would be the currency outcome? Belgium is a member of the Eurozone, using the euro for its currency. If the two regions separate, would the European Central Bank accept both nations as viable enough to use the single currency, or would one or both nations be forced to reissue national currencies? What impact would the loss of Belgium have on the euro?
• Would both areas remain independent, or would they join other nations? Polls show that 45% of Dutch nationals would welcome the merger of the Netherlands and Flanders. Other polls show that 66% of French citizens living near the Belgium border would be willing to absorb Wallonia. It is possible that Belgium would simply cease to exist and the Netherlands and France would enlarge.
Of course, maybe none of this will happen. Although the linguistic divide has been growing since the 1970s, probably neither group is prepared to take the step of liquidating the state of Belgium. One major issue is that neither group would want to cede Brussels to the other. For separation to occur, this key city would likely be forced to “internationalize” — perhaps becoming like Vatican City. This may be possible given that Brussels is the seat of the European Union and NATO. We don’t expect separation is imminent; however, tensions are rising and if a government isn’t formed soon, Belgium voters may simply decide to finish a process that appears to be moving toward separation.

Ramifications
Belgium separation could effect the financial markets in three ways:
• First, if Belgium separates and at least one of the devolved states remains independent, the nature of the euro changes, as one of the constituent nations has changed. It is similar to the problems that plagued the Canadian dollar when there were fears that Quebec would separate; the currency tended to weaken on concerns that Canadian economy would be adversely affected by the loss of Quebec. Thus, separation would likely weaken the euro. It would also call into question the eventual expansion of the single currency to Eastern Europe, as these nations may be more susceptible to separatist issues.
• Second, separation could encourage other separatist movements in Europe and elsewhere to consider autonomy and independence. This could increase global instability and encourage investors to hold safety instruments, such as Treasuries, and avoid confidence assets, such as equities.
• Finally, it could adversely affect investments in Europe, most directly in Belgium, as separation would raise uncertainty and likely cause investors to pull back from the country and the region until the situation is resolved. Thus, European equity markets could be adversely affected.

Additional information available upon request from Wachovia Securities. Wachovia Securities is in no way affiliated with the Geopolitical Rooster, but the Rooster loves the non-sensationalistic and informative weekly geopolitical report from Bill O’Grady of Wachovia Securities.  Wachovia Securities does not endorse the Geopolitical Rooster and does not share in the opinions posted here, except where indicated in the referenced reports.  The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee as to its accuracy or completeness. The material is published solely for informational purposes and is not an offer to buy or sell or solicitation of an offer to buy or sell any security or investment product. This material is not to be construed as providing investment services in any jurisdiction where such offers or solicitation would be illegal. Opinions and estimates are as of a certain date and subject to change without notice. You should be aware that investments can fluctuate in price, value and/or income, and you may get back less than you invested. Past performance is not a guide to future performance. Investments or investment services mentioned may not be suitable for you, and if you have any doubts, you should seek advice from your financial consultant. Where the purchase or sale of an investment requires a change from one currency to another, fluctuations in the exchange rate may have an adverse effect on the value, price or income of the investment. Certain investments may be mentioned that are not readily realizable. This means that it may be difficult to sell or realize the investment or obtain reliable information regarding its value. The levels and basis of taxation can change. Special risks are inherent to international investing including currency, political, social and economic risks. This document has been approved by A.G. Edwards Sons (U.K.) Limited, authorized and regulated by FSA.

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Michael Savage Needs a Lesson in Diplomacy

Learning what doesn’t work.  Politics are despicably misleading.  Media is despicably biased. But polical media is about as bad as it gets.  People out to “rally the base” and in it for the ad revenues.  Does it get any less reliable?  Someone, feel free to stop me – but is there really any rational way to compare Imus’ firing to Nazi Germany?   I’m just not sure throwing the history of Nazi Germany into the same league makes any sense.   And Savage compares a lot of people to Hitler – and a lot of situations to Nazi Germany.  Don’t get on my case for picking on the “Right”.  I have a lot to say abot the likes of Robert Reiche as well.  Please climb aboard the reality that in politics and media, the truth usually lies somewhere outside of the far right and the far left…..somewhere in the middle.

Real Ramifications of Pakistans ‘State of Emergency’

On Nov. 3, President Musharraf of Pakistan declared a state of emergency, which closed nearly all the non-government-controlled media, suspended the judiciary and curtailed public assemblies. It also began arresting activists and judges. In his report “Emergency in Pakistan“, Bill O’grady of Wachovia Securities, examine’s the president’s motives for this apparent coup, the impact of this action on the Global War on Terrorism, and the most likely outcome of this event. As always, we will also discuss the market ramifications.

What does Musharraf want?
It appears President Musharraf had two motives. First, he wanted recent elections to give him legitimacy, and second, he wanted to maintain his status in the military.
Comments from Western diplomats who had a conference with the Pakistani president shortly after the emergency order clearly indicate that his goal was tied to concerns surrounding the judiciary. Last month, General Musharraf was “re-elected” to the presidency. It wasn’t much of a contest, as the major opposition leaders were in exile. However, there was a legal problem with the vote: The president was still the head of the military, and it is constitutionally unclear whether one person can hold both roles of military leader and civilian president. The Supreme Court was expected to make a decision on the president’s military status by Nov. 15. Although most expected the court to “bless” the outcome, Musharraf apparently feared it would not. After all, he had a political crisis earlier this year with Chief Justice Mohammad Chaudhry. In order to ensure a favorable decision, Musharraf declared a state of emergency; one of his first acts was to fire the chief justice.The official reason given for the emergency order was to improve the government’s ability to fight Islamic insurgents. However, there is little evidence to support this claim. Media reports show the curious spectacle of mass arrests of blue-suited protesting lawyers. It appears that the bulk of the arrests are against secular democracy advocates and political opponents who are clearly not Islamic insurgents. Thus, it is likely that Musharraf’s goal was solidifying his political position. Having the Supreme Court confirm the constitutional legitimacy of the October election was apparently critical, even if that court was packed with newly minted judges.The key institution in Pakistan is the military. Pakistan was created soon after India was granted independence from Britain. Although Indian leaders wanted to craft a multi-religious nation, Muslims objected, and thus a homeland in Pakistan was created. Pakistan is a country, but a sense of nation hasn’t really developed. Instead, there are strong tribal elements to the country that tend to be more important to personal identity. In addition, the mountainous regions that border Afghanistan have always been autonomous. The British were never able to subdue this region, and the border with Afghanistan was deliberately established to divide the tribes and make them easier to govern. The only institution that has national appeal is the military; that’s why there has been little opposition to numerous military governments since independence.It is for this reason that President Musharraf wants to maintain his role as military commander. He fears, with good reason, that giving up his military status could undermine his power and make him vulnerable to being ousted by another military figure. In addition, civilian governments in Pakistan have tended to be corrupt, so Musharraf would gain little by becoming solely a civilian leader.

The Global War on Terrorism
Pakistan’s support of military operations in Afghanistan is critical. Afghanistan is a landlocked nation. Without overflight permission, supplies would need to be delivered through (or over) areas of either the former Soviet Union or Iran. The latter is very unlikely; the former has become increasingly problematic given deteriorating relations between the United States and Russia. Because Russia’s influence in these former Soviet states has been increasing, we have seen less support for U.S. policy from these nations. The United States managed to secure President Musharraf’s support, although reports suggest there was some “arm twisting” involved. Musharraf’s memoirs claim Deputy Secretary of State Richard Armitage indicated that if his government failed to support U.S. efforts in Afghanistan, his nation would be “bombed into the stone age.”
Although President Musharraf has supported U.S. and NATO efforts in Afghanistan, his assistance against jihadist insurgents has been less than stellar. There have been high-profile arrests of senior al-Qaida operatives since 2001. But the Taliban and other fellow travelers have been allowed to operate in the western tribal regions. There are two reasons for this situation. First, as mentioned above, these regions have been autonomous for centuries. In general, these tribes are sympathetic to the religious aims of the Taliban and thus tend to support them. In addition, there is a code of protecting travelers and visitors; when jihadists from Afghanistan move across the border into Pakistan, these tribes usually protect them. Second, in the early 1980s, under the military government of General Zia, the military shed its secular policy and began to promote religious fervor within its ranks. This trend dovetailed with the mujahideen’s war against the Soviet Union in Afghanistan. It should be noted that the Pakistani intelligence services showed a similar trend toward Islam.Unfortunately, the Islamic leanings within the Pakistani military undermine U.S. and NATO efforts against jihadists operating in Afghanistan. Three recent events highlight this issue. The government was forced to trade 25 convicted terrorists for 213 soldiers who were captured by jihadists. Forty government paramilitary soldiers surrendered two towns in the Swat Valley without resistance to insurgents. And the military has refused to pursue Baitullah Mehsud, an Islamist insurgency leader, who provides material support for foreign insurgents operating in Afghanistan. In addition, it is believed that he may have been the mastermind of the recent car bombing that marred the return of Ms. Bhutto from exile. Comments from anonymous military officials suggest that they see attacking jihadists as turning their weapons on their own kind. Thus, the military rank and file tends to oppose military action in the tribal regions, and their performance bears that out.Thus, the military and intelligence communities in Pakistan are generally unsympathetic to the U.S. Global War on Terrorism. A couple of items highlight this situation. This summer, the Musharraf government declared a cease fire with insurgents in the tribal regions. NATO commanders noted that soon after, insurgent attacks in Afghanistan increased. We also note that the military has been willing to arrest secular activists, lawyers and judges in the recent state of emergency; there is no evidence to suggest these resources have been used to arrest jihadist insurgents.

What will Musharraf do?
Prior to the emergency order, it appeared the president and former Prime Minister Benazir Bhutto had cut a deal where she would return from exile to become Prime Minister and Musharraf would take the position of president in the new government. It remained unclear whether Musharraf would remain head of the military as well. In response, Ms. Bhutto returned to Pakistan; at the parade marking her return, she narrowly avoided injury from a car bombing for which she was the target.
Initially after the emergency order, Bhutto said little against Musharraf; however, she is now under apparent house arrest to prevent her from organizing protest marches. It is unclear whether Bhutto can be co-opted by the president. Even without her, though, if Musharraf can ensure a favorable outcome for the Supreme Court on his ability to hold the highest civilian and military offices in Pakistan and the decision can be seen as legitimate, the current state of emergency could end early next year. Musharraf has indicated that he plans to hold elections in February and step down from his military post at that time, but there are significant doubts that either will occur.What is evident is that Musharraf will continue to court the military for his support. If the military turns against the president, his position will become untenable. And given the military’s bias toward supporting the Islamists, we would not expect aggressive actions to be taken against the tribal regions.

Ramifications
For U.S. foreign policy, developments in Pakistan are a double reversal. Not only does this apparent coup undermine President Bush’s support for democracy, it appears that the Pakistani military is retreating from the Global War on Terrorism. Although this is clearly an unwelcome situation, it could become worse. If Musharraf is replaced, it is possible his successor could be unfriendly to the United States and perhaps undermine Western efforts in Afghanistan. Thus, we would expect the Bush administration, despite misgivings about recent developments, to continue supporting Pakistan’s president.
Because Pakistan possesses a nuclear weapon, an unstable or unfriendly government would be a major problem for the West. At this point, we do not expect an unfriendly change in control in Pakistan, but if one developed, the West would find itself in a very difficult position. Invading a nation with a nuclear weapon could be problematic; a Pakistan unfriendly to the West would likely work to remove the Karzai government in Afghanistan and become a significant threat to India.Thus, we expect Musharraf to remain in power but probably ruling an authoritarian government. If this assumption is correct, the situation should not be a major short-term issue for the financial markets. However, current conditions are fluid and if civil unrest rises to the point where the current government is threatened, instability could have an adverse impact on the financial markets. Assets that would likely benefit would be Treasuries and precious metals; equities would likely suffer.

Additional information available upon request from Wachovia Securities. Wachovia Securities is in no way affiliated with the Geopolitical Rooster, but the Rooster loves the non-sensationalistic and informative weekly geopolitical report from Bill O’Grady of Wachovia Securities.  Wachovia Securities does not endorse the Geopolitical Rooster and does not share in the opinions posted here, except where indicated in the referenced reports.  The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee as to its accuracy or completeness. The material is published solely for informational purposes and is not an offer to buy or sell or solicitation of an offer to buy or sell any security or investment product. This material is not to be construed as providing investment services in any jurisdiction where such offers or solicitation would be illegal. Opinions and estimates are as of a certain date and subject to change without notice. You should be aware that investments can fluctuate in price, value and/or income, and you may get back less than you invested. Past performance is not a guide to future performance. Investments or investment services mentioned may not be suitable for you, and if you have any doubts, you should seek advice from your financial consultant. Where the purchase or sale of an investment requires a change from one currency to another, fluctuations in the exchange rate may have an adverse effect on the value, price or income of the investment. Certain investments may be mentioned that are not readily realizable. This means that it may be difficult to sell or realize the investment or obtain reliable information regarding its value. The levels and basis of taxation can change. Special risks are inherent to international investing including currency, political, social and economic risks. This document has been approved by A.G. Edwards Sons (U.K.) Limited, authorized and regulated by FSA.

The Geopolitical Rooster is Inconsistent

Sometimes life get’s in the way of good blogging.  In the last year, my partner has retired, my firm was purchased, and my assistant retired.  Just when I have things under control, I decide to move…….in December……..11 days before Christmas……….My children are changing schools…………I’m so tired.  See you as soon as I can.

Published in: on November 17, 2007 at 7:11 am  Leave a Comment  

Argentina Elects First Female President

Meet Cristina of Argentina

On Sunday, Oct. 28, Cristina Fernandez de Kirchner won a decisive victory in elections, becoming the first elected female president in Argentine history. In this report, Bill O’Grady introduces the new president and reports on the election results, the economic problems facing the country, her foreign policy stance and the market impact from this election.

Same as the old boss?
Cristina and Nestor Kirchner are, perhaps, the ultimate power couple. The latter is the current president of Argentina; his wife will be at the helm when she takes power Dec. 10. Both come from the region of Patagonia, and because of its southern location, they are called “penguins.” Although Cristina is the wife of a president, she is an accomplished political figure on her own. She is currently a senator and has held the second-highest state office in Patagonia.
Her husband is something of a political agoraphobic; he seldom travels within Argentina and abhors foreign journeys. Cristina, on the other hand, is a world traveler. In fact, she did little electioneering before the poll and skipped several debates. Instead, she made several state visits to other Latin American nations, as well as trips to Europe. Although Nestor is considered a rather dour figure, Cristina is flashy and even known for her fashion sense. Given her lack of politicking and her shunning of debates, it is unclear what policies she will follow. However, we can reasonably expect her administration to be more outward-looking than her husband’s.

The election
Cristina won 44.9% of the vote; according to Argentina’s election rules, a presidential election requires a runoff unless a candidate wins (1) more than 45% of the vote or (2) 40% of the vote and leads one’s closest rival by more than 10%. Cristina won nearly 45% of the vote and outpolled her closest rival by nearly 23 points. Thus, she will not face a runoff election.

There were some interesting political developments in this election:
• Nestor Kirchner, the current president and husband of the president-elect, declined to run for office. The Argentine constitution does not allow a president to hold office for more than two consecutive four-year terms. However, it apparently does allow a president to persistently return to office as long as the terms are not consecutive. The current President Kirchner is popular with the voters and controls the largest faction of the Peronist Party, a formidable political machine. Thus, he could likely have won a second term. His decision to step down and allow his wife to win has raised speculation that the Kirchners intend to rotate the presidency, which would allow Nestor to succeed Cristina in 2011. Although such “job sharing” would be unprecedented in Argentine political history, it apparently is legal.
• It is interesting to note that a woman won the vote in the major cities of Buenos Aires and Rosario; that woman was Elisa Carrio, the candidate for the centrist opposition Civic Coalition party. Reports suggest that support for the president-elect was inversely correlated to education. The president-elect’s support came mainly from the working class and the poor. In one sense, this isn’t a major surprise, as the Peronist Party usually does well with the lower socioeconomic classes. However, Carrio’s campaign thrust was on anticorruption. Her strong showing among the upper classes suggests that Nestor Kirchner’s administration was hurt by recent scandals, and the new president will need to address these concerns if she is to gain support of this part of the electorate.
• Although Cristina Kirchner is the first woman to be elected president, she is not the first woman president in Argentina. Isabel Peron became president in 1974 following the death of her husband, Juan Peron.

The economic issues
Argentina has faced persistent problems with inflation during the past century. By some measures, the country’s economy was among the five largest at the onset of the 20th century. It is clearly nowhere near that rank today. Argentina represents the problems that develop with trying to operate policy designed to reduce income and wealth differences. The constant government interference into the workings of the market has led to distortions and borrowing that eventually became unsustainable.
The peso Nacional was relatively stable (around 2.36 pesos per dollar) until 1948, when it began to weaken. This deterioration coincided with the election of Juan Peron. However, not all the depreciation can be blamed on him; a series of military governments that replaced him after 1955 did little better. At the end, it took nearly 350 pesos to buy a dollar. From 1970 to 1983, a new currency was introduced, the peso Ley, which officially exchanged one peso Ley for 100 peso Nacional — meaning the dollar exchange rate was around 3.50 pesos to one dollar. However, it also depreciated, eventually reaching 98,000 pesos per dollar.  In 1983, just after the first Latin American debt crisis, the peso Argentino was introduced, which exchanged one peso Argentino with 10,000 peso Ley — indicating that 9.8 peso Argentinos was equal to one dollar. It rapidly lost purchasing power as well, reaching an exchange rate of 673 peso Argentinos per one dollar. In 1985, the Austral was introduced, equal to 1000 peso Argentinos. At inception, .88 Australs equaled one dollar (which means that just prior to the new currency, the peso Argentino weakened further). The mid- to late 1980s was a period of debt restructuring for Latin America. Rapid inflation returned, reaching 2,000% and pushing the exchange rate on Australs to 10,000:1. Toward the end, Argentines were demanding dollars or other hard currency for payment and were refusing to accept Australs.  When nations face hyperinflation, citizens begin to take steps to protect their savings. The rich tend to hold either foreign currencies (usually U.S. dollars) or gold. They often invest outside of the country (i.e., capital flight). The less affluent will tend to hold savings in real assets (e.g., food, housing) and engage in barter. High levels of inflation tend to most adversely affect the poor. It is one of the great ironies of economics: Government policies designed to alleviate the struggles of the poor are usually inflationary, meaning that those who try to help often cause more harm.In light of a long history of inflation, in 1992 President Carlos Menem decided on a radical course to instill confidence. He created the peso Convertible at a rate of one peso to 10,000 Australs (for reference, note that one peso Convertible was worth 10 trillion peso Nacional, a reflection of how much damage government policies had done to purchasing power). In a sense, this was nothing new; as the above history shows, simply issuing new currency to end the rather ridiculous situation of using large-denominated notes for a trip to the grocer isn’t a long-term solution. What made the new program unique was the establishment of convertibility — the new currency could be exchanged 1:1 for U.S. dollars, meaning that monetary expansion was curtailed. In other words, pesos could be issued by the central bank only if there was a dollar in reserve backing it up.The convertibility program worked. Inflation declined rapidly, and confidence was restored. However, a number of problems developed. First, from 1995 onward, the dollar appreciated, meaning the peso appreciated as well. This factor lowered the price of imports and boosted the price of exports, hurting the trade balance. Because monetary expansion can occur only with dollars in reserve, this led to rising interest rates. To keep the economy growing, the Menem administration expanded government spending. This led to massive debts that were eagerly being funded by foreigners, attracted by the 15% rates being offered. Foreign investors were lured into buying Argentine debt because of high rates and the confidence that the currency would remain stable.Adding to pressure was the Mexican devaluation in 1994 and the Brazilian devaluation in 1999. Because both nations are major trade competitors with Argentina, these devaluations improved their competitiveness. By 1999, Argentina entered a deep recession. The inability of the central bank to expand the money supply led to the creation of “quasicurrencies” often issued by state governments. By 2002, the situation had become intolerable, and parity was abandoned. The peso floated and dropped to nearly 4:1.Nestor Kirchner took office May 25, 2003. Argentina was already in default on its massive foreign debt. Kirchner took the next step and refused an IMF restructuring plan. He froze the prices of energy and other staples and negotiated a 35 cent on the dollar plan for creditors. Although they grumbled, most accepted the plan. This cut its foreign debt payments significantly. Improving the situation further was a boom in commodity prices. Argentina’s grain exports have become more valuable, improving the economic situation. Growth has been running around 8% since the restructuring.

What Cristina inherits
Although the new president has the benefit of lower debt service and a commodity boom, there are significant problems brewing. Her husband expanded fiscal spending into the election, which has put pressure on inflation. There has been a scandal developing on inflation reporting. Officially, inflation is running around 8% to 9%. However, individual state data would suggest inflation is nearly double the official numbers, at 20%. Nestor’s administration recently fired 20 government statisticians who allege the government is manipulating the data (which should offer some insight to those who believe the U.S. government is manipulating the CPI — if it were true, we would likely be hearing of protests from government workers protected by the Civil Service Act). If inflation is becoming a problem, the new administration may be forced to implement austerity measures. Unfortunately, given the Peronist’s base of support — the lower classes — such actions would be very unpopular and difficult to maintain.
Another problem is related to the debt default. Although foreign investors seem to have remarkably short memories, it has been virtually impossible for Argentina to borrow from abroad. The country has managed to sell some bonds to Venezuela, but this was likely done to improve relations, not because the Chavez administration expects to be repaid. If Argentina wants to return to global capital markets, it will face significant difficulties.Finally, anything that would undermine the current commodity boom would be devastating. Argentina’s economy is, at this point, extraordinarily dependent on continued Chinese economic expansion.

Foreign policy
Given that Cristina’s husband was completely focused on Argentina, we would expect that the new administration will be much more active in foreign affairs. How much success she has is another issue, because it isn’t clear what she wants to accomplish. However, one obvious goal would be to improve relations with creditors so as to be able to tap global capital markets again. We would also expect that she will work hard with regional nations that supply natural gas to Argentina in an attempt to lower prices.

Market ramifications
For investors, there is one key message — beware of stylish women offering bonds! As the above discussion on Argentine exchange rate history shows, this country has not shown that it can maintain stable prices and that it will use either default or depreciation to undermine the claims of creditors. Thus, at some point during the next two years, we would expect Argentina to attempt to tap the global capital markets. They will likely offer very attractive terms and, at least initially, will repay on schedule. Unfortunately, by the time retail investors are offered a chance at this “opportunity,” it will be too late. As recent debt market action has shown, there is ample opportunity to purchase dodgy paper; historically informed investors should avoid Argentina.


Additional information available upon request from Wachovia Securities. Wachovia Securities is in no way affiliated with the Geopolitical Rooster, but the Rooster loves the non-sensationalistic and informative weekly geopolitical report from Bill O’Grady of Wachovia Securities.  Wachovia Securities does not endorse the Geopolitical Rooster and does not share in the opinions posted here, except where indicated in the referenced reports.  The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee as to its accuracy or completeness. The material is published solely for informational purposes and is not an offer to buy or sell or solicitation of an offer to buy or sell any security or investment product. This material is not to be construed as providing investment services in any jurisdiction where such offers or solicitation would be illegal. Opinions and estimates are as of a certain date and subject to change without notice. You should be aware that investments can fluctuate in price, value and/or income, and you may get back less than you invested. Past performance is not a guide to future performance. Investments or investment services mentioned may not be suitable for you, and if you have any doubts, you should seek advice from your financial consultant. Where the purchase or sale of an investment requires a change from one currency to another, fluctuations in the exchange rate may have an adverse effect on the value, price or income of the investment. Certain investments may be mentioned that are not readily realizable. This means that it may be difficult to sell or realize the investment or obtain reliable information regarding its value. The levels and basis of taxation can change. Special risks are inherent to international investing including currency, political, social and economic risks. This document has been approved by A.G. Edwards Sons (U.K.) Limited, authorized and regulated by FSA.

Political Rhetoric is Bothersome

 Make big oil fund alternative energy research

“The other day the oil companies reported the highest profits in the history of the world. I want to take those profits and I want to put them into a strategic energy fund that will begin to find alternative smart energy, alternatives and technologies that will begin to actually move us toward the direction of independence!”

Hilary Clinton – Source: Speech at Democratic National Committee winter meeting Feb 2, 2007  

What?  I want to take those profits???? Oh, do you? 

I have blogged before about how media puts a sensationalistic spin on our news.  Not picking sides – it’s most every news network.  The fundamental flaw of course is that news is a business and selling it is more important than keeping it to the facts.  I once heard a reporter sum it up best on NPR.  He said, and I’m paraphrasing, “Facts are expensive – opinions are cheap.”  And of course the other half of that – the reliance of our news on advertisers, who pay for viewers.  So it really comes down to how to keep us watching.

 But what about politicians?  In order to pursuade voters, they spin things to support an agenda.  Spinning is bad.  I’m all for being passionate, or full of conviction, but I long for the day when we elect people who don’t do it.  Sorry to pick on  Hilary.  I promise I’ll pick on someone else later, but the above quote and her other comments on “big oil”, drive me nuts. 

First, why are we trying to convince people that corporations should not make big profits?  These are businesses, owned by millions of shareholdes (including you, in your 401k).  What business does not try to maximize profits? 

Second, has anyone heard of OPEC?  Don’t they control prices?

Third, sell your Expedition.

Fourth, New York State makes almost 3 times as much as the oil companies, per gallon of gasoline.  Yes, Hilary’s state – and Schumers.  His position is the same as hers.  What are they doing with their big profits?  The federal government makes 1.5 x as much as the oil companies per gallon of gasoline.

 Game, Set, Match.

Be careful of rhetoric.  It’s easy to believe it, but we really need to think about what people are really saying.