Capital Flight keeps Argentine Stock above water

By: Richard Lapper
 Financial Times, December 12, 2001

Even the most prescient observer of stock market trends would have been hard pressed to anticipate the rally in Argentine share prices.

The Merval index rose by 26 per cent last week. Even taking into account profit taking at the start of this week its level is well above the 10-year lows hit last month. Traders in Buenos Aires were unusually busy, with volumes towards the end of the week more than double their normal levels. Stocks like Siderca, a steel company, (up 45.2 per cent) and Perez Companc, an oil company, (up 38.8 per cent) led the charge, but even banks - whose prices have been under particular pressure because of the financial crisis - reversed some of this year's heavy losses.

This is all a bit of a puzzle. After all there has been no improvement in Argentina's economic prospects, which grow more parlous by the day. Last week's imposition of banking controls that limit savers to withdrawing no more than $1,000 a month is proving to be a devastating blow to a cash-dependent economy now in its fourth year of recession.

A new fiscal austerity package to be unveiled this week will remove tax incentives for local businesses, which were granted only a few months ago, adding more pain. The government should be able to make payments on its $155bn external debt this month but there is no certainty that it will be able to do so in January.

Argentina's bond yields are now well over 40 per cent. The country risk premium was at 4110 basis points over US Treasury bonds on Tuesday, a rating that implies investors view default as a certainty.

President Fernando de la Rua and his controversial economy minister, Domingo Cavallo, insist that the government will preserve convertibility - the one-to-one exchange rate regime backed by a currency board. But during the last few days informal markets, where the peso trades at a discount of up to 40 per cent, have reappeared in Buenos Aires. This has all given rise to mounting expectations that Argentina will be forced either to replace its currency with the dollar or to devalue.

Curiously though, this recent deterioration does supply part of the answer. Unable to take their money out of the banking system, some Argentines may be choosing to evade these controls through the stock market.

They can do this by buying a share listed in Buenos Aires and then selling its American Depositary Receipt (ADR) equivalent in New York, if the Argentine company has a listing there.

The proceeds would then be safely deposited in a New York bank. Pointing to a discount between the price of the stock and the ADR, Walter Stoeppelworth, of Marcuard, a Buenos Aires money manager, says "people are buying local and selling in New York."

In addition, some funds that hold Argentine shares have been selling ADRs in New York and using their peso bank deposits to buy the same locally listed shares, as a means of transferring financial assets offshore.

"The idea is to use as many of your financial assets as you can because you can't get them out of the country," says Gray Newman, Latin American economist at Morgan Stanley. "Dust off all your textbooks from the 1980s. All those techniques are coming back into vogue."