By Brian Winter
BUENOS AIRES, June 13 (Reuters) - More than a decade after
Argentina's epic financial collapse of 2001-02, many investors
are rushing for the door once again.
From big Chinese and Brazilian companies like miner Vale SA
, to small-business owners and savers, the fear of a
new crisis has led to canceled investments and suitcases of cash
leaving the country.
The mass exodus, which has been limited only by leftist
President Cristina Fernandez's capital controls, is threatening
to undermine Latin America's No. 3 economy even further by
leaving it short of hard currency and new jobs.
The underlying problems range from Fernandez's hostile
treatment of the private sector, to severe financial distortions
such as a parallel exchange rate, to the general feeling that
Argentina is due for one of the periodic spasms that have racked
the country every 10 years or so going back to the 1930s.
Some say such worries are overblown, arguing that Argentina
has defied doomsday predictions for the past decade, which was
by some measures its best economic run since World War Two.
Yet for many, the feeling is of a gathering storm.
"The end of this story has already been written, and it ends
in crisis," said Roberto Lavagna, who as economy minister from
2002 to 2005 helped create Argentina's current export-driven
policy framework, and is still widely respected on Wall Street.
While everyone agrees any crisis won't be as bad as the
2001-02 meltdown - which saw nationwide riots, two presidents
quit, and the economy shrink by one-fifth - it could still be
enough to severely disrupt lives and business plans.
By relying on short-term fixes such as price controls and
bans on Argentines buying dollars, Fernandez may just be
delaying the inevitable while piling up even more problems.
"The longer they try to delay things, the worse they will
be," said Lavagna, who worked for Fernandez's late husband and
predecessor, Nestor Kirchner, before falling out over what he
saw as the couple's increasingly anti-business agenda.
"You can't have growth without investment."
Key ministers in Fernandez's government declined to be
interviewed for this story.
Following a sharp slowdown in Argentina's economy over the
past year, and growing concern in places like Washington and
Brasilia, Reuters recently spoke to about two dozen leading
figures in industry, finance, academia and politics to try to
gauge where the country is headed.
Some declined to speak on the record, citing growing efforts
by Fernandez's government to intimidate its critics. Others -
including Lavagna, who has become a leading opposition figure -
were clearly informed by a political point of view or agenda.
Yet even among those without an ax to grind, the sense is
that Argentina has lapsed into its old habit of scaring away
private capital, one of the main reasons why it has steadily
declined from its perch as one of the world's richest nations in
"It sure sounds like trouble to me," said David Rock, a
professor at the University of California at Santa Barbara and
author of several books on Argentina's economic history.
"What they're doing right now, it can't be sustained," Rock
said. "It's hard to believe it's happening again."
In truth, Argentina has been something of a financial rogue
for years. Since defaulting on $100 billion in debt during the
last crisis, the country has been cut off from capital markets
and considered a highly risky place to do business.
Fernandez confiscated private pension funds to help pay
government debts in 2008, and has nationalized some companies.
Her government is widely accused of doctoring economic data,
inflation runs at about 25 percent, and foreign firms are
forbidden from sending profits abroad.
Until recently, though, the economy continued to grow, often
at an annual pace of 8 percent or higher.
So what has changed?
First, the effect from years of high inflation has taken its
toll, making Argentine industries uncompetitive at a time when
prices for its key commodities like soy are falling.
And second, the major business partners the country hadn't
yet alienated - Brazil and China - have also begun to turn away.
Vale's decision in March to cancel a $6 billion investment
in a new potash mine was emblematic.
The company, which is publicly traded but heavily influenced
by the Brazilian government, walked away because the growing gap
between Argentina's official and black-market exchange rates
would have forced it to shoulder costs in dollars at a level as
much as 50 percent higher than it would receive profits.
Afterward, Interior Commerce Secretary Guillermo Moreno -
Fernandez's point man on contentious economic issues - demanded
a meeting with Brazilian officials. He then threatened to have
Vale executives in Argentina detained unless the company
reversed its decision, according to three Brazilian officials
with knowledge of the conversation.
Neither Moreno nor his office responded to repeated requests
for comment. Economy Minister Hernan Lorenzino also did not
respond to interview requests.
The hostile treatment, plus other recent clashes, infuriated
Brazilian President Dilma Rousseff and led her government to
"downgrade" ties with Argentina, two senior officials said.
Shortly thereafter, state-run oil company Petrobras
stepped up efforts to sell its assets in Argentina.
Difficulties with the Chinese have been quieter, but also
troubling. The Heilongjiang Beidahuang State Farms Business
Trade Group, a Chinese investment entity, had agreed to help
build a range of large projects from wind farms to port
improvements to railroads in Buenos Aires province.
"These have been delayed because of the political
situation," said Oscar Gomez, an adviser to the group.
"Today, whatever money they have budgeted, it runs out in
two months," Gomez said, citing inflation and the parallel
exchange rate, among other factors. "Everything's working
against Argentina. There's no investment today because there's
nothing in it for anybody."
CHILL IN LOCAL INVESTMENT TOO
Chinese companies have also suspended or slowed down huge
investments in shale gas and urea, a fertilizer, said Diego
Guelar, a former ambassador to the United States and author of a
forthcoming book about Argentina and China.
"Brazil and China were our last dynamic partners, so now
what?" Guelar said. "Who will create jobs?"
The answer doesn't seem to lie with Argentine companies. A
business confidence index produced by the University of Belgrano
fell 4.4 percent in the first quarter compared to the year
before - putting it near levels last seen during the 2008-09
global financial crisis.
Economists say the private sector likely contributed zero
net jobs to the economy last year, with only the government
picking up the slack - but that may have run its course, too.
Unemployment rose a full percentage point in the first quarter,
to 7.9 percent, a three-year high.
Some Fernandez supporters argue that robust consumer
spending will be enough to sustain the economy. And it's true
that, unlike the last crisis, Buenos Aires' famed steakhouses
and cafes continue to bustle with customers well past midnight.
"We do have a severe problem with private investment, but
that's always been an issue here," said Artemio Lopez, a
political analyst. "You have speculators and unproductive
capital that flee the country whenever they can."
"The solution is more controls on capital, not less," Lopez
Not everybody is running away - U.S. oil major Chevron Corp
said last month it would invest up to $1.5 billion in
shale in Argentina's south.
There are still some 500 U.S. companies in Argentina, and
many are profiting and continuing to invest, according to a
source close to the business community. But the same source
conceded that many invest because "they have no choice" -
Fernandez's capital controls prevent them from sending earnings
Official data, often questionable in Argentina, suggests
those controls have helped contain the damage - at least for
Capital flight slowed from $21.5 billion in 2011 to $3.4
billion in 2012, with a slight net inflow of $110 million in the
first quarter this year, according to the central bank.
Yet other evidence suggests the pressure for money to escape
is intensifying. In recent months, Fernandez has passed several
new measures such as a limit on cash withdrawals using credit
cards abroad, and a surcharge on purchases of airline tickets.
The demand for hard currency is such that Argentines pay a
premium of 60 percent over the official exchange rate to buy
dollars on the black market. Many believe that Fernandez is just
trying to hold the economy together until legislative elections
in October, causing many to take refuge now.
Argentines frequently tell stories in private of dollars
they've stashed in safe-deposit boxes, under their mattresses,
and in suitcases on trips to banking havens like Miami or
"Nobody wants to be the last one left," said Marcos Aguinis,
an author of several bestselling political books and novels.
"It's tragic, the predictability, but this is clearly falling
apart once again."
Indeed, one of the most commonly heard phrases in Buenos
Aires at the moment is "fin del ciclo" - the end of the cycle, a
uniquely Argentine notion that the economy and often the
government must regularly implode to make way for something new.
So why does that keep happening?
"I've been trying to answer that question for 50 years,"
said Rock, the historian. "To be honest, I still don't know."