$700 Billion Bailout

It is has been over a month since I have been motivated to comment on business and economic issues in Argentina. In a quick review of the the recent themes I am shocked to see that I was concerned about the buyouts by the Argentine government. The Argentine population can be outraged that their government might consider buying a bankrupt and debt-laden airline for nearly US$ 1B yet there are two primary differences between this action and that of the planned bailout of the U.S. financial sector.

First, the Aerolineas Argentinas buyout represents only .38% of Argentina's GDP. The U.S. $700B bailout represents 5% of the US GDP.

Second, the Argentine population will own shares in the airline, whereas in the U.S. the government will own nothing after the proposed plan.

The U.S. government should be applauded for taking action to avoid a run on the banking system. Yet, it seems that if someone should be bailed out, it should be the consumer that may lose his or her home and not a financial institution.

The average U.S. home price is $220,000. The same $700B could buy 3.1 million homes. In 2007 there were 1.5M homes that received foreclosure notices. Obviously not all of those are actually foreclosed. And, many foreclosures are on the speculation of 2nd homes or overzealous developers and builders.

One thing is clear, whether we buy financial institutions or we buy homes, let's take a page from our Argentine neighbor and at least own something at the end. Let's leave bailouts for the World Bank.

The $8 Billion dollar Train to Mendoza

If you want to ruin an Argentine dinner party just mention the words Bullet Train (Tren Bala). Simply mentioning the US$ 4 Billion price tag for the Buenos Aires to Rosario rail line sparks the controversial topic of how to finance such a project. The 36 year old economy minister, Lousteau, was responsible for the financing of the project and resigned shortly after declining to sign the proposal. Despite conversations with several CEOs that have assured the launch of this project, there are neither signs nor confirmations of advancement. Arguments such as; ‘the price of the ticket is comparable to airfare’ and ‘the destination city is already served by the best highway system in the country’ continue to complicate the probability of success.

Just in time to save dessert, there is a solution. A US$ 8 Billion train to Mendoza! Nothing like making a big problem go away by simply creating a bigger problem. Last week we learned the government is ready to assume nearly US$ 1 Billion for Aerolineas Argentinas. Perhaps distraction will work; maybe the earlier investors will now think that the original investment is relatively reasonable. It is not quite a “bullet” but they say it goes pretty fast.

The business perspective is concerning as well. Whether it is the government or foreign direct investment, the economy benefits from new track and rolling stock. The economy also posts a win by lowering costs from the creation of a competitive alternative to truck transport. However, the US$ 8B assumes that you lay track next to the existing rail line. Yet if the country can’t finance the $4B it seems unlikely they will raise additional funding for another rail project at twice the cost. So, the idea has been floated to improve the current rail line. In talks with executives in the rail industry the current rail line can absorb the additional traffic with a reasonable investment. So, now the challenge is how to improve the current rail system without interrupting the current service. Obviously, a parallel project could be built faster as there would be little interference with current rail operations. Realistically the improvement project will take at least twice as long, but at a fraction of the original price tag.

Is the current administration ready to make the hard decision to invest over the long term? In other words, this administration will need to make an investment that will not have an immediate positive impact on their popularity polls. In fact, they may actually lose confidence as these types of infrastructure projects are rarely seen by the average voter. A construction company seems to be the winner here as either way this project will be a long term, capital intensive infrastructure project.

One last question…. As I write this note there are 2,000 trucks idled at the foot of the Andes waiting out the snow storm to cross the mountain pass…is there a serious plan to connect the Atlantic to the Pacific or will we continue to offload rail cars onto trucks to cross the mountains 10 out of 12 months of the year?

Planes, Trains and....

...Automobiles? The 1987 commedy with Steve Martin and John Candy had Steve Martin desperately longing to return home for Thanksgiving using every transport possible. It seems Argentina's current administration yearns to return home to Peronism and state owned industries. Argentina celebrated its triumphant test of its democratic system last week while the administration took the opportunity to nationalize Aerolinas Argentinas. There is a Hostile Takeover Tracker to the right of this blog and it appears the Kirchner Administrations (both Nestor and Cristina) have successfully completed their 5th acquisition. Yesterday the President, Cristina Kirchner, announced that the government successfully assumed control since the airline was first sold to Iberia in 1990. It is unclear the actual terms of the agreement with the current Spanish owner, Marsans. The minister of planning, Julio De Vido stated that the debt was US$ 890M, yet in the White Room at the "Casa Rosada", the President corrected him adding an additional US$90M taking the total to nearly US$ 1B.

So far, we have Planes, Trains and ....Water, Radio Spectrums and Post. What is next?....

1. Areolinas Argentinas - Tuesday, July 22, 2008
2. Rail Lines Roca & Belgrano Sur - Tuesday, May 22, 2007
3. Aguas Argentinas, now AySA - Wednesday, March 22, 2006
4. Correos Argentina (before a Macri Company) - June 11, 2004
5. Radio Spectrum (before Thales Spectrum) - January 2004

Alianza Multi-Modal Logistics Park

Argusa Development SRL has recently formed Argusa Logistics S.A. which owns the development rights to Alianza Multi-Modal Logistics Park in Buenos Aires. This is a 276 acre or 112 hectare logistics center. The site has three operating warehouses that provide cross docking capabilities from train to truck and train to port. Our current tenants are Danone Water, Quilmes and Grupo Peñaflor.

VP Cobos Breaks Tie; Advantage Farmers

Thursday, July 17, 2008

After 128 days of conflict, the Vice President of Argentina, Julio Cobos, stayed true to his rural roots of Mendoza, Argentina and cast the tie-breaking vote to shelf the President’s polemic proposal to increase export taxes on agricultural commodities.

Mr. Cobos was forced to vote at 4:25am this morning as senators from Argentina’s provinces deadlocked at 36 in favor of the government and 36 in favor of the agricultural sector. In his speech prior to his vote, Mr. Cobos expressed his hope that his decision would not be considered one of betrayal by President Christina Kirchner. He expressed his desire to continue his role as Vice President and recommended a new proposal for a law that more fairly addresses potential retentions to the agricultural sector.

It was Cobos that recommended to the President that the conflict should be decided by the legislative branch rather than an executive mandate. Beyond the political and financial impacts of the decision, the result, if respected by the executive branch, should send a clear message to investors that the democratic process is securely in place.

Semblance of Truth? - Argentine Farm Crisis

Last week and old friend wrote me with a couple of excerpts from the article found in an article by Tom Dyson (link below).

Essentially, the question was whether it was true that the political crisis resulting from the Argentine government's decision to increase retentions was creating an opportunity for investors to shift farmland acquisition dollars from Argentina to Paraguay.

In Mr. Dyson's article, he referenced a conversation with an Argentine farmer that was sent to Paraguay to buy millions of dollars of farmland. Apparently a small community of farmers were motivated by the Argentine government's new policy on retentions to shift their investment dollars to a cheaper and more politically stable Paraguay.

My Response:

The Farm Crisis in Argentina is now approaching nearly four months. The executive branch finally agreed to allow the country's legislative branch to determine the future of these new agricultural policies. Although a law has yet to be approved, it is clear that the democratic process is functioning.

If the investor's goal is to invest in agricultural land in Argentina, I would suggest waiting for the outcome of the proposed bill. If you absolutely had to invest in farmland in the region my suggestion would be to consider Brazil and then Uruguay in that order. I cannot recommend Paraguay nor Bolivia. Although both regions are excellent for soy production, neither have the political stability, industry infrastructure nor market liquidity that are enjoyed by countries like Brazil, Argentina and Uruguay.

I could go into much more detail on my concerns over the political and business climate of Paraguay, but with market options like Brazil and Argentina, why waste your time?

Perhaps the investor's goal was to determine whether this farm crisis would affect their other business opportunities in Argentina. A four month crisis is significant and it adds to the government's headaches of inflation, CPI credibility problems and a looming energy crisis. That said, the country's democratic process is working and these problems, although significant, are no more unique to Argentina as they are to any other emerging market.

In summary, if Argentina has any serious problems, it is that it may grow faster than the government and private industry can develop infrastructure. Although the government has record bank reserves, it is my opinion that these reserves will be consumed quickly to pay for these infrastructure needs. The race is on to increase competition and install the energy base to maintain reasonable GDP growth before inflation cools the economy.

http://www.moneyweek.com/file/49348/how-to-profit-from-argentinas-farming-crisis-.html