Future goverments will pay 90% of YPF’s nationalization

The Argentine government will finally compensate for the nationalization of REPSOL YPF. Although the announced compensation will be of about U$S 5 billion in bonds, when the high implicit interest rates are computed the total costs rises to more than U$S 10 billion. In addition to the elevated amount, the bulk of the payments will be faced by future administrations. This is another clear testimony of opportunistic decisions made based on unprofessional criteria that compromise the welfare of future generations.

The government celebrated that it reached an agreement with the Spanish company REPSOL in order to pay for YPF shares unexpectedly nationalized in April 2012. Forced by international isolation and the deepening energy crisis, with this agreement the authorities’ intention is to patch the technical and legal carelessness that has characterized the nationalization process. The initial triumphalism with speeches tinged with nationalism gave way to a passive acceptance of the consequences of irresponsible and unprofessional decisions. 

Argentina promises to deliver to REPSOL government bonds for U$S 5 billion. However, it also promises to deliver additional bonds to ensure that the market value of bonds given to Repsol rise to at least U$S 4.670 million, with a maximum of U$S 6,000 million in nominal value. In simplified terms, Argentina will end up paying between U$S 5and 6 billion.   

The interest must be added to these amounts. Since Argentina has very bad ratings risks, the interest rates range between 7% and 8.75% per year. Therefore, the total amount that the Argentine State agrees to pay exceeds U$S 10 billion. One particularly important characteristic of the agreement is that the payments will be distributed in time in a peculiar way. According to documents issued by the company REPSOL:

·  Between 2014 and 2015 approximately 10% of these bonds will be paid.

·  Between 2016 and 2019, 32% will be paid while between 2020 and 2023 a further 34% will be paid.

·  Between 2024 and 2033 the remaining 24% will be paid.

This data shows that the current government will seal the deal and determine future payments, but it will pay just a minor portion of the commitments the country makes. The two coming governments (namely presidents who will govern the country between 2016 and 2023) will be the ones which have to face two thirds of the cost of YPF nationalization. Subsequent governments will face the remaining quarter of the total cost. This schedule and the magnitudes involved make it clear that the YPF nationalization handicap the future wellbeing of the citizens many of whom belong to future generations.

The economic impact of the nationalization may be avoided if YPF generates and distributes dividends equivalent to at least the flow of payments committed for the next 20 years. Being an oil company, it is doable, if the management follows technical and not political criteria. Within the region there are good examples of professionally managed state owned companies such as Codelco in Chile or Petrobras in Brazil. But in Argentina improvisation and lack of professionalism prevail, as the case of Aerolíneas Argentinas epitomises.

The National Congress has the chance to avoid another mortgage on the country's future. Instead of joining the triumphalist attitude that prevailed in the instance of approving the nationalization, Congress should work on creating rules to protect the management of YPF (and the other state owned companies) from pressures caused by cronyism, clientelism and corruption. Given the background in the Argentine public sector management, it is not a minor challenge. But only with transparency and good management it will be avoided that society, in addition to paying the bonds of nationalization, will have to bear the costs of mismanagement.

YPF is not the first case in which opportunism and lack of professionalism generate enormous social costs deferred to the future. Other reforms and nationalizations, such as the one in the pension system, were conducted under the same logic. The difference is that, given the proximity of the change of government, the transfer of the consequences to future administrations is more explicit. It is unclear whether this will stimulate Congress to adopt more responsible and professional decisions.