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Argentina Crisis Slaps Foreign Banks & Companies Operating in the Country

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Via Wolf Street

Peso collapse and inflation force Spanish companies and banks — second largest investors in Argentina, behind US companies — to tally their losses.

By Nick Corbishley, for WOLF STREET:

Having learnt their lesson, most European companies and banks have limited exposure to Argentina’s crisis-prone economy. One exception is Spain’s corporate sector, which, after the U.S.’s, has the most exposure to the South American economy, with almost €6 billion invested by its companies there, down from around €9 billion in 2011 after some divestments.

For many of those companies, Argentina is still an important source of revenues and profits. But those revenues and profits are getting slammed by the double whammy of a rapidly deteriorating economy and rampant inflation. Now, there’s the potential risk of yet another Argentine default to contend with.

The Argentine peso has slumped 25% since the primary election on Sunday. Stocks have crashed. The risk of default has surged to above 75%, based on the latest credit default swap levels. The peso is worth just 1.7 cents, having lost 68% of its value against the U.S. dollar in the last year and a half.

In June, before this latest episode of political and economic turmoil, annual inflation in Argentina was already over 55%. The lower the peso falls, the worse the inflation gets. Argentina was already deemed to have entered hyperinflation in 2018, meaning that overseas companies operating in the country that report in Argentine pesos now have to reformulate their financial statements, depreciating the value of assets in line with the rapidly soaring prices.

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This restating exercise has already cut €1.34 billion from the profits that large listed Spanish companies earned in Argentina over the past four quarters. The brunt (85%) of that impact has been borne by three big companies:

  1. Telefonica, which over the last five quarters has had to restate (lower) its global profits by €467 million in order to take account of soaring prices in Argentina, which provides roughly 5% of its global earnings;
  2. Spain’s second largest bank, BBVA, which has had to write down its global profits by €360 million due to inflation in Argentina.
  3. Banco Santander, Spain’s largest bank, which had to restate its global earnings by €239 million for 2018 and €74 million in the first quarter of 2019.

Other Spanish companies that have been hit by hyperinflation write-downs in Argentina include the energy giant Naturgy (€67 million in 2018), the insurance firm Mapfre (€21 million), and Dia (€45 million), the heavily indebted, loss-making supermarket group that came close to collapse earlier this year and is still not out of the woods despite being acquired at the last minute by the scandal-tarnished Russian corporate raider Mikhail Fridman. Argentina is Dia’s third biggest market.

Prosegur Cash, which handles transportation and management of cash, is, pound for pound, the Spanish company most exposed to Argentina, employing nearly 5,000 staff there. Its parent, Prosegur, employs about 18,000 people in Argentina. Its shares have tumbled 15% since Monday while the shares of Prosegur Cash are down 20%.

But it’s in Spain’s banking sector’s exposure to Argentine assets where the biggest risks lie. That exposure amounted to $22 billion (€19.6 billion) in the first quarter of this year, according to the Bank of International Settlement’s figures. That’s 21% less than a year before, but it’s still the equivalent of 52% of total foreign banking investments in the country. The second and third most exposed national banking sectors are the U.S. and the UK.

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Only four months ago, Swiss megabank UBS warned about the contagion risk posed by Spanish banks’ outsized exposure to Latin American markets, not only to Spain but the entire Eurozone. A mind-boggling 80% of the Eurozone’s total banking exposure to the region is channeled through Spain whose banks have around €384 billion of counterparty claims in the region. That’s the equivalent of over a quarter of Spain’s GDP.

Given the relatively small size of Argentina’s financial market, a default on its debt may not be enough to trigger a major crisis for Spanish banks. But it could shatter investor confidence in other Latin American markets where their exposure is much greater, including the region’s two mega economies, Brazil and Mexico. It’s here where the biggest danger lies, with Spanish banks, mainly Santander and BBVA, holding Brazilian and Mexican assets worth $158 billion and $165 billion respectively, the equivalent of 45% and 42% of total foreign banking investments in the two countries.

Both Brazil and Mexico, which account for just over half of Latin America’s GDP, are already at risk of recession. The Brazilian real and the Mexican peso have both borne up fairly well this year despite the rallying dollar, but they’re beginning to show signs of strain. The real, feeling the heat from events in neighboring Argentina, fell 2% on Wednesday to below 4.05 against the dollar, its lowest level since May. Stocks are also sliding, with Mexico’s main index sinking to its lowest in more than 5 years, while Brazil’s main index plunged 3% on Wednesday, its worst day in 4-1/2 months.

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A region-wide economic crisis would pose a serious risk to Spanish banks, in particular Santander and BBVA, for which Latin America has been a massive boon, allowing them to diversify their operations away from a stagnating economy in Europe. By Nick Corbishley, for WOLF STREET.

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