Argentina’s debt problems threatens to worsen trade tensions in Mercosur, adding to the economic woes of Brazil in a tense election year and causing headaches in Uruguay as the Argentine economy looks likely to plunge deeper into recession.
Brazilian exporters of goods ranging from shoes to cars and busses are reckoning on lower sales, while hotels and other tourist attractions in the hip Uruguayan beach resort of Punta del Este are bracing for a slow summer season after Argentina’s refusal to pay holdout bondholders.
The ‘selective default’ is likely to hurt Argentine purchasing power because inflation, already running above 30%, is heading higher.
The pain will be acute in the auto industry: Brazil, the region’s biggest economy, sends about 50% of its car exports to Argentina. “Even before a default, there was a visible fall in exports to Argentina,” said José Augusto de Castro, president of the Brazilian Foreign Trade Association.
“With the default, we’re going to have a substantial drop. Who is going to bank the risk of exporting to Argentina?”
For a region already grappling with an economic downturn and rising trade protectionism, the latest crisis is another setback for regional trade.
Argentina’s troubles are unlikely to translate into a major economic blow to Brazil and Uruguay, the neighbors with which it has the closest business ties. For Chile, the effect is likely to be negligible, given it hardly sends any exports to Argentina, though shares of Cencosud and Falabella, Chilean retailers with Argentine operations, dropped in Santiago.
Still, Brazil exported over 7 billion in goods to Argentina through June this year, or almost 7% of its total exports, including petrochemical products, electric transformers and even cutlery. Argentina’s woes could nudge an already sluggish Brazilian economy closer to recession, giving President Dilma Rousseff’s rivals more ammunition as they campaign to unseat her in October’s election.
A deeper recession in Argentina could prompt factories in Brazil to slash output and speed up layoffs, potentially robbing Rousseff of one of her trump cards – a strong job market – while also clouding the outlook for a Brazilian rebound in 2015.
The default will also be a test for a new bilateral car trade pact signed in June between Brazil and Argentina, important markets for Italy’s Fiat SpA, Germany’s Volkswagen AG and US-based General Motors Co and Ford Motor Co, all of which build cars in Brazil.
The trade pact allows Brazil to export 150 dollars worth of cars for each 100 in autos it imports from Argentina, without paying tariffs. After the default, however, Argentina may struggle to find dollars to pay for its imports. Weak Argentine demand will also challenge Brazil’s largest bus maker, Marcopolo, which has already cut output there by two-thirds in just six months.
Marcopolo CEO Jose Rubens de la Rosa said on a June conference call that the lingering uncertainty in the country is “clearly” weighing on the company’s performance.
“It isn’t the first time that this happens in Argentina,” he said. “The government has asked us to be patient.”
Brazilian exports to Argentina have been shrinking over the past few years as the end of a global commodities boom weighed on Argentina’s meager dollar reserves, prompting policymakers to impose capital controls and trade barriers.
In a worst-case scenario, the Argentine default could cost Brazil as much as 0.5 percentage points of growth in 2014, said Robert Wood of the Economist Intelligence Unit.
The leading Brazilian newspapers blasted Argentine president Cristina Fernandez as the sole responsible for the ‘default event’ which followed the failure of negotiations with holdouts in New York. This despite the fact that Brazilian economy minister Guido Mantega denied Argentina was in default and strongly supported the Argentine government.
O Globo from Rio de Janeiro and Folha de S. Paulo in their editorials did not heed in appealing to strong words to question the Argentine president’s attitude, which has triggered the current situation: “arrogance”, “ineptitude” and “incompetence”.
“The Argentine debt crisis is the outcome of much arrogance and lack of capacity in dealing with the creditors on the part of the Kirchners, both Nestor and Cristina. As well as a disastrous economic policy, populist and heterodox”, points out O Globo in its editorial with the heading: “The ruinous performance of the Kirchnerite Argentina”.
The editorial also targets Economy minister Axel Kicillof, described as a “young Marxist professor” and points out that calling holdouts ‘vulture funds’ is ideological. Likewise hedge funds are “usual and necessary actors in world markets, since they help to give liquidity to bond rejected by investors”.
O Globo warns that the current situation will generate problems to access to foreign credit besides making more severe recession and inflation.
Folha de S. Paulo also is concerned about the future of the Argentine economy. “The fall in consumption and measures to contain trade deficits will further diminish the already contracted Brazilian sales to Argentina that in the first half of 2014 have dropped 20%.
Brazil is Argentina’s main trade partner and for Brazil the most important behind China, EU and US.
“Argentina is in recession, mostly because of economic populism. Without credit Argentina runs the risk of a payments crisis, since foreign trade does not offer the sufficient funds to address international debts. And if Argentina pretends credit in the domestic market it will have to pay exorbitant interests”, says Folha.
“It is not unlikely that political tension and some reduction in the already scarce foreign financing could force a strong devaluation of the currency and thus inflation and recession, plus interests”.
Folha finally points out that Brazil is far from following the same path as its neighbor and main Mercosur partner, and supports the current Brazilian administration policies of president Dilma Rousseff.
“She is far from being so inept as the Cristina Fernandez that Argentina supports”.