“The misguided macroeconomic and monetary policies, especially the confiscatory tax policy and huge government spending – much of it inefficient – was doomed to catch up with the country someday,” says Horacio Marquez, a Wall Street veteran, emerging markets specialist and editor of two trading services affiliated with Money Morning: The Money Moves Alert and the Shadow Stock Trader services.

Argentina’s act of not-so-petty larceny was launched late last month when the government, in a surprise move, ordered Argentine pension funds to liquidate their foreign holdings, the first step in a plan to transfer that money into the state pension system. Argentine President Cristina Fernández de Kirchner said she abolished the 14-year-old private pension system to protect pension money at a time of global turmoil and denied the government had grabbed the cash to service its crushing debt, which officials told The Financial Times is now about $21 billion.

The reality is, however, that surpluses from the state system – known as “Anses” – already have been a key source of government funding, especially in the past year, after a surge in the number of workers returning to the state plan caused its holdings to surge substantially. Expect the use of those surpluses to continue.

Indeed, the government is clearly hoping that the addition of the assets from the private pension system will create an even-bigger surplus that it can use to service its debt. Otherwise, the government might have to cut back significantly on the spending programs that benefit Argentine citizens. And since 2009 is an election year, such cutbacks aren’t an option.

But the strategy is fraught with peril. First, the decision “effectively killed the primary institutional investor in its emerging capital market,” the World Bank said. “Confidence in this market has predictably suffered from this measure, the latest in a series of government meddlings.”

The move calls to question what the government will do about the $10 billion in private investments, including the shares of both foreign and domestic firms.

That makes Anses the country’s biggest investor in its capital markets, whose liquidity and depth will become greatly reduced, The FT said. And the disappearance of the private pension funds will raise a lot of concerns over how the government will be able to keep a steady supply of credit available to consumers, whose spending drives the economic growth in that country, as it does here in the United States.

The lack of available credit major combined with a downturn in confidence in the Argentine financial system might well be the double-whammy that pushes Argentina into a major downturn, which could easily translate into another debt default.

Haunted by Past Problems

To really understand what happened, we need to turn back the clock to 2001, when Argentina – Latin America’s second-largest economy – found itself on the brink of financial collapse. A loss of confidence in the country and its policies induced a surge in capital flight and a major run on the nation’s banks, as investors and Argentine citizens alike exchanged pesos for U.S. dollars, which they then sent abroad.

Argentina was forced to default on the lion’s share of its public debt, estimated at $93 billion. Even today, however, an estimated 30% of Argentina’s bondholders still refuse to accept the 70% discount the government offered to settle the default.

Even in a world not currently gripped by a global credit crisis, Argentina would likely have found it impossible to obtain the finding needed to finance its government operations. But the financial crisis is a stark reality, meaning that the few sources of funding that remain available in the world markets are not open to Argentina.

And with Argentina’s agriculture-heavy domestic economy slumping badly – and now certain to feel the sting of the plunge in food-and-commodity prices – the central government is left with a possible debt-payment shortfall of as much as $10 billion for next year.

“With the abrupt drop in commodity prices, it left Argentina’s ‘cleptocratic’ government little room other than to confiscate private savings in order to reduce its chances of defaulting again in 2009,” says Marquez.

Default Déjà Vu?

There are some disturbing similarities between Argentina’s current economic crisis and the economic malfeasance that led the country to default on its debt in 2001.

Then, as now, the government faced accusations of corruption and mismanagement of debts. Argentina’s current president, Cristina Fernández de Kirchner, succeeded her husband, former President Néstor Kirchner, in December 2007. Like her husband, President Kirchner has been accused of employing dubious accounting tactics.

It is widely believed that the current president Kirchner has underreported Argentina’s inflation situation by replacing members of the state statistical office with handpicked analysts “friendlier” to the administration’s view.

During Kirchner’s husband’s administration, which ran from 2003-2007, several industries were nationalized. Despite having campaigned on a socialist platform of “returning to a republic of equals,” he nevertheless oversaw the state takeover of the postal system, water works and railways.

The pattern of the Argentine government’s failure to acknowledge economic reality continues.

The legislature recently passed the budget for 2009, that bases its financial assumptions on 4.0% economic growth (as measured by gross domestic product growth), 8.0% inflation, and a currency valued at 3.19 pesos for each U.S. dollar (despite the fact that it currently takes 3.33 pesos to buy one U.S. dollar), MercoPress reported.

Many economists feel Argentina’s economic growth is likely to be much lower. JPMorgan Chase & Co. (NYSE:JPM) predicts just 1.0% GDP growth for 2009. And some economists have predicted inflation as high as 20%.

Current President Kirchner has chosen to blame the global financial crisis for the government’s need to grab of private sector assets – without acknowledging the role that her administration, and the domestic economy, have played in the current economic crisis.

“There was a [private] system that spectacularly collapsed. This was a policy of looting,” Kirchner said in an attempt to justify the nationalization, the AFP reported.

“It is evident that when nobody regulates the market, nobody controls it and it is allowed to do what it wants, we wind up with a financial disaster like the one the global economy faces,” she added.

But it’s widely acknowledged that without the projected $4.5 billion to $5.0 billion in worker inflows to the private pension system next year, coupled with the current $24 billion in deposits, the Argentine government would find itself dangerously close to another default.

Despite all of the similarities between Argentina’s past and current economic troubles, there’s one important difference for global investors.

During Argentina’s prior collapse, Mexico and Brazil – large Latin American economies and important Argentine trading partners – were faced with their own economic crises. It cast a pall over Latin American investing for emerging markets and international investors. But that’s not the case this time around.

“Argentina, unlike Mexico, China and Brazil, is a fairly closed economy,” says Shadow Stock Trader editor Marquez. “Therefore, the impact to other economies from the Argentine pension nationalization is almost negligible.”

Argentina’s Economic Isolation

Even with its strong average economic growth of 9% for the past several years, Argentina hasn’t been a smart place to park investments since the 2001 crisis.

During the prior economic collapse, large numbers of business owners and foreign investors alike yanked all of their cash out of the Argentine economy and sent it to safer havens aboard. Needless to say, this caused a capital squeeze, and many businesses of all sizes failed, causing unemployment to soar, and government receipts to plummet. With no sources of income, many struck out on their own, without the presence of the owners and their capital, as self-managed “cooperatives.” This helped create some economic and job growth where there was none, and eventually the economy started to rebound.

Although GDP has grown consistently and quickly since 2003, it was only in late 2004 that it reached the levels of 1998 – the last year of growth prior to the recession. Other macroeconomic indicators have have shown a similar rebound pattern.

Strong commodity prices fueled an economy that counts soy as its biggest export, but government mismanagement and questionable economic policies continue to make Argentina a poor investment.

Standard & Poor’s Inc. recently downgraded the country’s credit rating to B-, well below investment grade.

“It’s a textbook definition of an economic disaster,” Nick Chamie, head of emerging-market research at RBC Capital Markets Corp. (RY) in Toronto, told Bloomberg News. The S&P ratings reduction “confirms what the rest of the market knows – that Argentina is close to default and that risk is very high.”

But the good news for global investors is that Argentina’s problems are unlikely to spill over into the economies of its healthier Latin American neighbors.

Even Brazil, Argentina’s largest trading partner, is likely to be unaffected by its Latin American neighbor’s current economic trouble. Argentina accounts for only 9% of Brazil’s exports. And the planned liquidation of foreign assets in Argentina’s pension funds will amount to just $540 million worth of in Brazilian equities – too little to have much of an impact on the Brazilian market.

“Argentina’s government does not pass the first ‘C’ of credit analysis: character,” says Money Morning’s Marquez. “It is not only the ability to pay [its debt-service payments], but the willingness to do it and the track record in doing this that matters.”

Compared to the fiscal responsibility of neighbors Brazil and Chile, Argentina’s history of borrowing and default make it a bad bet.

Latin America still hosts several choice investment opportunities, but you won’t find them in Argentina.

“The nationalization of pensions in Argentina shows the escalation of confiscatory government policies,” says Marquez. “In this environment, where flagrant violations of property rights are escalating, Argentina is no place to invest.”

Source: With its Pension Fund Grab, is it ‘Déjà Vu All Over Again’ For Argentina?

I don’t think Treasury Secretary Paulson is having as good a time as I did in the nation’s capital. When he came down from NY a couple years ago to take over the Treasury, he was Wall Street’s best paid CEO and looked to cap his career with a high-profile sojourn in public service. But his credibility has really taken a hit over the past year, and his update before congress yesterday didn’t quite go as everyone expected. Chuck left me the following to share with readers this morning:

“Yesterday I told you that Treasury Sec. Paulson was going to give an update on the bailout package… And instead of an update, he threw the markets a great big 12-6 curveball! Treasury Sec. Paulson laid out his plans for the next stage of the financial market rescue package, announcing he has shelved a plan to buy troubled mortgage assets and is moving his attention to non-banks and consumer finance.

And… in a striking admission, Paulson said that buying mortgage assets “is not the most effective way” to use government funding. Geez Louise! I could have saved him, Congress, and the whole country a lot of time and stress on this if he would have just listened to me at the time! I said when it was first announced that the Gov’t had no business buying up these troubled assets, and getting involved in what used to be known as “free markets”! He’s changing horses in the middle of the stream! What gives? And… All this unknown stuff now, put the Trading Theme in overdrive, buying dollars in the deep, dark days of the U.S. economy!

There’s a silver lining here folks… And I believe that Sec. Paulson is seeing the seized up credit markets unlock. This development might just be nascent, but he believes it’s there. And when this problem with the credit markets eases, a return to the fundamentals could very well be in store. In fact, I would bet a dollar to a Krispy Kreme, those fundamentals are going to come home to roost once this credit market problem is in our rear view mirror.

Now, back to the bailout package… Now, the Treasury Sec. wants to put the government’s money toward unlocking student loans, credit card receivables, and auto loans… Some are calling this move a U-Turn, but in essence it isn’t… Before the Gov’t was going to buy toxic bonds made up of residential home loans… Now, they will be buying bonds made up of consumer loans, which in my opinion may end up more toxic than the first choice, given the fact that we’re in a recession and the recession will work out to be one that is protracted.

While these things “might” get the credit markets unlocked, they might miss the mark too, and until we get these credit markets unlocked, the markets focus will remain on the crisis and not return to focusing on the awful fundamentals in the U.S. economy. These awful fundamentals need to rise to the top again for risk takers to come back, and until the risk takers come back, currencies and commodities like euros and Gold, will continue to be put into a corner by the dollar.

We get a new Treasury Sec. in January when the new administration takes over… The new Treasury Sec. will have their hands full for sure!

On the side… OK…. Yesterday morning… I looked up to the TV and saw that knucklehead Jim Cramer on the Today Show… I swear.. He said this to Meredith… “I have been honest on this show, Meredith, and I “try” to be honest on my show”… He Tries to be honest? OMG!”

I agree with Chuck, whoever decides to take over as the new Treasury Secretary will certainly have their work cut out for them. I’ve heard they may bring back Volker to take over for Paulson. That would be an interesting choice, as he has ‘been there, done that’ crushing inflation during the 1980’s. But his high interest rate policies which he pushed caused the US to dip into a deep recession, and he also played an important role in bringing the US off the gold standard back in the early 70’s. Even if he doesn’t take the Treasury position, Volcker is one of Obama’s advisors, and will certainly have some influence on the new administration’s monetary policies.

Paulson’s curve ball put the markets in a sell mode, with investors moving back into the relative safety of US treasuries and money markets. The dollar strengthened after his bombshell, but started to fall again in Asian trading. The Japanese yen which has been one of the most volatile currencies, rose to a two week high against the euro after Paulson’s curve caused cuts in purchases of higher-yielding assets. But the yen reversed some of yesterday’s sharp gains overnight as currency traders worried about BOJ intervention. These concerns were heightened by comments from Japanese Finance Minister Nakagawa who warned that Japan would protect the yen against sharp volatility.

Despite the prospect of intervention, the yen remains a buy according to a report by Goldman Sachs group. Goldman believes the yen will strengthen 6 percent against the US dollar due to a continued unwinding of the carry trade. The dollar will weaken to 90 yen in three months, before gaining to 100 yen six months from now, Goldman said. “Deleveraging and funding constraints have likely created a new source of foreign-exchange demand and supply,” the Goldman analyst wrote. “We expect deleveraging patterns to continue into year-end, driving the dollar and yen stronger and putting pressure on higher-yielding currencies.” As readers know, Chuck has been talking about this carry trade reversal for some time, and we agree that this reversal will likely last through the end of the year and into the 1st or 2nd quarter of 2009. Look for further dollar strength during this time period, but watch out below once the dollar reverses course.

The reversal of the carry trades has led to a fall in the value of the Australian dollar, a move which accelerated yesterday. The currency drop became too much to bear for the Reserve Bank of Australia who intervened in the markets to protect the AUD$. An RBA spokesman confirmed the central bank bought its own currency, putting a floor under the currency after it dropped over 2 cents yesterday morning. This intervention is a good sign that the RBA is now concerned with the value of the Aussie dollar and won’t let it slip too much further than the current levels. With the RBA’s support, and the possibility of a bottoming of commodity prices, these could be excellent levels to buy into the Australian dollar.

The German economy, Europe’s largest, contracted more than economists expected in the third quarter, pushing the nation into the worst recession in at least 12 years. German GDP dropped a seasonally adjusted .5% from the second quarter, when it fell .4%. The economy is officially in a recession, as it has now contracted over two consecutive quarters. Traders increased bets that the ECB will reduce interest rates. The euro had been sold off before the announcement, hitting a low of 1.2389 vs. the US$, but then rallied back above $1.25 in early US trading.

This week has been a pretty slow data week here in the US, but today we have two important releases. The US trade deficit probably narrowed in September as retreating oil prices reduced the value of imports. The sharp increase in the value of the US$ over the past 6 months has also helped reduce our trade deficits. But I don’t think the commodity price slump will last, and also believe the US$ will turn back around sometime next year. So this narrowing of the trade deficit won’t last. We will also get the weekly jobs report today, which will likely show another big bounce in first time filings for unemployment. The labor market in the US is bad and getting worse, and I would be surprised to see a number below 500k for the weekly initial jobless claims. This is one of the factors which caused the Treasury Secretary to reverse course on the bank bailout, as he now moves his focus to the growing consumer credit crisis.

We talked about China’s big stimulus package earlier this week, and the impact it will have on China’s US$ reserves. But the stimulus package will have another impact on the markets. Most of the $586 billion stimulus will be focused on infrastructure building projects. These projects will mean China will continue to import large amounts of copper, iron ore, cement, and other building materials. They will also continue to demand a greater supply of oil and feul. This new demand will help offset some of the drop in commodity demand from the slowing western economies. Commodity prices have fallen dramatically as traders priced in the global slowdown. But China’s economy is still the fastest growing among the world’s 20 largest, with a growth rate close to 8 percent, and this latest stimulus announcement should cause a bounce back in the prices of these commodities. The countries supplying China with raw materials should also benefit, including the currencies of Brazil, Australia, and Canada, all of which have been beaten down lately.

Finally, Chuck let me know some great news for our St. Louis readers: There’s going to be a screening of Addison Wiggin’s movie, I.O.U.S.A. here in town… The screening will be Nov. 18 at the Missouri History Museum, part of the Community Cinema Series, co-sponsored by KETC and the History Museum. “I.O.U.S.A.” will be shown at 7, followed by a panel discussion.

Currencies today 11/13/08: A$ .6389, kiwi .5557, C$ .8113, euro 1.2535, sterling 1.4838, Swiss .8404, ISK (No Quote), rand 10.3166, krone 7.096, SEK 8.0703, forint 215.51, zloty 2.9765, koruna 20.095, yen 96.03, baht 34.99, sing 1.5119, HKD 7.7501, INR 49.2925, China 6.8298, pesos 12.97, BRL 2.305, dollar index 87.43, Oil $56.81, Silver $9.41, and Gold… $717.66

Source: Paulson throws the markets a curve…