Madrid threatened to retaliate as soon as this week in response to Argentina's proposed seizure of a prized unit of Spain's flagship oil company, as Argentina's nationalization drive drew international rebuke and threatened to drive the relationship between Spain and its former colony to its lowest level in decades.
Spain will take "clear and forceful measures," said Spanish Foreign Minister José Manuel García-Margallo.
These could affect commercial, energy and industrial relations between the two countries, senior officials said, and could be announced during Friday's weekly cabinet meeting."This is bad news for Spain, but terrible news for Argentina," Mr. García-Margallo said, adding that the Argentine government "is shooting itself in the foot."
President Cristina Kirchner's government on Monday proposed effectively nationalizing Argentina's largest oil-and-gas company, YPF YPF -24.26% SA. She proposed taking 51% of YPF from Spain's Repsol YPF SA REP.MC -6.21% at a price that is yet to be determined, leaving the Spanish firm with a 6% stake.
Repsol shares fell as much as 9% Tuesday amid uncertainty over the possibility of compensation. Repsol values its stake in YPF, which represents more than 50% of Repsol's total hydrocarbon output, at $10.5 billion.
Later Tuesday, one of Mrs. Kirchner's most influential economic advisers scoffed at Repsol's $10 billion compensation request.
"The idiots think the state must be so stupid that it will do what the company says," Deputy Economy Minister Axel Kicillof said during a testimony to Congress about YPF's future.Repsol had vowed to battle for full compensation for YPF, and sought to reassure investors that the company would have enough funds to finance its capital expenditures without YPF.
European Commission President José Manuel Barroso said he is "seriously concerned" about Argentina's decision, which a commission spokeswoman called "illegal." The European Union has postponed a meeting with Argentina scheduled for Thursday and Friday.
Mexican President Felipe Calderón assailed Argentina's decision late Monday, saying it "shows little sense of responsibility and rationality." Mexico's state-run oil monopoly Petroleos Mexicanos, or Pemex, owns nearly 10% of Repsol.
Spain's scope for retaliation is limited, said those familiar with bilateral trade. While its $1.41 trillion economy is four times the size of Argentina's and Spain is one of Argentina's top 10 trading partners, Argentina does more trade with Brazil and China.
According to Spanish external commerce data, in 2011 Spain exported €1 billion ($1.31 billion) worth of machines, cars, books and pharmaceutical products to Argentina, while Spain imported more than €2 billion worth of food and seafood, chemicals, oils and minerals from Argentina.
Moreover, Spain was unable to prevent the nationalization of air carrier Aerolineas Argentinas from the now bankrupt Spanish travel company Grupo Marsans in the late 2000s.
Spanish officials didn't say what sorts of measures they might take against Argentina. Repsol Chairman Antonio Brufau speculated that Spain could adopt import controls or lodge a complaint to the Group of 20 leading nations.
Mr. Brufau called on Spain to enforce its bilateral agreements with Argentina and help ensure that the rule of law prevails. "A government that doesn't make sure its agreements with other governments are respected isn't really a government," he said.
The affair threatens to upend the close but complex relations between two countries bound by culture and language. Cross-Atlantic migration has often served as a safety valve both for Spaniards and Argentines.
Spaniards fled to the former colony and other Latin countries during that country's Civil War in the 1930s. Argentines have fled to Spain during Argentina's recurrent financial crises.
But the two have rarely faced off as equals, said Raanan Rein, a specialist on Latin American and Spanish history at Tel Aviv University.
"The trade and economic relationships between Spain and Argentina have always been characterized by misunderstanding and mistrust," Mr. Rein said. "During certain periods, the balance of economic power tended to favor Spain. During others it tended to favor Argentina.
"In the 1940s, when Spain was destitute after World War II, Argentina was one of the few countries that came to its aid, Mr. Rein said.
The government of Gen. Juan Domingo Perón sent money and grain to Madrid, and his hugely popular wife, Eva Perón, crossed the Atlantic to try to boost morale in Spain. But Mr. Rein said the Argentine helping hand wasn't a gift—and the Perón government charged a high financial price for assisting Spain.
During the 1990s, when a conservative Argentine government started privatizing state-run companies, there was controversy in Argentina when Repsol, Telefónica SA and other Spanish firms emerged as acquirers. Argentine nationalists carped about a "reconquest" by their former colonial masters.
Nevertheless, during Argentina's brutal economic collapse in 2002, Spanish companies maintained operations in Argentina and the Spanish government contributed money to helping ameliorate the crisis, analysts said.
The latest spat over YPF is another "link in a chain of minicrises over issues of trade, investment and debt," between Spain and Argentina, Mr. Rein said, adding that "It does have potential to be the biggest [bilateral] crisis since the end of World War II."
Executives at Repsol vowed to fight aggressively Argentina's takeover. "This is not lost," Mr. Brufau, the chairman, told reporters. "The battle will go on."
The Argentine government blames YPF for low production that has forced it to spend heavily on importing energy, at a time when capital flight has made dollars scarce. Coming alongside other moves such as import limits, Argentina's government hopes to boost hydrocarbon production and decrease its recent reliance on imported gas and oil.
Mr. Brufau argued Tuesday that Repsol had boosted investment in YPF, including doubling the number of employees and raising natural-gas production to peak levels in 2004. But he said aging oil and gas wells are naturally weighing on output.
He said Repsol hadn't been counting on YPF cash to finance operations outside Argentina in the next four to five years. YPF won't generate cash in any case, as it will pay this year's dividend in shares, he said.
Repsol's dividend payment plan remains unchanged, Mr. Brufau said, but may need to be revised in the near future.
Mr. Brufau added that Repsol would seek compensation for the full value of YPF, amounting to about $10.5 billion for Repsol's 57.4% stake.Repsol faces a tough road ahead in contesting the nationalization, said Carlos Alfaro, an Argentine who practices law in New York, Buenos Aires and Madrid and who has served as an arbitrator for the American Arbitration Association.
"It will be very hard for Repsol to do something," he said. Repsol can take its claim to the World Bank's International Center for Settlement of Invesment Disputes, he said, but added that multinationals that pressed cases against Argentina there concerning contracts broken after the 2002 peso devaluation didn't fare well.
"Settlements were not substantial because it's very difficult to determine what is the real damage suffered by companies," Mr. Alfaro said. "And the nature of arbitrators is that they settle in the middle."
Andrea Kay Bjorklund, a visiting law professor at McGill University in Montreal, noted that the Kirchner government has refused to pay the awards rendered against Argentina by the World Bank dispute settlement body. "I can't say that Repsol has no options, but I don't think Repsol's options are attractive," she said.
Mr. Alfaro said another option is for Repsol to sue in Argentina. Argentine courts are known for being highly politicized, but Mr. Alfaro said Repsol could always hope for an eventual change in Argentina's government.
Because Argentina's move was long anticipated, several analysts said the nationalization was largely priced into Repsol shares, although the steep share decline seemed to contradict that view.
Repsol shares closed down 6.1% at €16.42 Tuesday, underperforming a sharply higher stock market in Madrid.
On a call, Repsol Chief Financial Officer Miguel Martinez said the company's credit ratings could come under pressure without YPF, which accounted for 25% of Repsol's operating income and 16% of its debt in 2011.
Analysts concurred, with Barclays and others saying that should it lose YPF, Repsol would have difficulty maintaining its Baa2 rating from Moody's Investors Service Inc. and BBB from Standard & Poor's and Fitch Ratings.
On Tuesday, Moody's said it had downgraded YPF's Global Local Currency Rating to B3 from Ba3 and National Scale Rating to Baa3.ar from Aa2.ar. All ratings remain on review for downgrade.
David Gualtieri, director of equity sales at Intermoney brokerage in Madrid, said uncertainty over the level of compensation and the effect on Repsol's credit rating and dividend payout will likely continue to weigh on the company's shares.
Compensation, to be determined by an Argentine tribunal, could take months or years to reach Repsol coffers, and in any case is likely to be far less than the company's preferred value.
wsj.com
Spain will take "clear and forceful measures," said Spanish Foreign Minister José Manuel García-Margallo.
These could affect commercial, energy and industrial relations between the two countries, senior officials said, and could be announced during Friday's weekly cabinet meeting."This is bad news for Spain, but terrible news for Argentina," Mr. García-Margallo said, adding that the Argentine government "is shooting itself in the foot."
President Cristina Kirchner's government on Monday proposed effectively nationalizing Argentina's largest oil-and-gas company, YPF YPF -24.26% SA. She proposed taking 51% of YPF from Spain's Repsol YPF SA REP.MC -6.21% at a price that is yet to be determined, leaving the Spanish firm with a 6% stake.
Repsol shares fell as much as 9% Tuesday amid uncertainty over the possibility of compensation. Repsol values its stake in YPF, which represents more than 50% of Repsol's total hydrocarbon output, at $10.5 billion.
Later Tuesday, one of Mrs. Kirchner's most influential economic advisers scoffed at Repsol's $10 billion compensation request.
"The idiots think the state must be so stupid that it will do what the company says," Deputy Economy Minister Axel Kicillof said during a testimony to Congress about YPF's future.Repsol had vowed to battle for full compensation for YPF, and sought to reassure investors that the company would have enough funds to finance its capital expenditures without YPF.
European Commission President José Manuel Barroso said he is "seriously concerned" about Argentina's decision, which a commission spokeswoman called "illegal." The European Union has postponed a meeting with Argentina scheduled for Thursday and Friday.
Mexican President Felipe Calderón assailed Argentina's decision late Monday, saying it "shows little sense of responsibility and rationality." Mexico's state-run oil monopoly Petroleos Mexicanos, or Pemex, owns nearly 10% of Repsol.
Spain's scope for retaliation is limited, said those familiar with bilateral trade. While its $1.41 trillion economy is four times the size of Argentina's and Spain is one of Argentina's top 10 trading partners, Argentina does more trade with Brazil and China.
According to Spanish external commerce data, in 2011 Spain exported €1 billion ($1.31 billion) worth of machines, cars, books and pharmaceutical products to Argentina, while Spain imported more than €2 billion worth of food and seafood, chemicals, oils and minerals from Argentina.
Moreover, Spain was unable to prevent the nationalization of air carrier Aerolineas Argentinas from the now bankrupt Spanish travel company Grupo Marsans in the late 2000s.
Spanish officials didn't say what sorts of measures they might take against Argentina. Repsol Chairman Antonio Brufau speculated that Spain could adopt import controls or lodge a complaint to the Group of 20 leading nations.
Mr. Brufau called on Spain to enforce its bilateral agreements with Argentina and help ensure that the rule of law prevails. "A government that doesn't make sure its agreements with other governments are respected isn't really a government," he said.
The affair threatens to upend the close but complex relations between two countries bound by culture and language. Cross-Atlantic migration has often served as a safety valve both for Spaniards and Argentines.
Spaniards fled to the former colony and other Latin countries during that country's Civil War in the 1930s. Argentines have fled to Spain during Argentina's recurrent financial crises.
But the two have rarely faced off as equals, said Raanan Rein, a specialist on Latin American and Spanish history at Tel Aviv University.
"The trade and economic relationships between Spain and Argentina have always been characterized by misunderstanding and mistrust," Mr. Rein said. "During certain periods, the balance of economic power tended to favor Spain. During others it tended to favor Argentina.
"In the 1940s, when Spain was destitute after World War II, Argentina was one of the few countries that came to its aid, Mr. Rein said.
The government of Gen. Juan Domingo Perón sent money and grain to Madrid, and his hugely popular wife, Eva Perón, crossed the Atlantic to try to boost morale in Spain. But Mr. Rein said the Argentine helping hand wasn't a gift—and the Perón government charged a high financial price for assisting Spain.
During the 1990s, when a conservative Argentine government started privatizing state-run companies, there was controversy in Argentina when Repsol, Telefónica SA and other Spanish firms emerged as acquirers. Argentine nationalists carped about a "reconquest" by their former colonial masters.
Nevertheless, during Argentina's brutal economic collapse in 2002, Spanish companies maintained operations in Argentina and the Spanish government contributed money to helping ameliorate the crisis, analysts said.
The latest spat over YPF is another "link in a chain of minicrises over issues of trade, investment and debt," between Spain and Argentina, Mr. Rein said, adding that "It does have potential to be the biggest [bilateral] crisis since the end of World War II."
Executives at Repsol vowed to fight aggressively Argentina's takeover. "This is not lost," Mr. Brufau, the chairman, told reporters. "The battle will go on."
The Argentine government blames YPF for low production that has forced it to spend heavily on importing energy, at a time when capital flight has made dollars scarce. Coming alongside other moves such as import limits, Argentina's government hopes to boost hydrocarbon production and decrease its recent reliance on imported gas and oil.
Mr. Brufau argued Tuesday that Repsol had boosted investment in YPF, including doubling the number of employees and raising natural-gas production to peak levels in 2004. But he said aging oil and gas wells are naturally weighing on output.
He said Repsol hadn't been counting on YPF cash to finance operations outside Argentina in the next four to five years. YPF won't generate cash in any case, as it will pay this year's dividend in shares, he said.
Repsol's dividend payment plan remains unchanged, Mr. Brufau said, but may need to be revised in the near future.
Mr. Brufau added that Repsol would seek compensation for the full value of YPF, amounting to about $10.5 billion for Repsol's 57.4% stake.Repsol faces a tough road ahead in contesting the nationalization, said Carlos Alfaro, an Argentine who practices law in New York, Buenos Aires and Madrid and who has served as an arbitrator for the American Arbitration Association.
"It will be very hard for Repsol to do something," he said. Repsol can take its claim to the World Bank's International Center for Settlement of Invesment Disputes, he said, but added that multinationals that pressed cases against Argentina there concerning contracts broken after the 2002 peso devaluation didn't fare well.
"Settlements were not substantial because it's very difficult to determine what is the real damage suffered by companies," Mr. Alfaro said. "And the nature of arbitrators is that they settle in the middle."
Andrea Kay Bjorklund, a visiting law professor at McGill University in Montreal, noted that the Kirchner government has refused to pay the awards rendered against Argentina by the World Bank dispute settlement body. "I can't say that Repsol has no options, but I don't think Repsol's options are attractive," she said.
Mr. Alfaro said another option is for Repsol to sue in Argentina. Argentine courts are known for being highly politicized, but Mr. Alfaro said Repsol could always hope for an eventual change in Argentina's government.
Because Argentina's move was long anticipated, several analysts said the nationalization was largely priced into Repsol shares, although the steep share decline seemed to contradict that view.
Repsol shares closed down 6.1% at €16.42 Tuesday, underperforming a sharply higher stock market in Madrid.
On a call, Repsol Chief Financial Officer Miguel Martinez said the company's credit ratings could come under pressure without YPF, which accounted for 25% of Repsol's operating income and 16% of its debt in 2011.
Analysts concurred, with Barclays and others saying that should it lose YPF, Repsol would have difficulty maintaining its Baa2 rating from Moody's Investors Service Inc. and BBB from Standard & Poor's and Fitch Ratings.
On Tuesday, Moody's said it had downgraded YPF's Global Local Currency Rating to B3 from Ba3 and National Scale Rating to Baa3.ar from Aa2.ar. All ratings remain on review for downgrade.
David Gualtieri, director of equity sales at Intermoney brokerage in Madrid, said uncertainty over the level of compensation and the effect on Repsol's credit rating and dividend payout will likely continue to weigh on the company's shares.
Compensation, to be determined by an Argentine tribunal, could take months or years to reach Repsol coffers, and in any case is likely to be far less than the company's preferred value.
wsj.com
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