Financial life in a big town

Less than a decade ago, Argentina was an exporter of oil and natural gas. Now the government has to spend billions of dollars to import fuel.

This dramatic reversal of fortune is why Argentina, already a global financial rogue after its historic debt default, is willing to risk becoming even more of a pariah by seizing control of its leading oil company from Spanish hands, analysts say. President Cristina Fernandez infuriated Spain, its largest foreign investor, but elated many Argentines by expropriating Repsol YPF SA’s majority stake in Argentina’s formerly state-owned YPF energy company.

Only two months earlier, Repsol YPF had upped its estimate for the shale oil and gas it found in Argentina to nearly 23 billion barrels, enough to double the country’s output in a decade .But the Spanish company said it would cost $25 billion a year to develop, and warned that Argentina would need to overhaul its energy policy to attract the necessary investment.

Instead, Fernandez simply seized the company, giving her government access to billions of dollars’ worth of cash, enough energy to answer domestic demand in the short term, and potentially even solving Argentina’s chronic money woes in the future.

She accused Repos of draining YPF since gaining control in the 1990s, underinvesting in its oil and gas fields and failing to keep pace with the needs of Argentina’s growing economy even as it paid huge dividends to shareholders.

Repos blames Argentina’s ever-changing mix of subsidies, price caps and export taxes for depressing production as the country’s demand for energy soared since 2003, when her husband, President Nestor Kirchner, came to power.

Both are partly right, says Eduardo Fernandez, an independent consultant and former fuels director in Argentina’s energy ministry.

The problem was a government approved practice of allowing Repos to use profits to pay shareholder dividends rather than invest that money in the company’s future. “That led to a lack of reinvestment in utilities, little exploration and dwindling reserves, as oil fields dried up and productivity fell,” Fernandez said.

Argentine oil production plunged 22 percent from 2000 to 2010, even as demand surged more than 40 percent, according to data from the Argentine Oil and Gas Institute and the Energy Ministry compiled by a former energy secretary, Emilio Apud.

Argentina’s production has fallen so low that the government now spends billions of dollars a year on expensive imported fuels that it provides at a loss to companies and consumers.

Cheap energy helped Argentines rebuild after a world-record debt default and devaluation in 2002 left the economy in ruins. It makes less sense now, after nearly a decade of growth, but letting consumer energy prices rise too quickly could cause already high inflation to spiral, and provoke popular discontent in a country where pot-banging street protests have driven other presidents from office.

The energy subsidies spiked by 63 percent in 2010 to $5.6 billion, according to a former energy secretary, Alieto Guadagni. At the time, oil traded at about $80 a barrel internationally. With oil now going for more than $100 a barrel, this year’s bill could be nearly $10 billion, even as the economy cools with less demand from China and Brazil.

Fernandez squarely blamed a Repose’s lack of investment for a $3 billion energy deficit when she announced the takeover.

“The worst thing is that if we don’t do this, we’ll turn into an unsustainable country, because of its business policies and not because of a lack of resources,” she said, noting that Argentina holds the world’s third largest reserves of shale oil and gas, after China and the United States _ a resource that remains entirely untapped.

“Our model is one of recovering our sovereignty,” she added, noting that the company will not be state-owned, but run as a mixed entity, able to bring in new private shareholders.

But rather than raise fuel prices that are now about five times lower than in Brazil and Uruguay, her expropriation measure insists that oil companies must serve Argentines first, even if it means selling the energy they produce at a loss.

In the lead up to the nationalization, as prospects for quick returns diminished in Argentina, Repos YPF sought to protect its shareholders by diversifying and making long-term investments elsewhere in Latin America.

Other oil companies did the same. With oil capped at $55 a barrel in Argentina while trading above $100 on the world market, they followed the money, Eduardo Fernandez said.

“So there’s no interest in making investments in Argentina when in other countries they’re paying in full. So Repos went to Brazil, Trinidad and Tobago, Bolivia. All of this provoked the disinvestment,” he said.

Repos President Antonio Bureau said Repsol invested billions of dollars in Argentina, and tried to head off the expropriation with promises to spend more. But by then, the Argentines were already determined to regain control. All Brufau could do in the end was demand $10.5 billion, which he said was the market price of the shares Argentina seized.

Deputy Economy Minister Axel Keillor accused Repos of hiding the true value of its Argentine unit, and said a thorough review of its books now that he’s in control of the company’s offices in Buenos Aires will affect whatever compensation is eventually paid.

“These morons think that the government is stupid enough to buy everything” that Repsol demands, the 40-year-old Kicillof said, sporting an open shirt and long, Elvis-like sideburns in a heated senate session this week.

Latin America’s third-biggest economy hasn’t been able to tap international debt markets since its default, but has been able to manage with dollars rolling in from taxes on grains, nationalizing private pension funds and the flagship airline, and by tapping central bank reserves.

By re-nationalizing YPF _ and not paying Repsol until international courts resolve the case years from now, if then _ Argentina can reinvest profits to develop new reserves and use the fuel Repsol was exporting to save consumers from price shocks as it weans them off the subsidies.

The shale deposits trapped deep under the “Vaca Muerta” (”Dead Cow”) basin of Neuquén province could increase Argentina’s oil reserves by at least 750 million barrels, and probably three times that much, said Michael Lynch, president of Strategic Energy and Economic Research.

Strategic partners will be key, and the Argentines aren’t waiting for them to come knocking. Planning Minister Julio de Vido assured Brazilian officials Friday that Argentine assets of their state-run oil giant Petrobras would not be expropriated, and secured a promise to increase their Argentine market share from 8 percent to 15 percent this year. Brazilian Energy Minister Edison Lobao called Petrobras’s current investment of $500 million in Argentina “good business.”

De Vido also secured promises of increased natural gas production from French-owned Total Austral, and planned meetings Monday with executives from Chevron and Exxon.

He said he had not heard from China’s No. 2 Sinopec oil company, “but that doesn’t mean that we won’t have contacts in the future.”

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Economists have lots of ideas about what can be done to help jumpstart the still weak economy, but they don’t expect Congress to enact any of them any time soon.

A survey of economists by CNNMoney found most don’t expect Congress to pass any kind of economic assistance anytime in the foreseeable future. Only about a third of the 16 who responded to the survey expect some kind of action early in 2013, after the election. Just one expects action in a lame-duck session after the election but before the end of the year. None of them expect action before the election.

"Two weeks after a sudden freeze in hell," is when Bill Watkins, of the Center for Economic Research and Forecasting at Cal Lutheran University, expects Congress to ride to the rescue.

Watkins and his colleagues are the most concerned of those surveyed about the recent weakness in a number of economic readings, including much weaker-than-expected job growth in the March jobs report. They were the only ones who checked the very concerned box.

Another five economists said they were somewhat concerned, but six said they were only a little concerned, and four said they were not concerned at all.

Policies they would like to see passed include comprehensive tax reform, which was endorsed nearly unanimously. Those surveyed were allowed to endorse as many options as they thought would help the economy.

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Tax reform would likely lower tax rates for both corporations and individuals, but eliminate many deductions and loopholes. The concept has been endorsed by everyone from President Obama to his likely Republican opponent Mitt Romney, but working out the details in a partisan atmosphere strikes economists as out of reach.

"Comprehensive tax reform would be great, but highly unlikely," said David Wyss, a fellow at Brown University.

Also getting the support of most economists is some extension of the Bush tax cuts, although they split on whether it should be for all taxpayers or if the extension should exclude high-income taxpayers.

Another third support another extension of the partial payroll tax holiday that has been in effect since the start of 2011 and runs through the end of this year.

"The pace of economic growth is too tepid to allow for the simultaneous expiration of the tax policies at the end of 2012," said Sean Snaith, economics professor at the University of Central Florida.

The survey also found 40% support repealing the health care reform and about a quarter would like to repeal the Dodd-Frank financial services reform.

"The uncertainty imparted on the economy by both Dodd-Frank and health care reforms are black clouds over the private sector and they both need to be reworked into more moderate forms," said Snaith.

Some believe that the economy will be better off if Congress does as little as possible.

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"There was a time in this recent period where the economy benefited from the assistance of government actions, but now it is time for the government sector to resume its place on the sidelines," said Russell Price of Ameriprise Financial. Price would like to see an extension of the tax cuts for all but upper income households along with comprehensive tax reform.

The economists surveyed forecast only modest growth and hiring for the rest of this year. 

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No one knows for sure what the Supreme Court will do with health care reform. But unless it strikes down the whole law, millions of wealthy families can expect a tax increase come January.

Two big Medicare tax changes were enacted to help pay for the new federal subsidies that millions of Americans will get when they buy health insurance. The tax changes themselves were not among the specific provisions of the law being challenged at the court.

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The new increases in Medicare taxes will apply to individuals making more than $200,000 a year, or $250,000 for married couples.

The measure, set to go into effect next year, is estimated to raise more than $200 billion over 10 years.

Roughly 4 million households — or 2.4% — will be affected by the increase initially, according to new estimates from the Tax Policy Center. By 2022 that number will grow to 8.3 million, or 4.6%.

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How much more households will pay depends on which Medicare increase they’ll be subject to since the Affordable Care Act calls for two changes. Some households will only be subject to one, and some will be subject to both.

The first involves the Medicare tax on earnings. Today, workers pay 1.45% of their wages into Medicare. Starting next year, high-income individuals will pay another 0.9 percentage points on their earned income over $200,000 ($250,000 if married).

The second change pertains to investment income, which to date has never been subject to the Medicare tax instant payday loan. But next year high-income households will start paying a 3.8% tax on at least a portion of their investment income, such as capital gains, dividends and rental income.

Households subject only to the Medicare tax increase on earnings will pay an estimated $2,430 more on average next year. But amounts vary widely depending on one’s income level. Those making between $200,000 and $500,000, for instance, will only pay about $633 extra while households making $1 million or more would pay another $11,242.

By contrast, millionaires subject only to the new investment income tax will see a much bigger tax bill, paying $38,149 more.

And — no surprise — households subject to both versions of the Medicare tax increase will get hit the hardest. More than 90% of those with incomes over $1 million fall into this group, according to Tax Policy Center estimates. And their average tax increase would top $45,000 next year. By 2022, they’ll pay $57,125 more.

While it’s easy to make the case that the wealthy can absorb these kinds of increases without much strain, that argument may not hold up as well over time as lawmakers seek to raise more revenue from the $250,000-and-up crowd to pay for any number of endeavors, including reducing deficits.

Said Tax Policy Center senior fellow Roberton Williams: "The well is only so deep." 

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European officials praised Spain

A Senate committee has approved President Barack Obama’s two nominations to fill vacancies on the Federal Reserve’s board. But prospects for a quick confirmation in the full Senate are uncertain.

The Senate Banking Committee approved by voice vote the nominations of Jeremy Stein, a Harvard economics professor, and Jerome Powell, an investment banker who served in the George H.W. Bush administration.

Obama nominated Stein, a Democrat, and Powell, a Republican, in hopes that pairing nominees from both parties could overcome Republican objections paperless payday loans. The Fed board hasn’t operated with a full seven members since 2006.

But one Republican senator, David Vitter, a critic of the Fed’s policies, has expressed opposition. That won’t necessarily block the nominees’ confirmation. But it means the Senate won’t vote before its two-week break starts this weekend.

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After botching its debut as a public company last week, BATS Global Markets issued a heartfelt apology Sunday night in a letter to customers.

"Let me get right to the point," said Joe Ratterman, chief executive of BATS, in the letter. "BATS experienced a serious technical failure Friday morning and I want to apologize for not measuring up to the level of excellence that you have come to expect from us."

The technical failure came on the day BATS had hoped to sell its own stock to the public for the first time. BATS, which operates stock exchanges, intended to list the stock on its own trading platform.

But trading in the newly issued BATS stock was halted when the price suddenly plunged almost immediately after it hit the market, triggering a so-called circuit breaker.

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"On Friday we were under the brightest spotlight imaginable … opening our own stock on our own exchange for the first time ever," said Ratterman. "It doesn’t get much more public than that."

Despite months of preparation and "rigorous" testing, BATS said it experienced a "system problem" that prevented the stock from trading properly payday loans for bad credit.

Ratterman stressed that all companies have technical glitches and that BATS exchanges have run smoothly 99.9% of the time over the last three years.

"It shouldn’t have failed, but it did, and the timing couldn’t have been worse," said Ratterman.

Ratterman suggested the offering could have been salvaged if the problem had been resolved quickly. But it took over two hours to reopen the market and by then the damage had been done.

"We determined that this was a material event that had eroded investor confidence and made the timely resumption of fair and orderly trading unlikely," he wrote. "As a result, we pulled the IPO and unwound all auction executions."

BATS is the third-largest exchange operator in the United States after NYSE Euronext (, Fortune 500) and the NASDAQ OMX Group (), according to the company’s investment prospectus.

The Kansas City-based company is considered one of the largest platforms for high-frequency computer-driven trading. 

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The tornadoes that swept through Missouri last year will cost homeowners who didn’t feel so much as a stiff breeze. Home insurance rates in Missouri are rising a little more than 5 percent, according to figures from the Missouri Department of Insurance.

Illinois state insurance officials wouldn’t provide an estimate on how much homeowners premiums may be rising this year.

People in the insurance industry call 2011 “the year of the cat,” as in catastrophe. And that partly explains the rising cost of home insurance here.

Several tornadoes ripped through St. Louis: one on New Year’s Eve of 2010 and then on April 22. Tornadoes laid waste to parts of the mid-South in April, then a massive twister erased much of Joplin in May. All told, twisters killed 1,900 people last year.

The result was the fourth biggest disaster loss in the history of insurance. The $21.3 billion tornado loss ranked just short of the $24 billion cost of 9-11, $25 billion for Hurricane Andrew in 1992 and $47.6 billion for Katrina in 2005.

The tornadoes capped a decade of disaster, in which catastrophic losses of all sorts more than doubled from the 1990s. This year is also shaping up as nasty with 270 tornadoes reported as of March 5, compared to a 7-year average of 123, according to the insurance rating firm A.M Best.

Tornado losses used to be a minor headache for insurers, who were more worried about hurricanes on the coast.

“Insurers are starting to say, ‘maybe this is the new normal,’” said Steve Weisbart, chief economist for the Insurance Information Institute, an insurance trade group. “They’re building into rates a little more margin for catastrophic loss.”

They’re also trying to bolster sagging profits. Earnings for property and casualty insurers dropped about 40 percent last year to $11.7 billion as “catastrophe-related losses wreaked havoc,” according to A.M. Best.

And so, St. Louis homeowners will be paying higher prices for coverage. The Missouri Department of Insurance says that insurers covering 80 percent of homes have filed rate increases averaging a bit over 5 percent from July of last year to early this month.

That was actually lower than in previous years. “Base rates” – rates before any discounts - rose 14 percent in 2009 and 9 percent in 2010, according to Missouri Insurance Director John Huff.

Those 2009 and 2010 increases were due in part to another ‘catastrophe’ hitting insurers — poor returns on their investments. 

Investment income has taken a big hit in recent years because of low interest rates, and falling investment income was pushing up rates before the rash of tornadoes.

Insurance premiums also depends on other factors, such as the amount of competition in the market and the amount of loss claims.

Huff says competition remains strong in Missouri with 130 companies angling to cover homes.

Insurers are looking for ways to lower their disaster losses beyond simply raising rates. More are moving to percentage deductibles, under which the homeowner pays a fixed percentage of any loss, says Weisbart. That’s a step away from fixed deductibles, in which the homeowner pays a certain dollar amount with the insurance company paying everything else up to the policy limit.

In Missouri, regulators are seeing some insurers move away from coverage that replaces damaged property with new property. If an old roof is blown off, they may give the owner a check for the value of an old roof, even if it costs more to replace it with a new roof.

Homeowners have to read their policy to know that they’re getting. “It’s really up to the consumer to do their own homework,” says department spokesman David Owen.

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Oil prices are climbing near $108 per barrel as optimism grows about a strengthening global economy.

A private survey of the U.S. homebuilding industry on Monday found that companies are increasingly hopeful that home sales will rise in coming months. International Monetary Fund Managing Director Christine Lagarde also said over the weekend that the global economy has “stepped back from the brink.”

The rise in oil also follows last week’s rally on Wall Street.

Benchmark U.S. crude added 56 cents to $107.62 per barrel in New York while Brent crude fell by 17 cents to $125.63 per barrel in London.

Meanwhile, retail gasoline increased more than a penny over the weekend to $3.842 per gallon.

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A top European Central Bank official says the 17 countries that use the euro will probably see a “very mild recession” this year and that higher oil prices should not have a lasting impact on inflation.

Benoit Coeure, an ECB executive board member, told Japan’s Nikkei newspaper that growth was held back by scarce bank credit and necessary government budget-cutting because of problems with debt in some eurozone countries.

He added that higher oil prices and increased value-added taxes on consumer purchases in some countries had led the bank to raise its outlook for inflation but that “insofar as they are temporary, higher energy prices should not have a lasting impact on inflation.”

Coeure said that whether inflation rose over the longer term would depend on whether higher oil prices were reflected in higher wages, creating so-called second round effects or a wage-price spiral.

He said in an interview text made public Sunday that “there are good reasons to believe that second-round effects will be limited.”

Coeure is one of six members of the ECB’s executive board, the body that runs the bank day to day at its Frankfurt headquarters. He also sits on the 23-member governing council, which decides interest rates.

Higher prices have become part of the bank’s discussion of the economy in recent days thanks to higher prices for crude and an easing of the eurozone debt crisis with a successful debt reduction and second bailout for Greece. Fears of a deeper recession and financial crisis pushed inflation concerns to the background in the last two months of last year when the bank cut interest rates.

But inflation increased in February to 2.7 percent, above the bank’s goal of just under two percent, and ECB President Mario Draghi said at his news conference last week that it was likely to remain over 2 percent for all of this year before falling payday advance. For 2013 the bank projects inflation between 0.9 and 2.3 percent.

Draghi made renewed mention of the bank’s primary mission of keeping inflation under control, as spelled out in the basic EU treaty, saying that task was “of the essence.”

That, along with expectations of a mild rather than deep recession, lead some analyst to think the ECB will not lower its benchmark rate below the current record low of 1 percent and may leave them unchanged into next year. Lower rates help growth but can worsen inflation if done at the wrong time.

The bank has helped bring a period of respite from the eurozone debt crisis with two offerings of more than euro1 trillion ($1.32 trillion) in cheap, 3-year loans to banks. The loans added around euro500 billion net in new cash to the banking system, given that some of the money was moved to the new loan offering from previous ECB loan programs.

The money has helped weaker banks repair their finances and led some of them to buy government bonds. That lowered borrowing costs for indebted governments such as Italy and Spain. High borrowing costs fed by fears of default are what drove Greece, Ireland and Portugal to seek bailout loans from other eurozone countries and the International Monetary Fund.

The eurozone economy shrank 0.3 percent in the fourth quarter, and two quarters of negative growth is one definition of recession.

The ECB’s staff projections foresee growth between minus 0.5 percent and plus 0.3 percent this year.

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