Another bone-headed decision by the Argentine government

On April 23, Standard & Poor's Ratings Services revised its outlook on the Republic of Argentina from "stable" to "negative." The revision stems from policies the country enacted since the October 2011 presidential election that the agency believes could undermine the country's economy and weaken its medium-term growth prospects. These policies include both new restrictions on international trade imposed by the government as well as its decision to re-nationalize Yacimientos Petroliferos Fiscale (YPF), the largest domestic oil and gas company.

The political meddling in private business matters in Argentina continues to befuddle rational people everywhere. First the government in Buenos Aires imposed taxes, regulations, and price controls that crippled YPF and hindered the company's ability to operate efficiently. Then it decided to nationalize the energy company when it underperformed.

Argentine President Cristina Fernández de Kirchner, an ally of Venezuela's Hugo Chavez, announced April 16 that her government was taking control of YPF, formerly a state-controlled company that was privatized a number of years ago and then acquired by Repsol. In her announcement, Fernández accused the Spanish oil company of pursuing a "policy of pillage" and said YPF had become "unviable" due to its business practices.

Few outside the Argentine government can see how Repsol's policies could possibly be more damaging than those of the state. In fact, Repsol had been trying to sell a controlling stake in YPF to a Chinese energy group before it was nationalized, according to several news sources.

Supposedly, Repsol had been shopping the Argentine company around and found a potential buyer in Sinopec, which was in negotiations with Repsol to acquire a 57% stake in YPF, although any deal would have required approval by the Fernández government. Repsol was asking $10 billion for its stake in the company.

Around the world, the prevailing sentiment was anger over Argentina's decision. Spanish Prime Minister Mariano Rajoy expressed his outrage and said there was no legitimate economic reason for the move. Felipe Calderón, Mexico's president, said, "No one in their right mind is going to invest in a country that expropriates investments."

In Madrid, the Spanish government summoned the Argentine ambassador and demanded an explanation for the seizure.

Meanwhile, just days after the nationalization announcement, the Argentine government said it is looking to lure major international oil companies to invest approximately US$10 billion in the country's energy sector, including YPF. Fernández said she was not offering shares in the company, but she hinted at alliances for specific projects or the creation of a joint venture opportunity. She appeared to be reaching out specifically to two Chinese companies, Sinopec and CNOOC, according to media sources.

Argentina's leaders seem hell-bent on self-destruction. All this reeks of a deteriorating political situation at home for the ruling party. In the 1980s, the generals that ran the country fomented a war with the United Kingdom over the Falkland Islands, which Argentina refers to as the Malvinas. That transparent attempt to divert public attention from troubles at home cost several thousand lives as Britain sent its navy and troops to retake the islands, which it has held since the early 1800s.

More recently, Argentina has again been stirring up trouble with renewed claims on the Falklands after preliminary exploration has revealed what may be major oil and gas fields in the waters north, east, and south of the islands. If you conclude that this is mainly about money and domestic politics, you would probably be right.

There is no reason to expect that the government will run YPF efficiently. Other Argentine companies, including utilities, have been privatized and then re-nationalized since the 1990s. The government-run companies have been accumulating colossal losses. Last year the state subsidy for them was 80% larger than the amount spent on child welfare.

What Argentina really needs are significant economic reforms in which the private sector is allowed to thrive or fail on its own accord without fear of government interference.

A US Department of Energy report shows Argentina holds more natural gas trapped in shale rock than all of Europe does - a 774-trillion-cubic-feet bounty that has the potential for transforming the country economically. Now, the only way the government is going to acquire funding to develop the reserves is with a government-to-government loan from a "friendly" country. No private source will be foolish enough to throw money down that rabbit hole.