Argentina’s ambitious economic reform program is well underway. The government is finally balancing its books (i.e. not spending more than it earns) while the economy is set for a healthy recovery. The IMF projects GDP to grow by 5.5% this year and 4.5% in 2026. Average inflation is expected to drop to about 36% in 2025 and 14.5% in 2026 (IMF). And an USD 20 billion deal with the IMF was agreed. But hurdles remain. Most significantly, FDI flows are still rather modest (despite the introduction of RIGI, a comprehensive investment promotion scheme), the peso is still overvalued in real exchange rate terms and the country’s FX reserves have not yet been rebuilt. Javier Milei and his government have high hopes to monetize the country’s natural resources, specifically its massive shale oil & gas reserves, to instill growth and create jobs. In April, YPF, the largest energy company operating in Argentina, announced capex plans in excess of USD 35 billion over the next 5 years to expand oil & gas production in the Vaca Muerta (“Dead Cow”) shale formation to 2 million boepd by 2030, more than double last year’s production. Energy exports are expected to reach USD 40 billion in 2030, supported by investments in LNG infrastructure (including 2 FLNG vessels).

However, this being Argentina, nothing is that simple. On June 30th, a US judge of the Southern District of New York, Loretta Preska, ordered the Argentinian government to transfer its controlling stake in YPF, in which the government holds a 51% interest, to creditors. The order follows a September 2023 ruling that requires Argentina to pay US$16bn (3.2% of GDP) in compensation for the nationalization of YPF. The ruling is a setback for Mr. Milei as the country’s access to international capital markets, both for the sovereign and YPF, may be jeopardized until a solution is found.

Cash cow…

Historically, YPF operated as a state company with the whole Argentine oil & gas industry effectively controlled by the government. This changed when Carlos Menem became president in 1989. He enacted an economic restructuring, which comprised privatization of state-owned assets, including YPF. In 1993, the government sold 45% in a global offering and transferred 11% to provinces and swapped 13% to holders of pension bonds and other claims. By the end of 1993, after some more transactions the government held a stake in YPF of 20%. In 1999 and 2000, Repsol acquired 99% of YPF in multiple offerings. Timing was somewhat unfortunate as Argentina defaulted on its external debt in December 2001 (which was a foretold event given undisciplined fiscal policies and a fixed exchange rate). 

In early 2002, Néstor Kirchner, like Menem a member of the Peronist party but from the leftist wing, became president. In 2007, he contrived a deal with Enrique Eskenazi, a businessman who had acquired provincial banks under Kirchner’s direction (including Banco de Santa Cruz), in which Eskenazi’s Grupo Petersen (via two companies incorporated in Spain) would buy a 15% stake in YPF from Repsol (consummated in February 2008) with an option to buy another 10% (exercised in May 2011). Eskenazi invested little of his own money and instead borrowed from Repsol and a group of international banks (the total value of the 25% stake was slightly more than USD 3.5 billion). YPF increased its dividend pay-out ratio to 90% of profits to enable Eskenazi to service his debt. The logic of this deal (for Repsol, that is) can only be guessed at. During 2010-2011 Repsol sold about 17.1% in the open market (NYSE) and reduced its stake to 57.4%.

In May 2012, Argentine Congress passed a law to expropriate 51% of Repsol’s stake in YPF (at that time, Repsol owned 57.4% of YPF, Grupo Petersen 25.5% and the remaining 17.1% was publicly listed). The law cited lofty goals but the real reason was that the government (after Néstor’s death led by his wife, Cristina Fernández de Kirchner or CFK) as a result of years of economic mismanagement had run out of money and wanted to get its hands on YPF cash flows (and usefully stuff its board with cronies). According to the Argentine government no compensation for the shares was due “as Repsol had already earned more than enough during the years it owned YPF”. Repsol obviously objected but settled anyway, in February 2014, by accepting USD 5 billion in sovereign bonds (about half of what they initially demanded). The dividend policy was scrapped, jeopardizing Grupo Petersen’s loan pay-back mechanism.

According to the bylaws of YPF at the time of expropriation in 2012, due to the change in control from Repsol to the Republic of Argentina other shareholders should have been permitted to offer their shares, presumably at the price as determined by the pricing formula in the bylaws. But the Argentine government ignored the clause, calling (by mouth of Axel Kicillof, then vice minister of economy in the Peronist administration of CFK and now governor of the province of Buenos Aires) minority investors idiots if they believed that the government would be stupid enough to extend the offer to all.

Following the expropriation, Grupo Petersen (through its 2 subsidiaries) delivered the shares to the banks as guarantee under the loan and both subsidiaries filed for bankruptcy. The trustee in the bankruptcy argued that the Argentine state should have made an offer for 100%. The litigation rights were bought by Burford Capital, a specialist litigation firm which already won a trial against Argentina for the expropriation of Aerolíneas Argentinas, for EUR 15 million (as well as 30% of court proceeds). Burford presented its lawsuit in April 2015 in New York courts. Eton Park, a hedge fund which had acquired YPF shares in the public market, joined the lawsuit (due to poor investment results, Eton Park dissolved the fund in 2019). Burford and Eton Park won their case (awarding USD 14.4 billion to Burford and USD 1.7 billion to Eton Park), but the court order will be difficult to implement as Argentina’s government by law will require authorization by two-thirds of Congress to transfer the expropriated shares (as YPF was left out as defendant by judge Preska, the amount should be paid by the sovereign). This is unlikely to be forthcoming.

The government is likely to appeal and has Donald Trump (“Drill Baby Drill”) on its side. It is also likely that the amount awarded will be adjusted downwards (one possibility is to argue that the current exchange rate should be used instead of the one prevalent in 2012, another is to point out that the losses of Grupo Petersen were actually mostly incurred by Repsol and the international lenders due to the share delivery under the collateral agreement). Argentina’s prosecution has also finally woken up to question the rationale of the Eskenazi deal, which reeks of fraud and corruption (Néstor Kirchner rewarded Eskenazi’s bail-out of Banco de Santa Cruz, costing USD 10 million, by awarding public construction contracts, probably including kick-back provisions).

Clearly, a speedy and cheaper resolution would help the government to resume its free-market growth and reform agenda. By the end of October, mid-term elections will be held, which hopefully will strengthen Milei’s powerbase in Congress (a third of seats in the Senate and half in the Lower House are at play). His chances in Buenos Aires province (which hold elections on September 7th) have substantially improved as Axel Kicillof, the current governor and culprit of this mess, is likely to pay a political price for his botched handling of YPF’s partial renationalization in 2012. The judgment by U.S. courts on compensation of YPF shareholders is clearly a set-back, costing up to 2.3% of GDP, unwelcome but not materially changing the positive investment case for Argentina. The to-do list remains challenging though, but if anybody can bring this about it is Mr. Milei and his competent team. Hopefully Argentine voters remember this at the ballot box in October and don’t wait until the cow comes home before empowering Milei to complete the country’s restructuring…