Tue, Jan 22, 2002 page21

• Argentine crisis costs spread to Europe's banks

  RIPPLE EFFECT Analysts say financial institutions and manufactures do not realize how exposed they are to problems resulting from the country's economic crisis

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  European companies have invested about US$50 billion in Argentina since 1994, accounting for more than half the foreign investment in the South American country. Now they're paying the price for that exposure.

  The international damage from Argentina's currency and debt crisis goes beyond Spain, where companies such as Telefonica SA, Repsol YPF SA and Santander Central Hispano SA face costs of more than US$3 billion from the peso's devaluation.

  Ahold NV, the Dutch retailer, set aside 100 million euros (US$88 million) earlier this month to cover rising debt costs at its Argentina unit. Shares in HSBC Holdings Plc, Europe's biggest bank, fell on concern it may write down US$1 billion in loans.

  In all, write downs and higher debt costs for European companies outside Spain may reach US$2 billion from Argentina, analysts said.

  "The impact for Spain is obviously the biggest, but there are a lot of other companies affected," said Cirus Andreu, director of asset management at Banco Sabadell in Spain, which manages 7 billion euros in European stocks and bonds. The bank has been selling shares in Renault SA, the French carmaker that is Argentina's No. 1 auto manufacturer.

  Argentina's US$141 billion debt default and devaluation forced European companies such as Ahold to set aside money for potential losses as the weaker peso reduces the value of their assets and revenue when converted to dollars or euros. European companies that operate in Argentina may also be forced to cut jobs and curb investment in South America's No. 2 economy.

  European Investment "A lot of people aren't aware of how much their companies are exposed to Argentina," said Mark Meiklejon, a fund manager at Britannic Asset Management in Edinburgh, which controls US$30 billion. "It's a surprise but it shouldn't be."

  Spanish companies have been among the biggest investors in Argentina, after investing US$24 billion since 1994, according to Argentina government figures. US companies have spent US$31 billion, followed by French companies at US$11 billion, Italy with US$5.3 billion and the UK with US$4.6 billion.

  European companies expanded in Argentina as the country sold former state-owned banks, oil companies and utilities. The investment helped Argentina post one of the highest growth rates in the world in the 1990s, expanding 8.6 percent in 1997. That began to turn around in 1999, when a devaluation in neighboring Brazil made Argentine products less competitive in foreign markets, prompted companies such as Volkswagen AG to shift production to Brazil and sent the economy into recession. The recession also made it harder for Argentina to finance its rising debt load, leading to last month's default.

  Tip of the Iceberg Losses for European companies may mount if the peso weakens further, boosting the costs of dollar debt and reducing revenue and profit when converted to euros. Many companies, such as Ahold, have made provisions based on a rate of 1.4 pesos to the dollar because that was the rate first set by the government after it abandoned a decade of peso-to-dollar parity.

  Since that rate failed to hold, the peso has been trading at 1.95 to the dollar and as low as 2.05 to the dollar at exchange houses in Buenos Aires.
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