- Associated Press - Sunday, April 22, 2012

MADRID — Argentina’s hostile takeover of its top energy company from Spain’s Repsol marks a turning point in traditionally cordial relations between two countries that have built strong ties over a century.

As the spat escalates, some fear the damage may be lasting.

Argentine President Cristina Fernandez has defended the move to renationalization of YPF as part of a drive to restore her country’s sovereignty, increase oil production and rely less on hydrocarbon imports.

Repsol and Spain deride it as outright “pillaging” and an attack on their interests.

In both countries, the citizenry is behind the respective governments.

In Spain, for instance, 90 percent of people polled condemned the expropriation of YPF, the Argentine unit of Repsol, according to a survey released Wednesday by the Elcano Royal Institute, a Madrid think tank. Repsol acquired a majority stake in YPF in 1999.

With Argentina seemingly unwilling to backtrack on the announcement despite protests from Spain, the European Union and elsewhere, Spain made clear it is preparing to hit back hard with support from its European partners.

Spanish Industry Minister Jose Manuel Soria said the reprisal will be diplomatic and commercial in nature.

Economic crisis

The U.S. State Department has said the YPF expropriation could have a negative effect for Argentina’s economy and investment in that country.

The question is how far the two countries will bring the spat.

“I think that there will be a ‘before’ and ‘after’ in Spanish-Argentina relations because of the expropriation of YPF,” said Carlos Malamud, Elcano’s chief researcher on Latin America. “This might continue to escalate if the outbursts and tough messages in both directions continue.”

In economic terms, Spain has more to lose, mainly because many Spanish companies operate in Argentina - from banks such as Banco Santander S.A. to Banco Bilbao Vizcaya Argentaria S.A. and Telefonica S.A.’s mobile-phone unit Movistar.

Many arrived in 2001, when an economic and banking crisis in Argentina coincided with a period of peak expansion in the Spanish economy.

But a decade later, it is Spain that is enduring its worst economic crisis in 30 years. And Spanish companies have failed to achieve a good image in Argentina in particular and Latin America in general, studies show.

Repsol’s shares continued to tumble Thursday, shedding 4.8 percent to close at $19.2 on Spain’s Ibex 35 index. They fell 6 percent on Tuesday - the first day of trading after the Argentine announcement - and dropped a further 6.2 percent on Wednesday.

To add to the company’s woes, the rating agency Standard & Poor’s downgraded its long-term corporate credit score for the company to BBB- - one notch above junk - with a warning that it could lower that score in the future.

Spain is the top foreign investor in Argentina, ahead of the United States. Spanish direct investment in Argentina totaled $23 billion in 2010. That was 26.3 percent of the total invested in that country, compared with 16.8 percent for the United States, according to the Argentine central bank.

Argentine investment in Spain totals just $60 million.

The trade balance also favors Argentina and has not stopped growing since Ms. Fernandez became president in 2007.

In 2011, the worst year yet in Spain’s economic crisis, Spanish imports from Argentina totaled $2.7 billion. This was practically double the amount of Spanish exports to Argentina - $1.31 billion, according to figures from the Spanish Economy Ministry.

However, Spanish imports from Argentina - mainly foodstuffs and chemicals - account for just 0.8 percent of its total imports. So the Spanish government could have room to maneuver in response to possible sanctions from Argentina without Spain’s overall trade balance being effected.

Ties that bind

Also, Spain belongs to the 27-member European Union, which could freeze trade accords with Mercosur, the trade bloc that is made up of Argentina, Uruguay, Brazil and Paraguay.

It is taken for granted that Spain will air its complaints in all international forums, including the Group of 20 industrial powers. Its summit in Mexico in June could bring Ms. Fernandez and Spanish Prime Minister Mariano Rajoy together face to face for the first time.

“If Argentina’s message is that it will continue to do what it feels is right to defend its interests but in a unilateral way, agreement will be difficult even in the event [the two leaders] can meet face to face,” Mr. Malamud said.

Besides economic relations, there is another, less tangible link between the two countries - a form of international “brotherhood” and solidarity that Spanish Foreign Minister Jose Manuel Garcia-Margallo said was broken by the YPF expropriation announcement.

The countries have enjoyed warm relations since Argentina gained independence from Spain in 1810. There are strong cultural links as well as family ties, from both the colonial period and modern times.

In the worst stretches after the Spanish Civil War of 1936-39, tens of thousands of Spaniards chose Argentina as a place to emigrate and start a new life.

Decades later, military dictatorship in Argentina and then the crisis known as the “corralito” - when people could not withdraw their money from banks in 2001 - saw thousands of Argentines come to Spain.

“This is a relationship forged over the course of a century. These are intensive ties with very intensive migratory movements also,” Mr. Malamud said.

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