Archive for the ‘business’ Category

Argentina defaults

Thursday, July 31st, 2014

As predicted,
Argentina Declared in Default by S&P as Talks Fail

Standard & Poor’s declared Argentina in default after the government missed a deadline for paying interest on $13 billion of restructured bonds.

A US judge had set a deadline of 04:00 GMT on Thursday for a deal.

This is the eighth time the country has defaulted:

ARGENTINA’S first bond, issued in 1824, was supposed to have a lifespan of 46 years. Less than four years later, the government defaulted. Resolving the ensuing stand-off with creditors took 29 years. Since then seven more defaults have followed, the most recent this week, when Argentina failed to make a payment on bonds issued as partial compensation to victims of the previous default, in 2001.

En la fuacata!

Ecuador and the ‘straitjacket’

Thursday, July 24th, 2014

Many of you approaching retirement age may have read multiple public relations articles touting Ecuador as A Top Retire-Overseas Choice. Among the reasons listed,

– Ecuador uses the U.S. dollar meaning no exchange-rate risk for American retirees.

If that’s a reason for your relocation, don’t get packing yet: Rafael Correa has other plans,
Ecuador Weighs Escape From Dollar ‘Straitjacket’

Congress has until the end of today to vote on President Rafael Correa’s proposal to change the South American nation’s financial laws, which would allow payments in “electronic money.” Lawmakers are debating whether to insist the central bank back the new currency with a one-to-one dollar guarantee.

As a current-account deficit drains dollars from the economy, making it harder for Correa to fund a burgeoning budget gap, a new currency could be used to meet government payments, said Jaime Carrera, a former deputy finance minister and director of the Quito-based Fiscal Policy Observatory. It could also lose its value quickly if not backed by the central bank, he said.

You may recall, seven years ago

Rafael Correa said Ecuador’s economy will remain dollarized during his four-year mandate

Of course that was before he changed the constitution to allow for his “indefinite re-election.”

Much water under the bridge and many debts later,

Correa, who calls the South American country’s use of the greenback an economic “straitjacket,” has already started paying some pension obligations in government bonds, which brokers are refusing to redeem at face value.

Additionally, Correa wants to issue electronic money without explicit public guarantees.

I can’t wait for him to turn to bitcoin.

Too bad Putin didn’t include Correa in the upcoming BRICS bank.

UPDATE:
Linked to by Babalu. Thank you!

Puerto Rico: Default

Monday, July 7th, 2014

Mary O’Grady writes, Puerto Rico’s Borrowing Bubble Pops
Moody’s measure of ‘expected default’ for Puerto Rico is higher than Argentina and Venezuela.

A Puerto Rican default should not surprise anyone. According to Carlos Colón de Armas, acting dean of the School of Business Administration at the University of Puerto Rico, for eight years from 2005 through 2012, government expenses exceeded revenues on average by approximately $1 billion annually. The dean told me by telephone that total commonwealth debt is now around $73 billion and in 2013 it was 101% of the island’s gross national product (GNP) up from 57% in June 2001. (Although gross domestic product is the most widely accepted measure of an economy’s size, it reflects the profits of large multinational corporations booked for tax purposes in Puerto Rico but not retained in the local economy. Therefore, GNP, a measure of what is produced by locals, is a more accurate tool to assess the economy.)

Unlike Luis Fortuño, the previous governor, current governor Alejandro García Padilla

increased expenses by almost $600 million in his first budget. While he is now cutting spending, the cuts are mostly from that increase, according to Mr. Colón de Armas. Some $500 million-$800 million in fat—from subsidies to special interests to funding for political parties—remains untouched in the $9.6 billion budget.

Fortuño lost by 12,000 votes since García Padilla (known as Agapito) promised the moon and the stars.

And there it goes: a certain default.

Added,

Argentina: Pay up, Cristina

Thursday, July 3rd, 2014

Argentine Consensus Emerges: Pay Off Debt
Argentines, Business Groups and Ruling-Party Lawmakers Say the Government Should Settle Its Bondholder Debt

“The solution is to reach an agreement, and an agreement obviously means paying,” Daniel Scioli, governor of Buenos Aires province and a leading figure in Mrs. Kirchner’s Peronist movement, said in a recent televised interview.

I would not be at all surprised if she decides to default.


Argentina: Cristina can’t pay up . . .

Saturday, June 21st, 2014

So she keeps looking for a settlement:
As posted earlier, the SCOTUS not only ruled that Argentina can’t make payments on its restructured debt unless it also pays the holdouts, but also that the creditors can get access to a wide number of bank records to locate financial assets overseas that they might be able to seize as compensation.

Cristina Fernandez gave a speech about “vulture funds”, and came up with this (emphasis added),
Argentina Wants to Settle With Holdout Creditors
Argentine President Cristina Kirchner said her government wants to reach a settlement with a small group of creditors suing to collect on defaulted debt, but only if U.S. courts create the right conditions for talks.

Let me translate this into plain English: Cristina’s saying that she’ll not abide by the terms of the contract upheld by the SCOTUS, but instead that she’ll agree to pay less when U.S. courts abide by Argentinian law, which is exactly what she’s been saying all along.

In her annual Flag Day speech, Mrs. Kirchner said Argentina would enter talks with the help of U.S. courts. “We only ask they create negotiating conditions that are just and in accordance with the Argentine constitution, laws and contracts we signed with 92.4% of our creditors,” Mrs. Kirchner said, referring to investors who accepted the restructured bonds.

There are fools out there who saw this as being conciliatory, and

The country’s restructured bonds jumped during Mrs. Kirchner’s speech on Friday, nearly wiping out their losses for the week.

These same fools probably bought some Ecuadorian bonds, too.

high apple pie
In the sky hopes

Inimical to Cristina’s thinking, the fact is that

Humiliating as that may be to the Argentinas of the world, no one would lend them money without contractually guaranteed recourse to a venue where the rule of law is well established.

Axel Kicillof, the economy minister,

dismissed the options of full payment or outright default as unthinkable. He said that the government would attempt to reroute its exchanged bonds from New York to Argentina, away from the reach of the United States’ courts. That would allow Argentina to continue paying the creditors it struck deals with in 2005 and 2010, without paying the holdouts.

“Transferring the bonds to local law would be very difficult at the street level,” warns Henry Weisburg at Shearman & Sterling, a law firm. First Argentina must convince a majority of holders of the exchanged bonds to agree to the swap. This task may be insurmountable given that many of the current creditors are bound by rules restricting them from holding assets under foreign jurisdiction.

Carrion trade
Even if Argentina were to succeed in persuading holders of the exchanged bonds to take the plunge, any intermediary that helped facilitate the rerouting risks being held in contempt of the New York courts. Argentina would thus need to find an intermediary that is not, and has no desire to be, subject to New York law. Lastly, Argentina would need to convince Bank of New York Mellon, its current trustee, to release information about the bondholders to its new intermediary. That could put the bank into contempt; it has already said it “will comply with any court order by which it is deemed bound.”

The Hedge Funds Aren’t Crying for Argentina, but they’d be wise to hold off the celebration until they actually get paid:

The offer to negotiate comes less than two weeks before Argentina has to make the next interest payment on its restructured bonds, which U.S. courts have said the country isn’t allowed to pay unless it also pays the holdout creditors. If Argentina misses the interest payment on June 30, the country sinks into technical default and will have another 30-day grace period to avoid an outright default.

In other LatAm debt stories, Guatemalan bonds are looking bad, too.

Sing it, guys,


Argentina: SCOTUS rules for the creditors

Monday, June 16th, 2014

Two, not one, rulings regarding the 2001 defaulted bonds, upholding U.S. contract law; As I had mentioned earlier,

This is an interesting case, not just because Argentina initially had to issue the bonds with a guarantee that they would pay them in full because the country had already defaulted, but also because it may set a precedent for any future sovereign debt or municipal debt restructurings.

High Court Sides With Holdout Creditors in Argentina Debt Case
The U.S. Supreme Court handed Argentina a pair of legal setbacks in cases stemming from its 2001 default, a major blow for the country in its lengthy battle with holdout creditors

The first,

In one highly anticipated case, the justices rejected Argentina’s request that the high court intervene in litigation with holdout hedge funds that had refused to accept the country’s debt-restructuring offers.

The Supreme Court, without comment, left in place a lower-court ruling that said Argentina can’t make payments on its restructured debt unless it also pays the holdouts.

And then there’s the disclosure case,

In a second related case, the high court ruled that bank records about Argentina’s international assets can be made available to one holdout creditor seeking to collect on court judgments stemming from the default.

To add to the double whammy, the decision was 7 to 1; Lyle Denniston of SCOTUS blog explains,

Besides refusing to hear Argentina’s plea that U.S. courts had no authority to command how it, as a sovereign nation, deals with holders of its external debt, the Court silently turned aside a plea by Argentina to get an interpretation by New York state courts of just what legal obligations of equal treatment Argentina has undertaken in selling the now-defaulted bonds.

In contrast to the simple denial of those issues, the Court issued a full-dress opinion on the separate question of how wide an opportunity the holders of defaulted bonds would have to gather information from two banks about the location of Argentina’s financial assets overseas.

In an opinion by Justice Antonin Scalia, the Court rejected Argentina’s argument that those bondholders could only seek information about assets that that country keeps in the United States. Argentina had relied upon a 1976 U.S. law seeking to insulate foreign governments from some legal obligations in U.S. courts.

For one thing, Justice Scalia noted, Argentina had given up its immunity to demands for information about its assets that could be used to cover its obligations on debts. But, in addition, Scalia wrote, the 1976 law on foreign immunity simply says nothing at all about giving foreign governments immunity to demands that they produce information that may be necessary to satisfy a debt obligation they had undertaken.

This means the investors can get access to a wide number of bank records to locate financial assets overseas that they might be able to seize as compensation.

Argentina had sent a delegation to meet with Nancy Pelosi last week to discuss the debt,

Hours earlier, the Argentine delegation had lunch with former US solicitor-general Paul Clement — a legal adviser for the Argentine position against the hedge funds that have refused to restructure the country’s defaulted debt — and representatives from the Cleary, Gottlieb, Steen & Hamilton law firm.

Justice Sotomayor had recused herself.

You can read the decision in full here.

Related headlines:
Argentina debt crisis fears grow after US supreme court ruling
Share prices fall 6% as US court refuses appeal against decision in favour of creditors who bought up debt worth $1.3bn

Argentina’s bond drama: pathway to peace or a new Falklands?

Argentina Loses US Supreme Court Appeal In Key Hedge Fund Case, Now In Its 12th Year

Cristina Fernández will address the nation on television at 9 pm local time tonight.


Brazil: Who made out from the #WorldCup money?

Tuesday, June 10th, 2014

The 2014 World Cup

is the most valuable, lucrative and expensive in FIFA history.

Record numbers include a $35 million prize to the winning team’s federation, $4 billion commercial revenue for FIFA and a $14 billion bill for Brazil.

And

As street protesters in Brazil know, FIFA’s revenue is untaxed there. World Cup sponsors and media also receive exemptions for their operations as a condition of Brazil’s hosting bid in 2007.

FIFA, however, has spent significantly in Brazil.

FIFA already gave $221.6 million to the embattled organizing committee, and more should follow in last-minute wrangling over paying for essential services.

Odebrecht’s certainly making out like gangbusters:
Brazilian Builder Odebrecht Emerges as World Cup Winner

Odebrecht is helping erect or expand four World Cup stadiums, financed with 1.5 billion reais ($447 million) in subsidized loans from Brazil’s state development bank. The company is one of the biggest contributors to Rousseff’s worker’s party, a relationship not lost on people critical of the World Cup’s cost to taxpayers.

Hmmm . . . Brazil, Inc.,

“Brazil has a lot of state-owned companies and big private firms with strong ties to governments in what I like to call Brazil Inc.,” said Peter Lannigan, managing director at broker-dealer CRT Capital Group LLC. . . .
Campaign donations from five Odebrecht units grew to 37.9 million reais in 2012, from 8.1 million in 2002, according to the electoral tribunal. Odebrecht’s building unit gave 6 million reais to the worker’s party in 2013, as incumbent Rousseff, a former guerrilla who was tortured by the military regime, seeks re-election. Units of World Cup stadium builders OAS SA, Queiroz Galvao SA and UTC Enghenaria SA also ranked among the top 10 contributors

Meanwhile,Stadium hosting World Cup opener between Brazil and Croatia would NOT pass UK safety test
Arena de Sao Paulo will host Brazil vs Croatia World Cup opener without a test taking place that would meet UK legislation
Junior game was held in the stadium but 20,000 were left empty
The Sao Paulo stadium has a capacity of 61,000
FIFA state the arena has passed four different tests at various stages
Two people were killed by a crane during the construction of the arena

Related: The Billion-Dollar Business Of The World Cup


Ecuador: The bond and pony show

Tuesday, June 10th, 2014

The Economist looks at this week’s roadshow to peddle new Ecuadorian sovereign bonds in London, Boston, Los Angeles and New York, and opens with the old saying, Fool me once, shame on you; fool me twice, shame on me.

Ecuador and the capital markets
Fool me once

Caveats remain. The state of the public finances warrants scrutiny. The non-financial public-sector deficit is widening. In April Mr Correa said Ecuador needed to obtain $9.5 billion, or close to 10% of GDP, in credit this year, compared with the $7.6 billion approved by Congress only a few months earlier. A recent $400m loan from Goldman Sachs that was secured by more than half of Ecuador’s gold reserves raised eyebrows. Such issues will doubtless crop up during the roadshow.

The Economist thinks invesors will “swallow their objections”; maybe, maybe not (emphasis added),

Not all investors are rushing to take part in an Ecuador deal.”Ecuador’s past record of defaults makes us very wary, and I don’t think taking part in the deal would be high on our radar,” said Colm McDonagh, head of emerging-market fixed-income at money manager Insight Investment in London, which manages £295 billion ($496 billion) of assets.

“There is a price for different types of risk, and there will always be demand for a deal such as this. But as far as we are concerned, Ecuador’s track record of honoring its debt obligations makes it hard for us to determine the appropriate yield level where we would be comfortable holding those bonds,” he said.

In plain english, that means, you can’t pay me enough to buy the stuff.

Here’s why:

  • The country defaulted on its debt in 1999
  • Ecuador defaulted again in 2008
  • In 2009, it bought back about 93% of the $3.2 billion in defaulted debt at 35 cents on the dollar

    That left an estimated $95.37 million of defaulted bonds that would have matured in 2012, with $194.4 million falling due in 2030.

  • And then there’s another$650 million of bonds due in 2015. Is the new debt issue going towards servicing those?

The other day I had 2 words of advice: Stay Away. I stand by those words.

In other news, Ecuador’ buying three more Airbus C295 military transport planes.

Venezuela: Where there’s rationing, there’s smuggling

Monday, June 9th, 2014

Toilet paper is in short supply in Venezuela, where each roll was recently selling for more than $6 at the official exchange rate in San Antonio.

The WSJ reports on two contrasting economies, free-market Colombia, and command-economy Venezuela:
Venezuela Pays Price for Smuggling
President Loses Popularity Amid Protests as Cheap Goods Move Across Border to Colombian Consumers

Stifled by inefficient state-owned factories and price controls, domestic production in Venezuela has plummeted. Moreover, the massive weakening of Venezuela’s currency makes its goods cheaper in Colombia. These factors lead to frequent shortages that make life especially trying for Venezuelans along the border, where smugglers leave little behind on store shelves.

Read the whole thing, and don’t miss the money quote, “Looking around here, you can tell why socialism doesn’t work.”

Ecuador: Something’s rotten in the gold swap

Friday, June 6th, 2014

Following up on the Ecuadorian gold story, it turns out it’s not quite a sale, it’s a swap:

On Tuesday, Ecuador announced that it had swapped 1,165 bars of gold with Goldman. The gold is worth nearly $600 million, based on current prices. Goldman GS 1.76% , in return, is giving the Ecuadorians “instruments of high security and liquidity,” which is likely cash or something close to it.

And Ecuador gets to keep its gold. As part of the deal, three years from now, the two will reverse the swap. Ecuador gets its gold back. And Goldman gets the going price for 1,165 yellow bars in 2017.

Stephen Gandel looks at the deal

. . . there are a few ways Ecuador could end up making $20 million on the deal. Ecuador could be betting that the price of gold will fall 20% over the next three years. Another way would be for Ecuador to take the cash it gets from the swap and invest it elsewhere in something that will make 20% over the next three years, not an easy task given that the average bond is yielding just 1.8%.

Or Ecuador could have done another swap, this time with the dollars it received from Goldman for Ecuadorian bonds. It would, of course, have to pay Goldman another fee for that. But that swap would pay the spread between U.S. three-year interest rates at about 0.85%, and Ecuadorian interest rates, which are around 7% or 8%, or a little over 20% during the three years.

So, then, why isn’t everyone doing Ecuadorian swaps? I mean, it’s guaranteed money. For one, the fee that Goldman or anyone else charges to do these deals must be pretty high. Also, if Ecuador defaults, you lose all your money, and you still have to repay the swap.

And Ecuador has recently defaulted, sort of. Five years ago, Ecuador tricked its lenders into thinking it was going to default on its debt. It told banks and investors that it didn’t think it would be able to repay about $3 billion in bonds. Those bonds, as you would expect, plunged in value to about $0.30 for every dollar Ecuador had borrowed.

Once the bonds plunged in value, Ecuador started buying them, eventually snapping up 90% of the much cheaper bonds. The move wiped out the debt and saved the country nearly $2 billion, which was also how much the banks and investors lost on those bonds.

Two words of advice: STAY AWAY.