Global Investing

Three snapshots for Tuesday

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Argentina’s debt insurance costs rose after the country moved to seize control of leading energy company YPF on Monday,  Madrid called the move on YPF, controlled by Spanish company Repsol, a hostile decision and vowed “clear and strong” measures, while the EU’s executive European Commission warned that an expropriation would send a very negative signal to investors. Of the countries in the MSCI Frontier equities universe Argentinian equities are the worst performer this year.

German analyst and investor sentiment rose unexpectedly in April. The Mannheim-based ZEW economic think tank’s monthly poll of economic sentiment rose to 23.4 from 22.3 in March, beating a consensus forecast in a Reuters poll of analysts for a fall to 20.0.

India’s first interest rate cut in three years may be its last for a while. The central bank cut rates on Tuesday by an unexpectedly sharp 50 basis points to boost the sagging economy, but warned there was limited scope for more cuts, with inflation likely to remain elevated and growth on track to pick up, albeit modestly.

A Hungarian default?

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More on Hungary. It’s not hard to find a Hungary bear but few are more bearish than William Jackson at Capital Economics.

Jackson argues in a note today that Hungary will ultimately opt to default on its  debt mountain as it has effectively exhausted all other mechanisms. Its economy has little prospect of  strong growth and most of its debt is in foreign currencies so cannot be inflated away. Austerity is the other way out but Hungary’s population has been reeling from spending cuts since 2007, he says, and is unlikely to put up with more.

How did other highly indebted countries cope? (lets leave out Greece for now). Jackson takes the example of  Indonesia and Thailand. Both countries opted for strict austerity after the 1997 Asian crisis and resolved the debt problem by running large current account surpluses. This worked because the Asian crisis was followed by a period of buoyant world growth, allowing these countries to boost exports. But Hungary’s key export markets are in the euro zone and are unlikely to recover anytime soon.

The other example  is Argentina.  It too recovered strongly from its 2001 crisis but its way out was default.  Capital Economics writes:

There are arguments for why, in Hungary’s case, default might appear to be an attractive option. The economy runs both a current account surplus and a primary surplus (i.e. government spending is lower than receipts before interest payments are taken into account). This means that if the Hungarian government were to default and were to be barred from borrowing from abroad, it would still not be forced into drastic fiscal austerity or a painful current account adjustment via reduced domestic demand.

Moreover, the note says:

COMMENT

Sujata Rao, let me explain why this isn’t going to happen, a default that is. It would tarnish the PMs otherwise flawless reputation and image.

He rather resort to unorthodox financial strategies that slowly makes the people that can, move out of the country, and the rest will suffer the consequences of these strategies.

Posted by Devero | Report as abusive

from MacroScope:

Vultures swoop on Argentina

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Holdouts against a settlement of Argentina’s defaulted debt are opening a new front in their campaign for a juicy payout more than a decade after the biggest sovereign default on record.

Lobbyists for some of the investors who hold about $6 billion in Argentine debt are in London to persuade Britain to follow the lead of the United States, which last September decided to vote against new Inter American Development Bank and World Bank loans for Buenos Aires.

Washington believes Argentina, a member of the Group of 20, is not meeting its international obligations on a number of fronts. Apart from the dispute with private bond holders, Argentina has yet to agree with the Paris Club of official creditors on a rescheduling of about $9 billion of debt. It has refused to let the International Monetary Fund conduct a routine health check of the economy. And it has failed to comply with the judgments of a World Bank arbitration panel.

In short, Argentina is not playing by the rules of the international game, says Rob Shapiro, a former U.S. under secretary of commerce, who is now co-chair of the Argentina Task Force America.

According to its website,  the group’s aim is to “vigorously pursue” a “just and fair” reconciliation of the Argentine government’s default in December 2001 on some $95 billion of debt.

Its members and supporters include the delightfully named Montana Women Involved in Farm Economics (WIFE). Another is New York hedge fund Elliott Associates, which has bought distressed debt issued by a number of developing countries and sued them for repayment.

In 2000 Peru paid Elliott $56 million to settle a four-year fight after the hedge fund refused to accept the restructuring terms on offer.

from Scott Barber:

Breaking point? Greece vs. Argentina

As the crisis in Greece continues, the comparisons with Argentina’s chaotic bankruptcy a decade ago start to look more justified. In Argentina, a bank deposit freeze was the tipping point, triggering mass violent protests. People took to the streets banging pots and pans to protest against an economic collapse that plunged millions into poverty. The government declared a stage of siege and presidents resigned one after another. Greek unemployment and industrial production numbers out yesterday were dreadful but how to they compare to Argentina in late 2001?

The table and charts below show some key economic series in Argentina in the run up to 2002 and after. Argentinean real GDP fell nearly 20% from its peak in 1998 to 2002 -that compares with around a 12% fall so far in Greece. The unemployment rate in Argentina reached a peak of 24% not far above the 21% Greece reported yesterday. On other metrics Greece looks much worse; the IMF puts public debt at 50.8% of GDP in Argentina compared to an expected 166% in Greece this year.

The IMF published its Lessons of the crisis in Argentina in 2003 (approved by Tim Geithner no less). Looking at the conclusions, the IMF faced many problems now becoming familiar in Greece as this passage shows:

“When the economy slid into recession, the Fund faced a somewhat different and more serious dilemma. In terms of policy advice, fiscal easing in support of growth was not a viable option given the exploding debt dynamics, while tightening would exacerbate the downturn. In hindsight, the most viable option would appear to have been an early debt restructuring involving a significant present value reduction, combined with the abandonment of the currency board. However, the authorities were unwilling even to consider the possibility of an exit: neither the government nor the public were prepared to take such a drastic course until it was forced upon them by events.”

Looking at the data post default Argentina started to recover fairly quickly, however the comparison here looks weaker. Argentina devalued into strong global economic upswing that started in 2003, and had the benefit of being a commodity exporter. While you could argue a swift resolution to the Greek crisis might be the catalyst for a similar rebound, this seems unlikely given the number of other countries with similar (if not as extreme) debt problems.

from Davos Notebook:

Will Goldman’s new BRICwork stand up?

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Jim O'Neill, the Goldman Sachs economist who coined the term BRICs back in 2001, is adding four new countries to the elite club of emerging market economies. But does his new edifice have the same solid foundations?

In future, the BRIC economies of Brazil, Russia, China and India will be merged with those of Mexico, Indonesia, Turkey and South Korea under the banner “growth markets,” O'Neill told the Financial Times.

Hmmm.  Doesn't quite grab you like BRICs, does it? The Guardian helpfully offers an amended branding banner of  "Bric 'n Mitsk" (geddit?). But which ever way you cut it, it's hard to see a flood of investment conferences and funds floating off under the new moniker.

Ten years ago, Goldman had this field to itself. Now more and more acronyms are being bandied around by  banks  seeking to pique investors' appetite for higher returns.

Goldman has already launched the N-11, or Next Eleven countries, and other contenders include the VISTA economies (Vietnam, Indonesia, South Africa, Turkey and Argentina), the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) and the EAGLES (Emerging and Growth-Leading Economies).

So far, none of them have really caught on. One thing you can bank on: the term BRIC will still score highly in any tally of the millions of words that will issue forth from Davos next week.

from MacroScope:

Argentina set for wheat windfall

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Not everyone is upset about the 50 percent surge in wheat prices over the past month.

Wheat's rise to 2-year highs was caused first by heavy rains in Canada and now by a Russian export ban that was triggered by its worst drought in decades. There are floods in Pakistan, another major wheat grower. But while the wheat market shenanigans are triggering much hand-wringing across developing nations, Argentina, one of the world's top seven wheat exporters, may be set for a windfall.

Farmers there are increasing wheat plantings, the Buenos Aires Grains Exchange says. The South American country is expected to export around 8 million tonnes of wheat in the 2010-2011 year. With wheat futures on the Chicago Board of Trade at around $8 a bushel, a very simple calculation shows export revenues are going to very significant.

Investors are taking note.

RBC analysts are advising their clients to buy the Argentine peso against the dollar. The peso is trading at 3.933 at present but currency forwards markets are pricing in a 2.1 percent fall in the peso's value over the next three months. RBC reckons they could be wrong and sees "very strong grain commodity prices supporting higher FX export inflows."  That it hopes, will keep the peso stable to the dollar. Buying the peso now would mean a 2.1 percent gain over 3 months or almost 9 percent in annual terms.

Nick Chamie, strategist at RBC, now expects Argentina's economy to grow 6.5 percent this year -- more than the 5 percent he originally predicted. He points out the stronger wheat price has had a knock-on effect on other grains -- prices for soy and corn, of which Argentina is a top exporter, are up 11-13 percent over past month.

Arentina has a bad reputation with investors -- it defaulted on $100 billion in debt in 2002, a record for any sovereign. It only recently finished restructuring defaulted debt and is hoping to come back to bond markets soon. The grain price bonanza could make its job easier. Strong grain export revenues have already boosted central bank coffers to a record $51 billion.

from MacroScope:

G20 dilemmas amongst the golf balls

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Interesting dilemmas facing G20 countries as their finance ministers and central bankers get together on the golf ball strewn Scottish coast ( a meeting in St Andrews we will be Live Blogging on MacroScope, by the way).

First, you have the Brazilians who are worried about hot money and have already slapped a tax on foreign investments in domestic bonds and stocks in order to cool down capital inflows.  They want the G20 to take action against what their central bank chief calls "imbalance- and bubble-building".

Next you have the Americans and other big economies who know that the huge amounts of stimulus they have put into the world economy have to be removed eventually. They are not ready to do it yet, but expect the G20 countries to discuss how they are going to "sequence" the great unwinding.

And then there is Argentina, which is not alone in noticing that talk of unwinding tends to put investors on edge.  Its central bank governor wants the big countries to be careful, fearing a rapid reversal of stimulus policies could mean big outflows in emerging market countries such as, er, Argentina.

So a tricky balance, a super-sensitive investor audience, and plenty of domestic politics. Fore!

But what does Argentina’s presidential couple think?

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Markets are waiting for Argentine President Cristina Fernandez and her husband and predecessor ex-President Nestor Kirchner to show they support plans for Argentina to return to international credit markets after a long absence.  Fernandez and Kirchner are known as the presidential couple and no major Argentine policy move can go forward without their stamp of approval.  Decision making is seen as almost entirely concentrated in them.

So, no matter how much new Economy Minister Amado Boudou talks about his plans to resolve Argentina’s different debt problems and issue a new global bond, eyes are on the presidential couple.  Boudou says he wants to move forward on various fronts. First, he wants to reopen a massive 2005 restructuring to attract holders of some $20 billion in defaulted sovereigns to neutralize their lawsuits — but this means sending a bill to Congress, something the president would probably announce. Secondly, he wants to normalize rlations with the International Monetary Fund, which were derailed a few years ago.  Lastly, he wants to restructure some $6.7 in defaulted debt to wealthy creditor nations in the Paris Club. 

Argentine bonds have rallied strongly on expectations that Boudou will make progress on these fronts, but the rally could fizzle without prompt concrete steps.

Why has the president been silent for three months while Boudou repeats over and over his intention to return to the markets?  One theory is that the Kirchners’ top priority for the moment is getting through Congress their pet project, a broadcast reform bill that could break up some of the countries big media conglomerates.  Some bankers and investors expect that once the Senate votes on the bill, this week or next, the Kirchners will turn their attention to the debt situation.

The Kirchners could also be holding back waiting for the right timing on the markets. With debt prices in many emerging market economies rallying, they could perhaps get a lower interest rate on a new global bond if they wait a while longer. Or perhaps they are still refining the political message that goes along with a return to the capital markets. The Kirchners have been vocal critics of Wall Street and they don’t want to be seen by their supporters as playing by the rules of the investment community.

COMMENT

The most difficult credibility pirouette the Kirchners have to make is to convince the international credit markets that (a) they are going to respect the legal integrity of any investment or loan – a tall order indeed – and (b) that credit markets graciously accept the much sexied economic official statistics without muttering a single word on them (except praise) – another tall order indeed!

Posted by Hector Ginzo | Report as abusive

Not quite 99 emerging market beers on the wall

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Should emerging market investors set aside their spreadsheets and crack open a cold one?

Their markets have zoomed higher from the March lows, with MSCI’s emerging markets stock index up 81 percent. Are they heading for a fall? Will investors soon be crying in their beer? And if so what kind?

Broker Auerbach Grayson held a rooftop fete this week showcasing emerging market versus developed market beers, with nary a Yankee brew in sight.

With the adventurous spirit and dedicated work ethic that can be found in all experienced emerging markets correspondents, I set in sampling the emerging brews first. No sip, swish and spit here, so the descriptions may get a bit more fuzzy as you read through the list.

It started with Argentina’s Barba Roja Aged Red Ale, the strongest of the evening at 9 percent alcohol. Not the one to slake your thirst on a hot August night, but it certainly can make your head spin faster than you can say “devaluation.” The smell is powerful, picking up deep scents of caramel. The taste is sweet as most extra-strong brews tend to be, but the finish is mild on the back of the palate. If only the Argentine government and its debt holdouts could settle up as gracefully.

Next up was another dark beer, this time from Brazil. The Xingu Black Beer from the Cervejaria Sul Brasileira is based on the traditional black beers made by indigenous populations in the Amazon. It is rich and sweet, with an overwhelming chocolate flavor that gets diluted by some bitterness from the hops after it sits on the tongue. It’s akin to drinking liquid bread, no butter necessary. Much like Brazil’s economy (and its president, left), this beer is complex, with a myriad of flavors hitting you all at once.

Financial crisis helps Berlin take root for fashionistas

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Berlin is slowly but surely establishing itself as one of the top global catwalks for the bold and the beautiful of the world of high fashion – and the global financial crisis seems to be doing nothing to slow it down.

 

For the fifth time, up-and-coming fashion designers are meeting in the German capital to present selections from their latest collections at the Berlin Fashion Week, which is attracting increasing interest from the international fashion scene.

 

Maia Guarnaccia, vice president at IMG Fashion Europe, which organises the fashion week in Berlin as well as similar events in New York, Miami and Amsterdam, said last year marked a turning point for Berlin.

 

“Since July (last year) people are now calling us to be here,” he said, adding that it used to be the other way around.