Wednesday, 17 December 2008

CAF Becomes Ecuador Default's First Casualty in Capital Markets

CAF (Corporacion Andina de Fomento) had its rating outlook revised down to negative from stable by Standard and Poor's. The CAF's ratings are A+, considered as investment-grade. 

In a short note issued only a few minutes ago,  S&P revised the outlook ``because the credit risk embedded in CAF's portfolio rose sharply following Ecuador's decision to default on its bonded debt.'' CAF is the largest multilateral bank in the region, and it extends long-term credit to South American nations. A downgrade on the CAF's A+ rating could come if Ecuador decides not to honour its liabilities with the Caracas-based lender.  Another downgrade to one of CAF's large borrowers in Latin America may also trigger a similar move (a downgrade.) Usually, when rating agencies lower their rating outlook on a certain borrower, a move can come within three to six months. 

This won't be the last announcement of its kind by rating agencies. I wonder what will be the position of Fitch, S&P and Moody's towards Venezuela's exposure to Ecuador. They must pronounce on the matter soon.  

Fitch Says Risk of Crises in Latin America is Growing

In an ominous note released today by David Riley, head of global sovereign ratings at Fitch, the Chicago-based ratings agency said the economic and credit outlook for emerging market nations has worsened dramatically as a consequence of the financial meltdown afflicting the most developed economies. 

The note says that countries in Latin America with weak credit fundamentals (call it growing trade and current account imbalances, widening budget deficits and a regulatory framework unlikely to be made more flexible in stress situations) and that are reliant on commodity exports remain ``especially vulnerable.'' Fitch said the credit fundamentals are better for most emerging market economies than in previous crises, suggesting that an increase in funding needs by governments and a hemorrhage of international reserves in most places is an unlikely scenario. High international reserves (such as the case of Brazil, Venezuela and Peru, for instance) provide these nations a buffer against financial and economic turmoil.

Ecuador y la Moratoria (Update)


He recibido dos cartas de lectores, pidiendo mas explicacion sobre la situacion ecuatoriana. Tratare de responder sus preguntas, no sin antes advertir que hay muchas cosas que todavia estan por ser explicadas. 

Un lector, Juan Fonseca, pregunta lo siguiente: ``La decision (de pagar), es acertada o no? Tiene asideros juridicos? Cree Ud. que el pais va a mejorar o se ira por el despenadero?'' Bueno, es posible dar varias respuestas contundentes aqui. Primero, la decision no es buena, es ilegal e injusta con el tenedor de bonos o el banco prestamista. La razon por la cual Correa creo una comision dirigida por su propio gobierno (no independiente ni negociada con los acreedores) para la evaluacion de criterios de la deuda ecuatoriana lo dice todo. Pero el problema es mas complejo -- es un primer paso para que en la region se creen comisiones similares que van a intentar repudiar acuerdos de deuda pasados. La segunda respuesta tiene que ver con la primera en el sentido que no sera dificil para los acreedores buscar argumentos juridicos para ser compensados. La verdad, podrian ser confiscados bienes ecuatorianos en el exterior, asi como cuentas bancarias y demas activos del gobierno. En realidad, el presidente Correa esta buscando una forma de renegociar algunos contratos de deuda (de pronto emitir deuda nueva en una restructuracion a tasas cupon mas bajas, o reconocer un valor facial a los tenedores de bonos del orden del 25 por ciento, etc.) Hay margen de negociacion en mi opinion. 

Finalmente, creo que esta decision va a llevar a una salida de capitales extranjeros del Ecuador y al aislamiento del pais en los mercados internacionales. Como lo dije anteriormente, la decisiond e Correa seguramente va a alimentar en paises con orientacion politica similar como Bolivia, Venezuela y Nicaragua  el deseo de no honrar sus deudas. Es claro que el pais que podria sufrir mas en ese contexto es Venezuela. Pero si Venezuela cae, otros paises como Colombia sufriran las consecuencias indirectas (Colombia es uno de los dos primeros socios comerciales de Venezuela.) 

Un lector llamado Darcy tambien escribio, pidiendo un poco mas de explicacion sobre el mercado de credit-default swaps (CDS) y la moratoria. Creo que lo que va a pasar aqui es que se van a testar diferentes formas de settlement entre los underwriters de esos contratos y los tenedores de CDS's. Puede ser en cash, como puede ser la eliminacion de las posiciones, en general existen un sinnumero de alternativas que seguramente van a ser estudiadas. Lo que es preciso es crear una regla de compensacion para futuras situaciones como esta. Eso no existe y es necesario hacerlo. Afortunadamente, el caso de Ecuador oferece riesgos limitados al mercado de CDS soberanos en Latinoamerica, porque el tamano de la deuda en bonos y de los contratos vigentes no es muy grande.  

Earlybird, Dec. 17, 2008

Headlines for Dec. 17, 2008

U.S. -- Obama Considers Overhauling TARP: (WSJ) The TARP under Obama may have a more active role, according to the WSJ. It will increase investments on cash-strapped financial institutions and provide mortgage holders with additional relief. 

U.S. -- SEC to Probe Its Own Ties to Madoff: (WSJ) Another one in the Madoff saga. Cox and his SEC are a disaster -- pretty much the same the SEC was under Harvey Pitt (the SEC chairman whose stint at the agency was tainted by the Enron scandal.) We should expect tougher corporate oversight under Obama.

BRAZIL -- House Lawmakers Discuss End of Re-Election: (Estado)  It is yet unclear whether this is beneficial for either the ruling party or the opposition. Last night, the Justice and Constitutional Committee of the lower house approved a total 62 amendments to the constitution, included changes to the current election rules. Under the changes, the presidential re-election (a maximum of two terms of four years each) would be changed with a five-year term. None of the proposals approved by the CCJ yesterday sought a second re-election of President Lula. 

BRAZIL -- Central Bank to Offer Currency Swaps Today: (Valor)  The currency swap auctions by the central bank are aimed at helping roll over contracts that settle on Jan. 2. The currency is recouping some of its losses against the dollar thanks partly to this strategy. 

COLOMBIA -- Congress Passes Uribe Re-Election Bill for 2014: (Tiempo) This is likely to increase political noise in Colombia ... 

COLOMBIA -- Government Has Seized 15 Bilion Pesos in Assets from DMG Pyramid Scheme: (Tiempo) In what seems to be the biggest financial scandal of the past ten years in Colombia, the government is rushing to find more assets belonging to DMG and return the money to depositors. So long as this doesn't imply the use of taxpayers' money ...

Barclays Recommends Bonds Over Stocks in Brazil

Paulo Hermanny, Barclays Capital's strategist for Latin America, yesterday issued a report favouring bonds over stocks in Brazil. Hermanny is betting that the central bank will cut interest rates as early as January, and see no clear signs that the Bovespa stock index will recover until after the second quarter of 2009. 

This reinforces the view that 2009 won't be a good year for stocks and that it seems better to wait before puring more money into the Bovespa. Some say that now is the time to buy because stocks are ``cheap.'' Cheap for who? Are you sure you won't be able to buy even cheaper?

Economic growth is losing momentum rapidly in Brazil (see yesterday's posting on Morgan Stanley's Carvalho) but many investors remain hopeful that the slowdown will be temporary. Nothing more far from reality.