Thursday, 29 January 2009

Hay Festival in Romantic Cartagena ... Programme for Today

Well, the day is sunny and there are lots of interesting people in Cartagena. My meetings will only start in about two or three hours so ... I wanted to share this programme with you dear reader. Are you green with envy?

12:30 p.m. NYT: Miguel Bosé and Juanes speak about Latin music with Roberto Pombo, the fat-ass Bogotá gentleman recently named El Tiempo newspaper general manager.

3:30 p.m. NYT: Juan Villoro, Martin Caparrós, Fabrizio Mejía and Alberto Salcedo Ramos; Round Table with Daniel Samper Ospina: A Diary of Cronistas -- This is interesting for those who have picked featuring, observation and analysis as their favourite area in journalism.

For more details go to

And, for the night .... 9 p.m. NYT: Asian Dub Foundation -- show

Spice it Up: Indonesia Seen Conducting Road Shows to Raise Cash With Bond Sales, Private Placements, Loans, This Year

Indonesia, which I think is the largest Muslim nation in the world, is preparing a series of road shows with investors starting on Feb. 2 to introduce the Global Medium Term Note Programme (GMTN Programme) under which the nation will likely issue debt securities through a mix of syndicated transactions and private placements, according to a source. Barclays Capital and UBS AG are conducting the efforts, and setting up presentations across Asia, Europe and the U.S.

Here, There and Everywhere: Venezuela Trip Notes from Cartagena, Colombia

Here, there and everywhere, such is the life of the MM blogger these days. One interesting thing about these trips is that you end up stumbling across some old friends, from many other places in the world, who are always willing to talk. In this case, I saw four good friends, all them Venezuelan bankers who were coming to Cartagena to attend the Hay Festival, a literature festival taking place here in this city, and were -- much to my surprise -- quite vocal about the situation of pre-referendum Venezuela. Let's share these comments with you, dear reader.

People changed their minds radically in Venezuela, especially the businessmen close to the regime, since President Hugo Chavez's defeat of his first referendum attempt in Dec. 2007. Chavez has deflected some of that ''dissent´´ with more prerogatives and perks, but the sensation is, according to these bankers, clear: ''This is becoming quite tiresome,´´ one of them confided me. Why?

The inflation situation has become apart from entrenched quite bad for the common Venezuelan citizen. The lack of dollars is squeezing businesses, more seriously hurting the smallest ones, as imported goods get scarcer by the day. President Chavez invades the homes of 28 million Venezuelans every Sunday (not new) for eight hours, but this time people aren't even laughing at his peculiar comments nor his horrible clothing. ''Let's say that he has lost his mind. When he says 'You dear countrymen, have to vote for the fatherland because I am the fatherland,´ you know there's something wrong',´´ one of them told me.

One thing we were talking about with much interest was the PDVSA situation and the opaque Fonden accounting. In general, there is some sort of consensus about the situation that PDVSA is going through, that is, highly unlikely probability of default on bondholders but rising chances that payments to suppliers aren't honoured in a six-nine month period. Cash holdings are drying out too fast, and debt refinancing is becoming too difficult for a company that is seen as a political puppet of the extravagant Bolivarian revolution. In general, these bankers, who you could have thought were sympathetic and tolerant to the mess that Chavez created for years -- the banking industry thrived under the lieutenant colonel's currency exchange controls and lending revolution, -- are finally seeing the situation as unsustainable. ''We saw the commander in a weird mood in recent months´´ they are clear about it. Another banker told me: ''He is panicking out.´´

Yesterday, Venezuelan Finance Minister Ali Rodriguez stated (well, let's say he had to communcate this to the markets so they have little doubts of the Bolivarian Revolution's financial firepower) that, following the $12.5 billion reserve transfer (seizure) from the Banco Central de Venezuela, the Fonden, its off-balance sheet sovereign fund, has now about $16 billion in funds that are yet to be earmarked to projects. The Fonden, apart from receiving billions of dollars in transfers from the central bank every year, is fed with weekly transfers coming from ... guess who: PDVSA. When asked about the future of those weekly transfers, these people said they are uncertain. A Goldman Sachs & Co. report this morning says predicts that, due to the ''large decline in oil prices, PDVSA might stop the regular transfers.´´ I think it is an unlikely situation -- not macroeconomically speaking, but politically speaking, and that point of view tends to be more accurate in describing Venezuela. The Goldman Sachs reports says that ''there is growing speculation in the local press that PDVSA might be selling some of its increasingly scarce dollars in the non-official (parallel) market where it can fetch 5.6 bolivars per dollar, rather than selling the dollars to the central bank where it only gets the official 2.15 per dollar parity.´´ We have said this in several postings, and it's a ''secreto a voces,´´ as we say in Spanish. Clearly PDVSA dollar sales are one more step towards a devaluation. Whether they want ot devalue or not remains a question. Why?

Rodriguez yesterday acknowledged that a devaluation ''would magnify the local proceeds of oil exports,´´ only to reaffirm the government's commitment not to devalue the currency. A devaluation would further spark inflationary pressures. As PDVSA and therefore the government budget suffer the impact of tumbling oil, ''financial distress is starting to emerge in both places,´´ writes Goldman's Latin America economist Alberto Ramos. ''The government still counts on a fair amount of funds spread out through several accounts, but a devaluation in the near term seems increasingly likely,´´ he writes.

Wednesday, 28 January 2009

BNP Paribas Lost AA+ Counterparty Credit Rating With S&P

Standard and Poor's lowered its long-term counterparty credit rating on BNP Paribas SA, the French lender, to AA from AA+. S&P removed BNP from CreditWatch, where it was kept since Dec. 17. The action looks a bit surprising, because BNP Paribas has navigated through the credit better crisis in better shape than most of its global rivals.

"The rating action reflects the material negative impact on BNP Paribas' financial profile of the current market dislocation and rapidly deteriorating global economic cycle,'' said credit analyst Bernard de Longevialle. "We expect a significant decline in profitability,'' and ''recovery prospects'' remain limited, according to S&P. Net income probably dropped below 3 billion euros in 2008, compared with 7 billion euros in 2007, according to S&P estimates.

Despite the news, financial shares across the world went higher, on optimism the new U.S. administration will create a bad bank to absorb distressed assets (click here to read our previous posting on the bad bank. I think it went out yesterday.) The movers are: Wells Fargo, which gained more than 10 percent after refusing more government aid; the star of the day, Lloyds Plc. of the U.K., with a 43 percent gain today. Citigroup Inc. gained 20 percent in today's session. Light at the end of the tunnel? Not yet, let's first see how this bad bank proposal works.

Cristina Fernandez, Argentina Head of State, to Address the LG Swap Issue in Presser Today, Sources Tell Us

The formal announcement of the results of the swap of Guaranteed Loans (known as Prestamos Garantizados in Spanish language) will be announced by President Cristina Fernandez Kirchner tonight(4:30 p.m. New York time.) Cristina, yet, doesn't have a good record of starting pressers on time.

Anyways, rumour has it that the amount swapped topped $3 billion worth of PGs that mature between 2009 and 2011 (the PGs eligible for this swap are pegged to the 2008 global bond and the 2006 Bonte among others.) About $9 billion of PGs mature by 2011.

Santelisa Vale Seeks Debt-For-Equity Swap

Santelisa Vale SA, the Brazilian sugar and ethanol maker that reportedly lost $300 million in derivatives bets gone awry, is rushing to exchange 2 billion reais of debts into equity. Gazeta Mercantil reported the move, without giving a clue who sourced them the information. There are more than 10 banks involved in the deal, in which the BNDES, obviously, is involved too. It doesn't take much to imagine the way the BNDES is helping out Santelisa Vale: pumping money into the company to consolidate a strategic player in the strategic ethanol strategic industry ...

Gazeta also reported that the investment-banking unit of BNDES, the so-called BNDESPar, is considering an additional investment in Santelisa Vale worth 500 million reais.

Volkswagen Leasing May Sell Short-Term Notes in Mexico

Volkswagen Leasing may offer up to 3 billion pesos in short-term notes in coming days. The notes are rated 'mxA-1+' in a local scale by Standard and Poor's. The offering forms part of a 10 billion peso debt issuance programme that includes the sale of shorter- and longer-dated bonds.

One More Blog About Brazil, Latin America, Financial Markets

Tony Volpon is an American economist who's lived in Brazil for years. He worked for BankBoston and a number of shops there and currently he is chief economist for the Brazilian unit of Spanish brokerage CM Capital Markets. I have just been informed of his blog, Alternativa Brasil. I really hope you'll like it a lot (I did!)

Here is the link to Tony's blog:
Enjoy it!

Market Memorandum Writer Has to Bring Food Home. Blog Will Be Semi-Abandoned for a Few Days

Dear reader:

I have to travel to Cartagena (yes!), bring food home, earn my living, do something productive, all that. We will be sporadically commenting the news that do move Latin markets, those which matter, bringing some insightful information to you while keeping this thing not that ''up to date´´ up until Feb. 3, -- by then I hope to be back soon. In the meantime, don't sweat, don't get stressed, don't jump off the window! We will be back shortly, I promise!

Thanks for your very support, comments and readership. Los comienzos son duros, mas hermosos.

Bogotá Suffers One Terrorist Attack. Two Colombians Died. Sad Day for Colombia.

Here is the Reuters story on the bomb blast that occurred in Bogotá last night. Two innocent people died. Initially, 20 were reported injured but fortunately no one ended up wounded.

I had a good friend having dinner at the Club Colombia restaurant next to the Blockbuster building were the bomb went off. She is fine, thank God. ''I felt the earth trembling,´´ she said to me on the phone minutes after the blast -- she sounded scared but fine. Diners rushed when they heard the blast. The Blockbuster facility was partially destroyed. I was nearby the site too, after having met with my her earlier ...

On the other side of the city, and about an hour after the blast, I met with a banker friend for drinks. We went to a bar called Invitro -- one of those places where the crisis ain't being and probably won't be felt. People were partying wildly, dancing, drinking heavily ... Yet, and you could see that from the windows of the bar, policemen and military were deployed along city streets. That image automatically reminded me of those years in the late 1980s and early 1990s when we Bogotanians used to go out our homes thinking that ''we were living in borrowed time´´ and that we may not make it back home later.

LatinFinance Says Lack of Financing is Putting Brazilian Homebuilders in a Bind. Time for Further Consolidation in the Sector?

A kind reader of this blog forwarded us a note by New York-based magazine LatinFinance published this morning. The magazine says in its daily brief that the ''lack of financing´´ is putting ''Brazil’s homebuilders in a bind,´´ citing a Fitch report that we summarised on Jan. 22 (click right here for the link to the posting.) The intersting part of the LF report is that ''private equity bankers say they are beginning to see investment opportunities in the sector.´´

Consolidation might be the natural path for many of these companies, said a U.S.-based anonymous source to LF, as ''debt payment and lack of financing will produce investment opportunities.´´ A São Paulo-based banker told the newsletter that ''he has had some conversations with companies in the sector,´´ some of which will undergo some restructuring or even might need to bring in a private equity partner.

While the situation of some companies like Brascan looks not too bad at the moment, others are facing serious cash problems. Company, Trisul, Cyrela (the market's leader,) Even and Gafisa were subject of credit ratings changes by Fitch in recent days. In the previous days, real estate companies have driven down the Bovespa on concern over their business model, expensive acquisition charges and a decline in the creditworthiness of mortgagors. The BNDES and Caixa Economica Federal (both state-owned lenders, of course) are ready to step in to help ailing homebuilders cope with the stressful markets. It seems that the Brazilian state is ready to become a war hospital ... at the expense of taxpayers.

Petrobras's Gabrielli Tells Bloomberg that Company Won't Borrow in Bond markets This Year. Got Scared with Pemex?

They got terrified. Petroleo Brasileiro, the oil giant, suspended plans to borrow in the bond markets because borrowing costs are ''too expensive,” Bloomberg cited Chief Executive Officer Jose Sergio Gabrielli as saying in an interview. The company, which has secured $17.5 billion in financing from Brazil’s BNDES and other lenders, has no need to tap bond investors for funding, for now ...

Well, if Petrobras has to invest more than $170 billion by 2014 to extract oil form the ocean sea bed, I would assume that they need more cash (that because the Brazilian state is such a big sucker of cash that ... yes, they would simply need it.) And they might need that money sooner rather than later -- to take advantage of a dramatic drop in exploration costs from the records we saw last year. For 2010, Petrobras needs $18.9 billion in financing, with about $10 billion having been guaranteed from the BNDES, Gabrielli told investors in NYC. But it is probably correct not going to the markets at this very moment, because Petrobras would have been badly hammered.

Remember that Pemex, the Mexican oil company, sold $2 billion of ten-year debt at 8.25 percent, or about 5.7 percentage points more than U.S. Treasury yields of equivalent maturity.

Pemex Placed Bonds in International Markets -- Will Petrobras Be Next? But at What Cost?

Pemex is one reason to talk about Petrobras. But before that, dear reader, here is Pemex's final terms spreadsheet:

Issuer: Petróleos Mexicanos

Guarantors: Pemex-Exploración y Producción / Pemex-Refinación / Pemex-Gas y Petroquímica Básica

Ratings:1 Baa1/BBB+/BBB (Stable/Stable/Stable)

Format: Rule 144A/Regulation S with Registration Rights

Joint Lead Managers and Joint Bookrunners: Calyon SA /Citigroup Inc. / HSBC Holdings Plc.

Co-Manager: Santander Investment Securities Inc.
Principal Amount: $2 Billion
Maturity: May 3, 2019
Coupon Rate: 8.00%
Interest Basis: Payable semi-annually in arrears

Interest Payment Dates: May 3 and November 3
Issue Price: 98.313%

Benchmark Treasury: UST 3.75% due November 15, 2018

Benchmark Treasury Spot and Yield: 110-13, 2.543%

Spread to Benchmark Treasury: +570.70 bps

Yield: 8.25%

Pricing Date: January 27, 2009

Will the next one be Petrobras? So long as they offer a competitive rate and also allow the market to price in the fact that it is an oil producer suffering from excessive political intervention.

A source in the capital markets told us that the company is feeling the pinch of
having been front-runned by Pemex yesterday. Some remarks made by CFO Almir Barbassa (to which this blog had no access to the posting time of this note) sort of confirmed that assertion. Petrobras's 2016 bond was uneasy in trading screens today, going up and going down, on speculation a potential deal might be on the making.

Some people are rumouring (you know how market rumours are, evil but true) that Petrobras secured $6 billion from a number of banks in the past few days. It sounds likely that Petrobras will try to sell more debt this year -- but I insist and I disagree with some of my sources, -- placing it will depend on pricing and the market reading of upcoming news over the political use of the company for job generation and all that Lula government crappie paraphernalia. Politicians from the ruling Workers' Party, who want to become masters of the universe, are far from understanding market functioning. Credit metrics will get worse and so will the market perception about Petrobras creditworthiness.

There Are Still Good People and Responsible Journalists Around the World

IncaKolaNews´s Otto Rock (photo, nice photo, isn't it?) is the one who spotted that outrageous thing in Facebook about Bolivian President Evo Morales. And a few reporters at the Associated Press went out looking for the story. Here is the result. There is still good people in this world of greed and indifference. Thanks to them ...

Facebook nixes group seeking Morales 'liquidation'
By FRANK BAJAK, The Associated Press

6:04 p.m. January 27, 2009

BOGOTA, Colombia — The social-networking site Facebook removed a group on Tuesday whose title advocated raising money so a gunman could be hired to "liquidate" Bolivia's leftist president, Evo Morales.

The Spanish-language group, created in August, had 8,069 members and had drawn the attention of at least one outraged blogger as of Tuesday, when The Associated Press alerted Facebook about it.

Called "Global collection to hire a sharpshooter to liquidate Evo Morales," the group's first description line stated, "We need to get the money to inspire someone to do it."

Its 20-year-old Bolivian creator, Hony Pierola, denied any malice. He told the AP he started the group "to laugh a little and wouldn't be so stupid as to do it with serious intentions."

However, many of the group's 497 postings were hateful, violating Facebook's terms of use, which ban threatening violence or expressing hatred.

One posting, dated Aug. 10, suggested Morales be "tortured and made to suffer, like he's doing indirectly to many Bolivian people." The vast majority of group members were well under 30, based on the birthdates and photos they posted.

The first Indian president of South America's poorest country, Morales has been a divisive figure as he drives a socialist agenda. On Sunday, Bolivia's voters approved a new constitution that seeks to empower the country's long-suppressed Indian majority.

Bolivian presidential spokesman Ivan Canelas said the government wasn't aware of the removed Facebook group but said officials would look into it.

A Facebook spokeswoman, Jaime Schopflin, said Pierola's group clearly violated the company's terms of use, and that the site was removed within 90 minutes of AP's call. She said she did not know whether anyone had previously alerted the 700-employee company to its existence.

Schopflin acknowledged the challenge of enforcing user terms amid skyrocketing growth; Facebook's users have more than doubled over the past year to 150 million, most outside the United States.

"We do have a multilingual staff. We are trying to scale right now," she said by telephone from the 5-year-old company's headquarters in Palo Alto, California. "These things, once they are reported, we remove them immediately."

The accounts of repeat violators are disabled, Schopflin added. Pierola's account remained active Tuesday.

In an e-mail exchange, Pierola was unapologetic and made clear his deep distaste for Morales, telling the AP that "in my honest opinion as a human I think it's not his fault he's such an imbecile."

"I hope he doesn't do stupid things and that Bolivia doesn't turn into a communist state," he said.

Obama Invites Lula to Talk in March. The Agenda: Lula's Stupid Opposition to the FTAA? Or His Stubborness to Sign the Doha Round?

Oh, dear reader, I wished I liked Brazilian President Lula's trade and foreign policy framework. Read this Valor Econômico link ... Lula will meet U.S. President Barack Obama in march -- what will they discuss? a revival of the FTAA? or the need to have annoying trade unions opposing any single measure to beef up cash reserves in corporations? or ... increasing environmental restrictions on industrial companies now that we are heading into a recession? Ha!

President Lula likes talking to the small fish because he feels the big one. When he talks to the bigger ones, he neither defends Brazil's interests nor flexibilises terms of trade with them. Anyways, that is my opinion.

IDEAGlobal Says Buy Short-Termed Colombian TES Debt. Translate it If You Can

I won't rewrite this -- I have had a long day! It reads quite clear to me .. but it might not read that clear for some of you. The only thing this blog will say is that there will be at least 250 basis points of monetary policy flexibilisation between the start of Jan. and mid-2009. The situation in Colombia (I just realised it tonight) is bad ... but people don't seem to quite get it.

Try a little harder with the reading ... IDEA kind of makes its point.

''Colombia's TES curve has paralleled most other domestic fixed-income markets in the region in enjoying an accelerated period of yield compression underpinned by the expectation of additional larger anti-recession rate cuts to come. In examining the shape of the TES curve, the described compression has also moved the spread between short and long-duration paper back to the edge of its prior "normal" trading range observed during the course of nearly 1 ½ years and that dates back to early 2007. Our particular chart (which we don't show here in MM) example isolates the spread of the 2010 TES and that of the 2020 TES. We're now holding differentials between these credits that were last observed in mid-2008. What's interesting about current levels is that the 2010 maturity trades with an approximate yield of 9.19 percent, which would be theoretically above the 9 percent levels we target as the official rate after the CB has its say on the matter this coming Friday. In-turn, the 2020 paper stands at 9.77 percent, which would imply a difference of near 75 basis points if the rate cut that we expect materializes. Our impression is that the front-end will need to start adjusting for additional stimulus to come, likely forcing this spread towards some bull steepening ahead. Hence, we would favor playing the 2010 maturity from the long side, while shorting the back end in expectation of shorter-duration paper leading market psychology towards more rate reductions ahead.´´

Tuesday, 27 January 2009

Pathetic: People in Facebook and Some of Their Stupid Groups

IncaKolaNews just posted this: Click here for the story. A group was created for hiring a hitman to kill Evo Morales. The founder is even offering himself to kill the Bolivian president in case the group fails to hire a gunman. Jesus! Remember that the force and reach of some of these Facebook groups is remarkable (many people credit one of them with having organised a march against kidnappings that gathered almost 4 million people last year.) How ridiculous this Evo Morales group can be?

Important that we sit down and think about this, and what we do. We, I say the media, are responsible for some of the biases against certain politicians or public people. But we have to be and quick radical at condemning all these expressions of hate and intolerance.

Fresh Stuff: Pemex Taps Investors to Offer Ten-Year, Dollar-Denominated Bond

Petroleos Mexicanos SA, the beleaguered oil state company of Mexico, is offering a benchmark size issuance of ten-year dollar debt. The banks managing the offering for Pemex are HSBC Holdings Plc., Calyon SA and Citigroup Inc. The sale may happen as early as today, according to our sources. Here are the preliminary terms:

Issuer: Petroleos Mexicanos (PEMEX)

Joint Guarantors: Pemex Exploracion y Produccion / Pemex Refinanciacion / Pemex Gas y Petroquimica

Structure: Senior Unsecured Notes -- Direct Obligation of PEMEX

Ratings: Baa1 / BBB+ / BBB (STABLE / STABLE / STABLE)

Size: Dollar Benchmark (At Least $500 Million)

Maturity: 10 year

Price Guidance: Treasury note with coupon 3.75 percent (Nov 2018) + spread (TBD -- To Be Defined)

Use of Proceeds: To finance investment program or to redeem, repurchase or refinance indebtedness

Bookrunners: HSBC Holdings Plc. /Calyon SA / Citigroup Inc.

Co-Manager: Banco Santander SA

Timing: ASAP

Camargo Correa to Pay 2.1 Billion Reais for 14.5 Percent Stake in CPFL. Votorantim is Raising Cash Quite Fast, May Avoid Downgrade

Camargo Correa, the Brazilian engineering company involved in a range of businesses from heavy construction to energy, agreed to pay 2.1 billion reais for 14.5 percent of CPFL, the electricity distributor controlled by the Votorantim group. Yesterday we posted here (click right here) the S&P warning on the creditworthiness of the Votorantim group and its imminent need to sell assets to improve debt metrics. Well, these guys are moving quite fast to get rid of businesses or raise cash without losing control of some key units. Downsizing is a good move in moments like this, some say.

Meirelles Learn From Lula Cabinet to Play Hardball with Banks

Henrique Meirelles (photo,) one of the few serious policy makers that are left in Brazil these days, is expected to announce by the end of this week rules that will allow 4,000 and more companies to access international reserves through special credit facilities. The measure was announced late last year as a way to protect companies reeling from a recent sell-off in the real. Folha de S. Paulo says in a short note today (click here for link) that financial institutions will not be given access to this credit facilities, to press them to lower lending rates charged to companies and consumers.

While it's desirable to see banks lowering their spreads now that local interbank credit is not under stress, it is stupid to expect private lenders to do this by decree. The government is committing absurd mistakes in the handling of this issue of credit, such as conditioning BNDES credit lines to companies to their maintaining idle staff in their payrolls ... how anti-economic is that? The government is seriously concerned with the unemployment data readings, meaning that they see the economic downturn as prolonged and painful.

LLX Get Money From BNDES, Banks for PF Minas-Rio Project

LLX, the logistics arm of Brazilian billionaire Eike Batista (photo,) signed 1.321 billion reais worth of financing agreements with the government-controlled development bank and two major commercial banks, according to a statement sent this morning. The accords have a total amortization schedule of 12 years and 2 1/2 years grace-period.

The transaction was structured as a
project finance with a debt/equity ratio of 73 percent to 27 percent, with half of the money being disbursed in the form of a BNDES direct loan, while the rest of the money to be offered by Unibanco and Itaú, the two domestic banks that agreed to merge in November. ''With the completion of this phase, LLX Minas-Rio is now fully funded to carry out its investment plan, thus enabling the handling of iron ore from Anglo American mines in the State of Minas Gerais, the anchor project for Açu Super Port,´´ said LLX in its regulatory filing statement.

Poll Closed. About 70 Percent of Those Surveyed Say Economy Won't Get a Quick Fix Under Obama

The question of our first MM poll was whether you, dear reader, thought that Barack Obama would get to quick the U.S. economy in a quick manner. Seventy-three percent said no. The rest said yes ... there were not many readers participating in this poll (only 15 readers out of an average 110 that we have during business days.)

As we pointed out earlier this morning, the challenges facing the Obama administration are diverse, huge and quite difficult. Those related to banks, to the real economy, the administration of the TARP funds, their quick disbursement, trade, China, .... The list seems interminable. But Obama started diligently by pressing Congress to confirm his nominee to the Treasury post, and acting quickly on highly-awaited measures such as the closure of Guantanamo -- nothing more than a vow of good faith to the world.

The Good, the Bad .. Bank. It May Turn Ugly Too, Some Analysts Say

Watching CNN En Español last night, I learned that the proposal of creating a bad bank is gaining traction among analysts and government officials in the U.S. According to a recent JPMorgan Chase & Co. report, a bad bank would form part of a broader solution for the financial crisis afflicting America. But, what is a bad bank?

A bad bank would be a company that would remove the bad assets from the balance sheet of the financial system and manage them. The rationale behind this idea is that, if the financial system fell into a situation where the financial value of assets dropped below the value of liabilities, the social cost of reestablishing credit formation would be quite high. The payments and credit system would probably collapse. All that said, the creation of a bad bank would be desirable. But there are challenges facing policy makers who endorse that idea.

As JPMorgan puts it, ''removing bad assets from bank balance sheets may resolve some uncertainty surrounding the health of banks, but it is still the case that many banks will need more equity capital.´´ Last night, former Colombian Planning Director Juan Carlos Echeverri, speaking in CNN, suggested this idea as a sort of panacea for the current problems hampering the financial system of the U.S. He may be, not surprisingly, endorsing an incomplete idea. A bad bank doesn't resolve the problems of capitalisation facing dozens of financial institutions in the U.S. nor offers an automatic solution to the problem of pricing distressed assets that are putting balance sheets under strain. James Saft, the Reuters columnist, wrote about this issue yesterday in a piece called ''Nationalisation: Friend or Foe.´´ Click here to read his very insightful column. Thanks to Mr. Echeverri, we remembered to mention this issue in the blog. The debate is open. As Saft puts it, ''the betting is now that the U.S. will opt for some sort of a 'bad bank´aggregator which will buy up doubtful assets from banks, with the emphasis on keeping as many as possible operating as publicly traded entities which, once shorn of their bad debts, would be viable and would lend.´´ But lending in the current circumstances may not only be risky, but also imprudent.

If the bad bank idea is pushed forward, commercial banks and insurers may ''run a real risk´´ as the new entity would rid them ''of assets that are bad now leaving them (banks and insurers) to founder on new bad loans later.´´ Although the cases of Scandinavia, Mexico, Colombia and the U.S. itself (the HOLC of the Great Depression) offer valuable experience to deal with the vicious circle of bad loans, declining banking asset values, economic recession and government pressure to kick start lending, the questions remains on the size, extent and duration of the ongoing recession. The risk, Saft says, is ''that we could find ourselves in six or nine months in exactly the same situation, but with banks crippled by a new wave of defaults and with the non-financial economy in a much worse state.´´

S&P Finally Does It: Votorantim Group Ratings Under Review for Downgrade

Standard and Poor's revised its outlook on Votorantim Participações SA to negative from stable. The risk of downgrading will persist for at least three months. "The outlook revision reflects the increasing uncertainty that the group's consolidated credit metrics will meet our long-term targets for the current rating amid the negative operating and financial outlook for 2009,´´said analyst Reginaldo Takara in a note released last night.

The group's main business units are already facing unfavorable pricing and market conditions, at a time when consolidated financial leverage is historically high after significant investments in capacity expansions and acquisitions. said S&P, which ''Although the difficult economy will pressure cash flow, we believe the group has room to adjust its strategy to preserve liquidity and reduce net debt, bringing cash flow coverage more in line with the current ratings,´´praised the merger between Votorantim Celulose and Aracruz, saying it may help streamline operations (??? the market thinks the opposite, dudes!)

Earlybird, Jan. 27, 2008

The headlines are:

BRAZIL -- Corporate Defaults Reached Ten-Year High (click here for link to Estado's story): Although Brazil's corporate sector is far from facing a systemic crisis, domestic bankruptcy filings soared 146 percent in 2008.In December corporate defaults jumped 36 percent in December. A major area of concern for companies and banks is the rapid deterioration in consumer creditworthiness. Personal loan default rates and the number of dishonoured cheques are soaring. This can only get worse in the first half of 2009 as job losses deepen.

BRAZIL -- Fraga is Confident that Rates Will Drop Fast (click here for Estado story): The most prominent central bank hawk is signaling that the space for rate cuts is ample. Arminio Fraga is someone who investors should always listen to.

ARGENTINA -- $23 Billion Fled the Country in 2008, Most Since 2001 When the Government Devalued the Peso (click here for link to Nacion's story) : The peso touched 3.5 to the dollar yesterday. Unfriendly policies that punish investors and give privilege to political decisions, and lack of transparency seem to be feeding the hemorrhage.

WORLD -- Nations Turn to Barter Deals to Secure Food (click here for FT story link): As trade finance dries up, poor countries are resorting to barter to buy food. One of the aspects that have made the Brazilian government very active in fighting this credit crunch in the issue of trade finance (Brazil is a major food exporter.)

U.S. -- Geithner Sworn In as Treasury Secretary (click here for WSJ story): No one would like to wear his shoes at this moment. He has a hell of a task ahead -- drafting a quick recovery plans for the financial sector, pushing for the aid package, dealing with a quick surge in joblessness that will be on for years maybe, proceeding with a few bank nationalisations if things get worse in the marketplace ...

Monday, 26 January 2009

News of the Day: 70,000 People Lose Their Jobs Around the World

As if economic fate wanted to show that the situation is far from improving, click here to read this interesting analysis by Reuters reporter Brian Moss on the wave of dismissals that hit the wires today. We had at MM some correct judgement about the news today and wrote a quick posting with the layoffs that were announced this very morning. But the Reuters story has all the background and size and scope that our short story lacked of.

Fitch Sees Challenging Year for Latin America Structured Finance Industry. Nothing New

Fitch Ratings issued a report dated Jan. 23 on regional structured finance trends, focusing on Mexico, Brazil and Argentina -- the big three in the region. According to the ratings company, in the past three or four years, Latin America witnessed significant credit growth in most segments of the economy, from consumers to corporate lending. ''The 2008 market turmoil that followed and the ensuing liquidity crisis created dislocations to varying degrees across the major structured finance markets,´´ says the report.

Fitch asserts that no sector will be immune to fallout in credit markets. ''Certain individual market sectors´´ will remain resistant ''such as cross border future flows and Mexican bank originated residential mortgage backed securities,´´ Fitch said.

Last year, Fitch affirmed approximately 616 tranches from its securitisation portfolio, upgraded 44 and downgraded 61 -- defining it as a ''balanced year´´ for the region. ''Overall, recognizing the regional challenges exacerbated by a subdued capital market, lower commodity prices and limited growth, Fitch expects Latin America to have an increase in the ratio of negative to positive rating actions in 2009 compared with 2008.´´ So, dear reader, be ready for the wave of downgrades in FIDCs, mortgage-backed bonds, securitisations of loans and credit card receivables etc., especially in Brazil and Mexico. We will try to write more about these actions when we have access to ratings decisions.

The Weekly Agenda for Latin Markets: Brazil Copom Minutes, Colombia Rate Decision; Fed Monetary Policy Meeting

The last week of January will be quite busy in terms of economic releases and policy decisions. Tomorrow the U.S. Federal Reserve announces its decision on interest rates. The day after, Ben Bernanke, the Fed's chief, (photo) will likely announce the purchase of long-term Treasury securities to boost liquidity and drive down yields. This week we will also have the preliminary report for fourth-quarter gross domestic product in the U.S. In Latin American markets, two main events will gather attention from investors. One is Thursday's release of the monetary policy minutes for last week's decision by Banco Central do Brasil to cut its benchmark lending rate target to 12.75 percent. The other is the Colombian rate decision for Friday afternoon.

The Copom minutes may indicate that the central bank has already carried out a "relevant portion´´ of its easing cycle, and that such event won't put at jeopardy its inflation target for this year.
On the other hand, the committee will play up recent data pointing to growth weakness. This will be relevant, for it will also help ease political pressure on central bankers -- who have been under attack by entrepreneurs, unions and government officials over their stance on interest rates.
About the Colombian rate decision, the market consensus points to the Repo Rate being cut to 9 percent. The bank is certainly worried about the rapid deterioration of economic data -- the same Friday a report on the December unemployment rate will be out.

U.S. Existing Home Sales Rebound, in Reaction to Low Prices

Click on this link to read a story by my old friend and former colleague Bob Willis. While there was an increase in sales of existing homes, the trend remains negative, as the story seems to suggest. While cheap prices might be luring some purchasing activity, the increase is far from signaling a revival in the U.S. housing market, which as some media stories have said, is at its worst recession since WWII.

Chinese Horoscope ... Jodidos Pero Contentos (Poor But Happy)

Jodidos, pero tratando de estar contentos ...

Well, this comes courtesy of one of our most faithful readers at MM. Thanks to you, dear reader!

I have to say my horoscope for this year looks simply awful. Nine unfavourable months, three neutral (out of 12 months obviously,) the outlook for love and new relationships doesn't look too promising, I will be on a restricted budget throughout 2009 and job opportunities will be scarce this year. Sounds like I am the U.S. equivalent of the Year of the Ox, innit? I was born in 1974, so I was born in the year of the Tiger (???) ... ''The year of the Ox presents an overwhelming influence upon the Tiger to maintain a steady and well disciplined pace.´´ At least I am getting to run and bicycle every morning -- discipline is my motto these days! Because we are not to discuss my love life, here is the horoscope's prediction for ''Tiger Wealth:´´
Tiger Wealth

''Take caution when it comes to your finances this year, as it is not a time to speculate or take any unnecessary risks. Plan your large purchases carefully and avoid impulse buying. The best advice is to monitor your spending throughout the year and you won't have any problems. This may sound like simple advice, but due to your generous nature, it may not be as simple as it sounds.´´

More Job Cuts in the U.S. Spring Nextel, Caterpillar, Pfizer-Wyeth

The following companies announced more job cuts in the U.S. and around the world. The situation is only getting worse.

1) CATERPILLAR -- It today announced the dismissal of 17,000 employees and the early termination of contracts for another 2,500.
2) PFIZER-WYETH -- As some of you might know, Pfizer agreed to acquire rival Wyeth for about $68 billion. The company will trim 10 percent of the workforce, or about 19,000 employees, to proceed with the merger.
3) SPRING NEXTEL -- The company today announced a plan to eliminate up to 8,000 jobs, or about 14 percent of its workforce.
4) SÃO PAULO, BRAZIL -- The São Paulo State's Industrialists Federation informed today that more than 130,000 job posts were lost in December across the state.
5) CORUS -- The steelmaker will cut 3,500 jobs, with 2,500 of those only in the U.K.
6) PHILLIPS -- It will cut 6,000 jobs.
7) ING BANK -- After reporting a 1 billion euro loss, it said it would cut 7,000 jobs and close its Argentina pension business.

Folha Says Votorantim Group Rushing to Raise Cash After Derivatives Crisis

Folha de S. Paulo, the Brazilian newspaper, reported Jan. 21 that Grupo Votorantim, the most-diversified private industrial group in Brazil, has raised 4.8 billion reais in cash from asset sales and may fetch another 2.4 billion reais through the divestiture of units including its technology arm Tivit and CPFL, the energy company in which it holds a 14 percent stake. The newspaper unfortunately gives no nut graph, or a reason why the company is doing this. We assume that this has to do basically with the serious losses the group's cellulose unit (Votorantim Celulose) posted for bad bets on currency derivatives contracts. The group, controlled by the Ermirio de Moraes family, sold a couple of weeks ago almost half of its stake in Banco Votorantim for 4.2 billion reais to state-controlled Banco do Brasil.

Venezuela's León Let The Cat Out of the Bag: Public Finances Are in a Bind

Central Bank Director Armando León (photo) is probably the most respected economist working for the Hugo Chávez administration. I met him 2 1/2 years ago in Singapore, during an IMF/World Bank meetings; we had coffee a few times, chatted at the airport, took the same flight from Singapore to Paris. León is criticised by some of his peers for his allegiance to the regime: to me, he simply refused to flee the boat while it started sinking. At the time of our meetings, oil was flying high and he sounded confident that the president's economic policies wouldn't go beyond rhetoric. He, like most of us, was wrong.

León, sources told me at the time, was a key advisor to Chávez during his decision to nationalise telecom and oil and electricity companies in Jan. 2007. He basically prevented things from getting worse.
In an interview with Últimas Noticias, the newspaper owned by the Capriles group, León voiced some discontent over the current course of the Chavista economic policies: ''State policies should be revisited. We can't afford buying companies that, in a three-month period, soak up their own resources and trigger losses, or are simply unable to honour their payrolls,´´ León told the newspaper. The translation is mine. The link takes you, dear reader, to El Nacional news summary on the UN story.

Even as Venezuela has a cash cushion that we estimate at around $70 billion, its public finances have suffered structural damages -- as León seems to suggest -- due to the president's obsession with nationalising anything he deems
strategic from dairy producers to oil joint ventures. The expected purchase of Banco Santander SA's Venezuela unit is one example of the many pending nationalisations that will take their toll on the national budget. Let me add something else -- the budget was elaborated assuming oil above $60 a barrel. Yet, last week, the price for the Venezuelan oil basket dropped to $37 a barrel.

León dropped a bombshell, days before the referendum that Chávez is desperately seeking to win so he can run again in 2013. Not that none of us didn't smell a rat, we all know that the fiscal situation in Venezuela is a mess.
But by ringing the alarm bells, León is signaling that the government is considering devaluing the currency or raising taxes, instead of cutting spending, which would be the proper thing to do. If Chávez wins the referendum, the probability of a currency devaluation will rise. The economy needs a valve of scape, and it might need it sooner than we imagine.

Important Economic Releases Out This Week in Brazil Will Tell Us About Extent of Economic Downturn

This week, the central bank will release current account figures and budget data for the month of January and December respectively (click on the link for the central bank's Web page.) The trade deficit will probably come narrower than expected by most economists, as imports are declining fast. And budget numbers will likely show a decline in tax collections plus the impact of rising spending earmarks to fight the crisis.

The data will probably impact the currency markets. The currency, said one trader who wanted to remain anonymous, will probably suffer from high volatility. The recession that is afflicting the U.S., some European countries and Japan, which together buy almost half of Brazil’s exports, is hurting exports. The plunge in commodities will also hurt dollar inflows. The real has also been taken hostage by fluctuations in global sentiment, said the trader. A deterioration in fiscal numbers may also put more pressure on the currency -- Brazil is still the biggest debtor in Latin America.

Emerging Market Debt Funds Experience $355 Million in Outflows. Recovery Trend Seen in Early January Seems Over.

According to EFPR, in the week ended Jan. 21, emerging market debt funds saw outflows of $355 million, or the equivalent to 0.82 percent of assets under management, compared with an outflow of $181 million in the previous week. Assets under management for emerging market debt funds declined by $882 million during the week, a significant amount. Fluctuations in the price of the U.S. dollar hampered the value of assets, resulting in a reduction of $229 million in assets value during the week. A drop in asset prices cut the value of assets under management by a further $299 million.

Earlybird, Jan. 26, 2008

And these are the headlines:

MARKETS -- The Era of Big Government to Be Discussed at Davos Forum (WSJ): The risks of big government in the current scenario, as much as the need for it, should be extensively debated and told to the public. No one says more effective regulation isn't needed. But the type of distorting intervention in private affairs, the way Brazil's government is doing, should be discussed, understood and fiercely attacked. No government should use the crisis to increase their grip on the economy nor offer taxpayers' money to help badly managed companies, nor use state companies to house political appointees and endorsers of the regime.

U.S -- Obama Plans Fast Action to Tighten Regulation on Wall Street (NYT): We have to see what type of solutions they will come up with to problems that range from conflicts of interest between banks and rating agencies to the crisis in the investment-bank model. Good news they are moving quick on these regulatory overhaul.

BOLIVIA -- Evo Morales Wins Referendum on New Constitution (Estado): The approval of the constitution by an overwhelming 58 percent is an important victory for Morales, who in the past year has been under fire due to a feud with opposition governors, declining gas exports and political uncertainty. The new constitution will allow more access to power to indigenous communities, which should be very welcome. One good friend of mine told me at lunch Sunday the importance of this type of ''revolution´´ in Bolivia, where the majority never had real access to power. On the other hand, the government will have almost full control of the economy. The U.S. new administration's reaction to this result is one aspect of interest -- it would be very encouraging to see the U.S. accepting the 'Yes´ victory and congratulating Evo and the Bolivian people for the process.

VENEZUELA -- Chavez Seen Garnering More Support for His Plan to End Presidential Term Limits (Nacional): Well, people are sovereign. But in any case the 'Yes´ victory won't be an overwhelming one. A call on this is quite a tough job. Chavez is doing quite a clever move by enticing his regional supporters to work for the 'Yes´ option. On the other hand, we see a dormant opposition, a bit lazy and perhaps fractured again after the electoral wins obtained in the recent regional elections.

BRAZIL -- Crisis is Leveraging the Clout of Unions (Estado): Good story by Estado. We have been saying this along the past month. It doesn't mean that unions will get what they want, but Brazil need stronger unions, less dependent on state aid, independent, protective of the interests of Brazilian workers.

COLOMBIA -- Uribe, Venezuela's Chavez Agree to Create $200 Million Fund for Small Companies (Tiempo): Another populist move that will end up in nothing. Instead of creating these funds, both countries should work on issues ranging from trade problems (Venezuelan companies are squeezed by little access to foreign exchange to pay for their Colombian imports) to contraband. Another item in the agenda should be oil investment by the Venezuelans in Colombian projects and vice versa. Ah! One more thing: Hugo Chavez believes that bilateral trade will reach $10 billion by 2012 ... That can be possible only if Venezuela stops imposing barriers on Colombian imports.

MEXICO -- Drug Dealer Dissolved 300 Rivals in Acid (London Times): Jesus Christ! No comments.

IDEAGlobal Expects 'Turbulent´ Week for Latin American Bond Prices

IDEAGlobal, the New York-based market intelligence company, said in a report out today that Latin American debt paper ''finished off a turbulent week (last week) with losses of 1.5 percent on a category-wide basis,´´ which the shop deemed as ''a positive when compared to the 3.5 percent drops observed in the U.S. equity markets.´´ U.S. stocks will remain a major external price-driver for Latin bonds.

Risk is to the downside for the regional debt markets, said the company, adding that buying Brazil on breaks to the downside would be an interesting alternative for the time being; IDEA views ''Panama and Peru as preferable alternatives to Colombia and Mexico under such scenario of weakness.´´

According to IDEA, ''price drift in Latin America is very subject to the evolution of´´ the U.S. Treasury market in exactly opposite direction to when the drive to lower yields forced by the Federal Reserve rallied the Latin America camp. The shop also warned that comments made by Treasury Secretary Nominee Timothy Geithner about the overvaluation of the Chinese yuan and that country's alleged manipulation of its currency opens space for protectionist actions and ultimately a trade war (IDEA says that ''chatter coming from Davos starting Wednesday might filter into this confrontation.´´) U.S. Treasury yields will therefore remain quite sensitive to the China subject -- remember that the Chinese are the biggest holder of Treasury bonds,) ''pushing the skew to the upside for U.S. rates in detriment to the outlook for Latin bonds.´´

Friday, 23 January 2009

Israel Electric Bond Sale Data

And the final result is:

Issuer: Israel Electric Corp. Ltd.

Size: $500 Million

Maturity: Jan. 28, 2020

Coupon: 9.375% (Semi-annual)

Issue Price: 99.158% of principal amount

Yield to Maturity: 9.5%

Spread to Benchmark Treasury: 684 Basis Points

Benchmark Treasury Price and Yield: 109.11%; 2.66%

Gross Proceeds to Issuer: $495.79 Million
Ratings: Moody’s: Baa2 / S&P: BBB+
Book Managers: Citigroup Global Markets Inc / JPMorgan Securities Inc.

Co-Managers: Credit Suisse Securities / Goldman Sachs & Co. / Merrill Lynch & Co. / Morgan Stanley & Co.

Israel Electric Seen Closing Bond Sale Today. Latest Pricing Puts Yield at 9.75 Percent

This is the latest data regarding Israel Electric Corp.'s bond sale. expected to be completed today. The use of proceeds is for new investment and general corporate purposes.

Issuer: Israel Electric Corp. Ltd.

Ratings: Baa2 / BBB+ (Stable/Negative Watch)

Type: Senior Secured Notes

Maturity: January 2020

Size: Benchmark Size in U.S. Dollars (At Least $500 Million)

Yield Guidance: 9.5 - 9.75%

Bookrunners: Citigroup Inc. / JPMorgan Chase & Co.

Co-Managers: Credit Suisse Group / Goldman Sachs Group Inc. / Merrill Lynch & Co. / Morgan Stanley

Argentina: Guaranteed Loans Swaps a Done Deal? Swap of Bodens May Come Next

Ambito newspaper reported today that the government already sealed the local tranche of the guaranteed loans (GLs) swap. Investors have submitted bids worth $3 billion of GLs, the equivalent to 50 percent participation of debt eligible for the transaction, according to the paper. The swap is scheduled to take place next Wednesday. HSBC Securities analysts estimated recently that a transaction in such terms would trim borrowing requirements this year by about $1 billion. One investor said that next in the government plans could be a new swap of 2012 Bodens for discounts, aimed at international investors.

Krugman Tells Valor Governments Should Spend More. His Words Can Be Misinterpreted by People Like Mantega

Yes. For people like Brazilian Finance Minister Guido Mantega articles like this in Valor Econômico may sound like music to the ears. Mantega (photo, in his version of Criswell, the bizarre predictor of events decades ago) can't probably sleep at nights, thrilled by the fact that the global crisis is helping all his predictions (and wishes) about stronger government finally come true. Nothing more fallacious than that. You see him more confident and daring and encouraged to make stupid decisions these days.

Paul Krugman, the Nobel Prize winner, is telling governments of the world, ''spend now and worry about the costs later,´´ people like Mantega risk following his instructions to the word, impoverishing our children in the meantime. Krugman should watch his tongue better. The same guys who followed Milton Friedman's creed are now seen as stupid. Krugman is worried that the Obama economic salvage package will be unable to revive the economy (Valor says the measures are preventing dismissals and asset writedowns from getting worse, not improving the situation.) Mantega yesterday pledged to increase national debt by 10 percent to beef up the state development bank with new funds and lend to the nation's companies. Produce and invest for who? Wouldn't it be logical to allow companies find their optimum level of production until it hits rock bottom? Social costs are huge but, wouldn't it be logical?