Monday, 19 January 2009

Mexico Brings Lesson to Obama, Says Bloomberg. Tom Black Hit the Nail on the Head

This is one excellent story as a curtain raiser for the Obama inauguration tomorrow, courtesy of Bloomberg Mexico reporter Thomas Black. Click on the link here, sit and enjoy your reading. My only comment to this is that, recently, I had a chat with several economists and many of them said that the typical Keynesian approach of boosting public expenses in large infrastructure works may not work this time. Some of them recalled an interview with Nobel Prize winner Paul Krugman, who said in the occasion that it would be quite hard to find enough viable projects for the economic rescue package. And we have to agree with them all -- and with Tom: the bigger the size of the stimulus, the harder to find where to spend the money on.

Nevertheless, we hope Obama and his team make it. Infrastructure spending should kick start some activity and prevent a more significant loss of jobs, but it was not, is not and will not be a panacea. And, more importantly, it will not be enough to fix the global economy, nor pave the way for a global recovery. We in this blog wished that voters were more skeptical over the government's capacity to fix things and instead urged for less state intervention. But asking for that at this moment could be nothing but ... absurd.

DebtWire Releases Story About Arantes Bondholders. Things May Get Uglier ...

This is the text of a story by DebtWire reporters Ana Mano and Maria Fernanda Blaser. The Arantes bankruptcy filing two weeks ago is just the start of an ugly tale. Clearly at the heart of all this is the very weak corporate governance practices by many Brazilian companies that failed to disclose their debt and derivative positions to investors for quite a long time. This will have a negative impact in the way foreigners perceive Brazilian companies in general. Please read the story, it's quite interesting.

The bondholders of Arantes Alimentos have had their first meeting in New York this week to organize a strategy to collect USD 150m in claims against the Brazilian meatpacker, a source close to the investors told Debtwire.

One of the bondholders recommended a lawyer to a group of investors and the committee that is being formed is soon to issue mandates in the US and Brazil, the source said. Arantes filed for bankruptcy protection in the town of Nova Monte Verde, north of Mato Grosso state and close to the Amazon forest, after missing its first USD 8m coupon payment on 19 December. Holders of the 10.25% bond due in 2013 are disappointed with the company and at the banks that led the deal to market, the source said. Bondholders are claiming that "management lied" to investors regarding the closing of derivative contracts that triggered the bankruptcy filing. A lawsuit against the bond's underwriters for "lack of due diligence" is a possibility, the source said, referring to Credit Suisse and Santander, which declined to comment.

Legal action against the company in the US is also an option. Apart from structuring the bond, Credit Suisse and Santander also sold currency derivative contracts to Arantes "which the management of the company did not understand," the source close to the bondholders said. Food processor Sadia and pulp and paper producer Aracruz suffered the same fate despite having "more sophisticated" administrators, the source close to the bondholders and two analysts said. The exotic contracts had a multiplier component that worked against the company, but not against the banks, in case the BRL fell against the USD, the source close to the bondholders said. The USD surged 22% against the BRL in the fourth quarter.

In a November conference call, Arantes told investors in public it had closed all outstanding derivative contracts, the source said. Arantes had gross debt of BRL 1.5bn (USD 652m), lawyer Geraldo Gouveia Junior was quoted as saying by financial daily Valor Economico on 13 January but is now "forbidden" by the company to give more interviews, Arantes press officer Regina Antonelli said. The managers themselves were also unavailable for comment. At the end of the third quarter, the fallen meatpacker reported total debt of BRL 780m (USD 340m), 80% denominated in foreign currency. The undisclosed derivatives losses could explain part of the difference, the source close to the bondholders, two credit analysts and a banker close to the company said. Gouveia told Valor derivatives losses amounted to up to BRL 250m (USD 109m). Arantes third-quarter results were audited by Terco Grant Thornton, which noted the company hedged its foreign currency exposure with non-deliverable forward contracts. Based on information provided by Arantes, however, the auditors said on 25 November "they were unaware of relevant modifications that should be made in the financial statement for it to conform to Brazilian accounting norms." The auditors declined to comment for this report.

Arantes was the last of six Brazilian beef processors to successfully market a bond and had tried to sell a deal via Standard Bank in November of 2007. Eventually in June 2008 its debut bond was successfully issued by Credit Suisse, which still owns some of the securities, and Santander. In the last two months, there was a surge in trading in Arantes bonds, the source close to the bondholders said. Despite luring hedge funds in at about 11 cents, many original investors remain exposed to Arantes, the source said.

Among Brazilian banks, Bradesco is the largest creditor of Arantes with BRL 60m-70m (USD 26m-30m) in claims, a banker formerly close to Arantes said. Santander, in turn, is the largest individual creditor of Arantes with BRL 140m (USD 61m) in claims, most of which is unsecured, according to the same source. These figures do not include derivative-related losses "which will sooner or later appear," the source said.

Obama y El Desafío de la Economía (Spa.)

Por primera vez en muchos días me he decidido a escribir en español. Hoy y mañana, el mundo centrará su atención en la posesión de Barack Obama como presidemte de los E.E.U.U. Los mercados en el mundo estero se encuentran a la expectativa de lo que la nueva administración podría anunciar como medidas de choque(clique en este link para leer el round-up de noticias de mercados de Bloomberg.) Se espera que Obama haga una advertencia a los bancos para que mejoren sus balances más rápidamente, y destine más recursos para la economía real por medio del TARP. El país está librando guerras en Irak y Afganistán y, en medio de su peor crisis económica desde la Gran Depresión, enfrenta algo peor: la incredulidad y la desconfianza de gran parte de su ciudadanía en el futuro del país. Obama dice ser optimista de la capacidad de los americanos de superar este crítico momento. Sin embargo los números recientes de desempeño económico, y las constantes encuentas realizadas por los medios señalan una pérdida deliberada de confianza. Eso es algo muy grave para un país en crisis.

Este blog ha querido hacer una encuesta (poll) muy simple. Confía ud. en la capacidad de Obama para revertir esta crisis? Responda SI o NO en la casilla superior derecha de este blog. Espero sea de su agrado.

Venezuela's Chavez Seizes $12 Billion From Reserves to Bolster Spending. Cuento de Nunca Acabar ...

This thing will never end. President Hugo Chavez announced that he would seize $12 billion from international reserves that will be funneled into the nation's sovereign wealth fund (Fonden) for new and existing spending plans. That leaves international reserves above $31 billion -- near the optimum level of about $30 billion for the indicator, according to the Chavista foreign-exchange currency policy-making manual. This is the fourth year in a row that Chavez, invoking the need to use oil wealth for Venezuelans (you wonder whether his Venezuelans are only those how wear red shirts in the streets,) takes money from the central bank to beef up the Fonden, the piggy bank of his Bolivarian Revolution.

Following this move, it would be reasonable to expect that Venezuela, errr sorry, Chavez, has a cushion of about $70 billion to fight the impact of the global recession. The money is comprised of international reserves of $31 billion, plus Fonden's total assets under management worth $25 billion, plus a minimum $15 billion in tax and royalty payments and contributions that PDVSA will have to make -- no matter what its financial situation is. For sure, a devaluation and an increase in domestic fuel prices remain on the table as last resort moves, although it is highly unlikely he tries either or both them if things get uglier. Chavez, seeking to win a Feb. 15 referendum on the end of presidential term limits and hide the grave situation of food shortages and reduced dollar supply his country faces, will for sure avert such policies. One wonders the size of the budget shortfall that the Chavez administration has been accumulating for years ...
For some reason, the bolivar fuerte is trading in the black market at almost 6 to the dollar -- almost three times the official quotation of 2.15 bolivares fuertes to the dollar.

Citigroup Brazil Integrates Consumer Finance Unit to Credit-Card Operations

According to Valor Econômico, starting April 1, the consumer finance unit of Citigroup Inc. in Brazil will be integrated into the bank's credit-card business, one of the most profitable activities it runs in Brazil. In a note to shareholers and clients released on Friday, Citi pledged to stay in business and denied it would sell any of its Brazil-based operations. As you might know, dear reader, there have been instense rumours in the marketplace saying that Brazilian banks and foreign lenders would be pitching offers for Citigroup's Brazilian unit. And the more Citigroup does to deny those rumours, the stronger they come. Citi has about 90 billion reais of assets in Brazil, if you add the retail banking operations (40-50 billion reais,) the consumer finance company (which is badly wanted by rivals including Banco Bradesco,) and the asset management unit, which administers about 25 billion reais in assets. The credit card company runs more than 6 million of cards.

Rumours on Friday were that
1) Bradesco was to bid for the consumer finance operations; 2) that Santander was interested in the operation (crazy, they haven't even finished the integration with ABN Amro,) and; 3) that a major European lender would be willing to pay cash and swap assets. In the wake of the Citi-Nikko news in Japan (click on this link to understand what I am talking about here,) the Citi guys are surely gauging every option -- summarising, not only they remain open to listen to any offer, but also they don't care about shedding valuable assets if the money offered for these is considerable.

Fund Flows Data Show Modest Readings; Recovery Seems to Be Losing Momentum


The recovery trend in inflows of investor money into emerging market funds that characterised the end of 2008 might be fizzling. High-Yield and Equity funds attrated less money, and bond funds posted outflows, according to EFPR. For the Jan. 14 week, inflows into emerging market high-yield (HY) bond funds slowed, after having lured almost $1 billion in new money the previous week. HY funds have posted net inflows in each of the last 7 weeks, according to Dresdner Kleinwort. Inflows of investor money into emerging market equities are also taking place at a slower pace. Inflows fell from $1.1 billion in total for the Jan. 14 week, compared with $1.9 billion in the previous week.

Peru, the Fastest Growing Latin Economy, Braces for Tougher Times, Bulltick Says

Bulltick LLC said in a report Friday that fourth quarter economic growth in Peru would slow to 5.9 percent on a year-on-year basis from 9.4 percent in the third quarter. Bulltick now estimates 2008 real GDP growth of 8.96 percent, the highest in Latin America. Their estimate for 2009 growth is 5.6 percent, also the highest in Latin America. The slowdown will come ''as the slumping global economy curbs demand for Peruvian exports and as domestic demand eventually slows´´ by half to about 6 percent growth this year, down from 12 percent last year.

Bulltick insists that Peru is well positioned to deal with the global recession because of structural reforms it undertook earlier in the decade and growing fiscal savings. ''However, Peru is not immune to the strong global headwinds, and as we have been contending, this country will also experience lower economic growth, less favorable terms-of-trade, as well as deteriorating current and fiscal accounts over 2009. This expected trend has begun, yet it will be a soft landing,´´ the shop said.

Earlybird, Jan. 19, 2008

These are the headlines for Mon., Jan. 19:

U.S. -- Bank Nationalisations in the U.S. Are Very Likely (Reuters): Nice story by Reuters. The truth is, options other than state takeovers are running out. And clearly, if another round of bad corporate results comes in April or so, nationalisation shouldn't be seen as an abnormal outcome. Reuters writes: ''The U.S. banking system desperately needs capital. Estimates of the shortfall range from $700 billion to more than $2 trillion. That money will not come from the private sector as long as the pending losses are all but impossible to estimate.´´ Scary.

U.S. -- New York Times Seek Slim Investment (WSJ): Interesting story, because it plays two different realities. One, the grave situation that media vehicles may face if this recession begins to cut back on ad revenue. On the other hand, the growing relevance of Carlos Slim as a global dealmaker and the fact that he is flush with cash amid this crisis. Among the options being discussed for the potential investment is a preferred-stock issue, says the WSJ. Preferred stock carries no voting right but pays an annual dividend, in return for his investment. But, why Slim would loan money to the NYT if it isn't for anything else than that? Lending money to Citigroup or any of those banks could yield much nicer returns for a deal, I think.

BRAZIL -- Unions, Defying Labour Confederations, Sign Job, Wage-Cut Accords (Estado): We said last week that this could be the most likely scenario, because right now there is no guarantee that a macro-accord between employers and labour confederations will be forged before the end of the month. In the meantime, smaller unions are buying time by agreeing to a flexibilisation in labour rules, to work time and pay cuts in exchange for job stability. The number of companies with already-signed accords is significant: 130. A deep overhaul of Brazil's labour rules remains, in our view, necessary.

U.S. -- Venture Capital Funding Fall to Four-Year Low (WSJ): The crisis is forcing venture capital and private equity investors to rethink their business models. Venture-capital investment dropped 30 percent in the fourth quarter to its lowest level since 2005, signaling that confidence on start-up companies is waning and that the outlook for IPOs in the long term is nothing but awful.

MEXICO -- Banks Tussle For Small, Mid-Sized Lenders; Credit Costs Data Seems Contradictory (Universal): Banks say they are lending more money to companies than they actually do, and that they charge less in interest and fees than they actually do. Hoarding cash is one thing bankers have done well in the past months -- this story is so much against anecdotal evidence anywhere these days. If this was true, Mexico would be the only country in the world where banks would be extending credit to small customers. I don't buy that. Nonetheless, I read in a recent report that bancarisation levels in Mexico are less than half those of Brazil's (18 percent of GDP vs. 37 percent,) and that would suggest that the most capitalised banks would be willing to vie for increased market share even in spite of this crisis.

U.S. -- Obama Urges Hope as Economy, Job Prospects Get Uglier (WSJ): ''Keep the faith,´´ ''work harder,´´ are Barack Obama's mottos these days. But unless the role of the state, international policies and corporate ethics parameters are improved and reworked in a way that effectively restores citizen confidence, nothing will change.

CHINA -- Economy Probably Grew at Slowest Pace in Seven Years (Bloomberg): The resilience of China's economy has been seen many times throught the years. But the effect of a decline in China activity would be devastating for Asia and the emerging market world, as Bloomberg rightly points out.

Citigroup Denies Again Plans to Sell Brazilian Unit. But Rumours About a Divestiture Abound.

There are rumours in the marketplace that Brazilian banks and foreign lenders are pitching offers for Citigroup's Brazilian unit. And the more Citigroup does to deny those rumours, the stronger they come. Citi has about 90 billion reais of assets in Brazil, if you add the retail banking operations (40-50 billion reais,) the consumer finance company (which is badly wanted by rivals including Banco Bradesco,) and the asset management unit, which administers about 25 billion reais in assets.

Rumours on Friday were that
1) Bradesco was to bid for the consumer finance operations; 2) that Santander was interested in the operation (crazy, they haven't even finished the integration with ABN Amro,) and; 3) that a major European lender would be willing to pay cash and swap assets. In the wake of the Citi-Nikko news in Japan (click on this link to understand what I am talking about here,) the Citi guys are surely gauging every option -- summarising, not only they remain open to listen to any offer, but also they don't care about shedding valuable assets if the money offered for these is considerable.