Wednesday, 21 January 2009

Fitch's Shetty Comments on Brazilian Rate Cut (Port.)

Comentários de Shelly Shetty, diretora sênior do grupo de ratings soberanos da Fitch na América Latina. Prestem atenção da forma que Shetty menciona a situação de desaceleração econômica no Brasil -- o que o BC não menciona de jeito nenhum no texto já traduzido no nosso último posting.

“A queda da inflação e das expectativas de inflação, assim como a
desaceleração da atividade econômica de forma mais acentuada do que era
esperado proporcionou ao Banco Central flexibilidade para começar o ciclo
de relaxamento monetário com um agressivo corte. Entretanto, o Banco
Central precisa se manter vigilante contra os riscos de inflação
provenientes do enfraquecimento do Real.”

“O corte na taxa de juros pelo Banco Central, assim como sua atitude pró-ativa para

garantir adequada liquidez no sistema financeiro, deverá proporcionar algum
apoio à vacilante perspectiva de demanda doméstica.”

“A manutenção de uma estrutura de política monetária e de taxa de juros

confiável será essencial para que o Brasil possa enfrentar o ambiente
externo desfavorável e minimizar os impactos da recessão global, queda dos
preços das commodities e desalavancagem global.”

They Are Aggressive: 100 Basis-Point Rate Cut in Brazil ...

Jesus! The Copom did it. The Committee trimmed the overnight rate by a full percentage point to 12.75 percent. Interpretation: WE ARE IN A RECESSION, AND A BAD ONE ... We expected here in MM a reduction in the Selic to 13 percent.

This is the text in Portuguese, and then my translation follows:

''Avaliando as perspectivas para a inflação, o Copom decidiu, neste momento, reduzir a taxa Selic para 12,75% a.a., sem viés, por cinco votos a favor e três votos pela redução da taxa Selic em 0,75 p.b. Com isso, o Comitê inicia um processo de flexibilização da política monetária realizando de imediato parte relevante do movimento da taxa básica de juros, sem prejuízo para o cumprimento da meta para a inflação.´´

''Evaluating the prospects for inflation, the Copom decided, in this moment, reduce the Selic rate to 12.75 percent, with no bias, in a five-to-three vote, with three ballots going for a 0.75 percentage point reduction. With this, the Committee initiates a process of monetary policy easing carrying out immediately the relevant portion of monetary policy actions related to the changes in borrowing costs, without putting at jeopardy the fulfillment of the inflation target.´´

My reading of this is:
1) The dissent were the conservative voices that for the Lula years managed monetary policy decisions (including CB President Henrique Meirelles.) This is the first time the hawks were defeated -- I don't recall such a voting result during the Lula years.
2) There must be some serious and intense political pressure going on. Why the Copom doesn't mention the magic words ''economic activity´´ in its statement will remain a mystery until next week, when it releases its policy minutes. The decision is clearly aimed at stimulating the economy -- but the guys at the Copom only do talk about INFLATION!
3) Equity markets will jump tomorrow. Many strategists at several shops (Bulltick among them) were confident of this ... although neither of them sounded tooooo convinced.
4) The beginning of the monetary easing cycle will be asymmetrical -- that is, the hawks will try to slow the speed, while the doves will try to accelerate it. Meirelles will probably remain mum for a while, and only limit his talking to dull conferences.
5) The Finance Ministry is the clear winner of this tug-of-war. Mantega (Mr. Criswell) will now have more clout to increase spending until he sees some recovery signs sparking. Poor him -- he won't see any of that, at least until 2010!
6) The CB will have freedom (uhhm, sorry, will be forced) to extend aid to ailing companies by offering either a decrease in reserve requirements or more dollars to help them roll over maturing debt.
7) And what about banks? Mantega will try to force them to lend at any cost. Meirelles must be fuming after this ...

Now, wait a minute! what about if the bank board members decided to negotiate this dissent signs, to show the markets they still care about inflation? Nahhh, please, this is no time for conspiracy theories.

Recommended: Bloomberg Story on Madoff and Excesses by Santander´s Spain Bankers

Check this story by Bloomberg reporters Esteban Duarte and Charles Penty. It shows the excesses by which bankers ran for years -- and no regulator could ever trace down. Self-regulation, ethics must be part of the revamp of the financial industry.

Santander’s Madoff Sales Mean ‘Catastrophe’ for Teacher, Vendor

By Charles Penty and Esteban Duarte
Jan. 21 (Bloomberg) -- Banco Santander SA sold Bernard
Madoff investments to a teacher and a street vendor, not just
to wealthy private banking clients in Spain and Latin America.
Branch managers channeled customers with money from
property sales or inheritances to private banking salespeople,
lawyers for the investors said. A retired school teacher put
300,000 euros ($388,000), half her savings, in a structured
product linked to Madoff, said Jordi Ruiz de Villa, an attorney
at the Barcelona law firm Jausas. The vendor invested 325,000
euros of lottery winnings in a similar product and may have to
return to street sales, according to lawyers at Cremades &
Calvo-Sotelo in Madrid.
“The fact that someone has a sum of money in the bank
doesn’t make him a suitable customer for this type of
product,” said Ruiz de Villa, who’s representing about 30
account-holders with potential claims of 10 million euros,
including the teacher. “Some retail clients have suffered true
personal catastrophes because of this.” He wouldn’t provide
the teacher’s name.
Santander, Spain’s biggest lender, may lose customers at
the domestic branch network that accounts for a third of profit
if it is found to have misled people who trusted their
neighborhood bankers, said Peter Hahn, a fellow at Cass
Business School in London. The bank, led by Chairman Emilio
Botin, has said clients have 2.33 billion euros invested with
Madoff, including 320 million euros from private banking
customers in Spain.
“The model in Spain where customers just left it to Big
Daddy Botin to take care of things has been broken,” said
Fernando Zunzunegui, a Madrid-based lawyer. He said he is
taking on Madoff-related claims valued at 8.2 million euros
from 20 clients who are “clearly retail.” He declined to
provide detailed information about his firm’s clients.

‘Qualifying Investors’

Ruiz de Villa and Zunzunegui said they are signing up
clients and reviewing the cases in preparation for filing
possible lawsuits against Santander. Javier Cremades, chairman
of Cremades & Calvo-Sotelo, said he’ll push for a settlement
New York-based Bernard L. Madoff Investment Securities LLC
collapsed last month after Madoff told his sons it was a $50
billion Ponzi scheme, according to a complaint filed by the
U.S. Federal Bureau of Investigation. Worldwide, the victims
include banks, charities and investors such as Madrid-based
billionaire Alicia Koplowitz and film director Steven
Santander, based in the Spanish city of the same name, on
Dec. 14 said international private banking clients and
institutional investors had 2.01 billion euros of potential
losses in Madoff-related funds. The rest of the money is in
investments sold to “qualifying investors” in Spain.

Legal Protections

Branch customers were sold products linked to Madoff
through Santander’s Geneva-based Optimal Investment Services
hedge-fund arm, said the three lawyers representing the bank’s
customers. Investors were asked to sign statements that they
understood what they were purchasing and met the criteria for
The bank has said it won’t compensate clients who invested
with Madoff because the losses involve fraud. A spokeswoman for
Santander said the bank had no further comment on the matter.
Selling structured products to wealthy clients has been a
popular strategy in Spain and wasn’t in itself wrong, because
Santander believed it would yield safe and stable returns, said
Fernando Luque, an analyst at Morningstar Inc. in Madrid.
“Many of these institutions like Santander are going to
be protected by the documentation, but the question is how
great is the business damage from all this,” Hahn of Cass
Business School said.

Lottery Winner

Spanish securities law requires anyone offering investment
services to “suitably evaluate” a customer’s experience and
market knowledge and ensure that he or she understands the
The criteria for being a potential private banking
customer are lower in Spain than other countries, said Manuel
Romera, head of financial industry studies at Instituto de
Empresa, a business school in Madrid.
A 2006 study by the school showed that Spanish banks tend
to start targeting clients with 500,000 euros in assets,
compared with 1.5 million euros for international banks.
The lottery winner invested in a Santander structured
finance product, according to Cremades & Calvo-Sotelo. The firm
is representing some 80 individuals in Spain and Latin America,
mostly Santander customers, who have about 35 million euros of
claims. Cremades declined to provide the investor’s name.

‘Stable’ Fund

The teacher put half the proceeds from an apartment sale
in a “multi-strategy” structured product, 35 percent of which
was in Optimal Strategic U.S. Equity, an Irish-registered fund
whose trades were executed by Madoff, according to Santander’s
description of the investment, which was shown to Bloomberg by
Ruiz de Villa.
The document describes the investment as “conservative”
and “probably the most stable” of all funds run by Optimal.
Structured products have a defined maturity date and include a
mix of assets to meet investor needs in areas such as risk
hedging and diversification.

‘Pending Valuation’

A retired electronics executive said his private banking
account manager told him losses on a 400,000-euro investment he
made three years ago could be 80 percent. His bank statement
now lists the product as “pending valuation,” the executive
said in an interview. He asked not to be identified because he
may have to return to work.
Spain’s anti-corruption prosecutor last week said it had
opened an investigation into Madoff’s alleged fraud.
M&B Capital Advisers, a brokerage founded by Botin’s son
Javier and Guillermo Morenes, husband of his daughter Ana
Patricia Botin, has said its investors put 152 million euros in
funds linked to Madoff.
Santander shares have fallen 18 percent since the bank
released details of potential Madoff-related losses. The
Bloomberg Europe Banks and Financial Services Index dropped 27
percent in the same period.
In a speech at the Euromoney magazine awards last July in
London, Botin urged bankers not to buy products they don’t

‘Incalculable’ Damage

“The damage to reputation from all this to the Santander
name is incredible, incalculable, the kind that takes years to
repair,” said Bernhard Bauhofer, founder of Wollerau,
Switzerland-based Sparring Partners GmbH, a consulting firm
that specializes in corporate image management.
Santander, which calls itself “the world’s best bank,”
has avoided most of the fallout from the U.S. subprime lending
crisis. Last February, the bank took a 737 million-euro
writedown on its stake in Sovereign Bancorp after the
Philadelphia-based lender plunged in value following charges
for loan losses. That compares with the $49 billion of losses
and writedowns posted by Zurich-based UBS AG, the largest total
among European banks.
In the five years through 2007, Santander’s net income
tripled to more than 9 billion euros as Botin expanded in Latin
Spain has the world’s highest density of banks, with 96
branches per 100,000 people, compared with 18 for the U.K.,
according to a World Bank study. Santander has about 4,840
retail branches in Spain, while Banco Bilbao Vizcaya Argentaria
SA has about 3,484.
In that environment, Santander has been expanding its
private banking business. The division, with almost 110 billion
euros under management, targeted 18 percent growth in managed
assets in 2008 and a 20 percent increase in pretax profit,
according to the bank’s 2007 annual report.

‘Back to Basics’

“Spain is a country of salesmen, but we also need
financial experts to better explain the product to clients,”
said Romera, at Instituto de Empresa.
The Madoff case highlights the need for Spanish banks to
return to good investment practices that should preclude
clients from putting more than 15 percent of their money in a
single security or product, said Jose Miguel Mate, chief
executive officer of Tressis SV, a Madrid-based wealth
management company.
“There will be a way back to the basics and to common
sense,” said Mate, a former commercial director of Banif,
another private bank owned by Santander.

Brazil Rate-Cut ... Despite Its Conservative Credentials, Meirelles' Boys Will Trim Selic by 75 Basis Points

A few days ago, one reader said the reasons I gave for the 75-basis-points reduction in the Selic were wrong. Espúreas, fue mi interpretación. I insist -- I put the inflation factor as first reason behind any decision to cut borrowing costs. But the second, the reader likes it or not, is linked to the ability of companies to refinance their debts abroad. Demand for Brazilian exports is weak, very weak; confidence is reaching record lows (perhaps it did already reach bottom); credit is contracting; and there's not much fiscal room to act as many assume. Despite the Monetary Policy Committee's conservative credentials, a half-percentage rate cut is quite unlikely.The situation requires action, determination. Such a cut would be seen as shy, even coward for such a conservative economic policy-making body like the COPOM.

I insist in the issue of corporate creditworthiness. One thing that Brazil cannot afford now is to see its companies falling into insolvency because of retarded government action. And this is occurring despite the administration's aggressive action to ensure that steady flow of credit reaches companies. The Copom will have to mention that at some point, because labour issues such as wages and compulsory contributions will become a burden for corporates at some point and, as we know, they are rigid to the downside. Second, because the cost of past investments will begin to haunt these companies, and force them to pare the ongoing or future projects. We know this has an effect on future inflation perceptions, via future installed capacity. The Copom is surely thinking about all this and gauging a measured yet aggressive cut. My call continues to be a reduction of 75 basis points to 13 percent -- that will have no impact on either stocks or bond prices.

On the same token, a 100 basis-point reduction -- which looks exaggerated for the Copom, -- should not be ruled out. The move would spark some optimism among Brazil's disheartened executives and workers. If such decision was to be taken, it is because the Copom would be very worried about the ongoing deterioration in business sentiment. The first catalyst would be the stock market -- so, dear reader, remain very attentive to the announcement text tonight.

Colombia and Plunging Output Numbers

Yesterday, the government reported that Colombia's industrial production tumbled more than 13 percent in November. Technical reasons attributed the drop to two fewer working days compared to the year-on-year estimate. But many analysts say such reason is lame. For the 12 months ended in November, output fell 2 percent. Sectors affected include machinery and mainly exporters.

Plunging industrial production and slowing retail sales mean Colombia will collect less in taxes. As President Alvaro Uribe prepares for a second re-election, he will somehow have to stimulate the economy. With the deficit growing and the current account deficit remaining at significantly-high levels, the president has limited room to do that. He may opt to increase borrowings and keep spending rolling -- he isn't a very disciplined guy. The central bank will have to do the other part of the job (cutting rates) ... but leeway to do that is also very limited. Alianza Valores, a Bogota-based brokerage, is forecasting inflation to end the year at 6 percent, down from 7.7 percent last year (but still off the central bank target for the year. Forgive me if I am wrong.)

Fiscal Deficit Announcement

Finance Minister Oscar Zuluaga said yesterday that the deficit will widen this year to 3.2 percent of GDP, compared with the initial estimate of 2.6 percent of GDP. The reasons? lower tax collections and higher debt servicing payments. The target for the consolidated public sector deficit was upped to 1.8 percent of GDP from the initial estimate of 1.2 percent. And the government enacted a 3 trillion peso cut in spending!!!!!