Tuesday, 3 February 2009

List of Policy Actions by Latin Governments to Stave Off Crisis

The following is a list of anti-crisis policy actions announced by Latin American countries, as put out by BNP Paribas SA economists this morning. We added some details too.

-- Brazil: Last month, Banco Central do Brasil announced that it would tap $20 billion of international reserves to help more than 4,000 companies roll over maturing foreign debt. More than $60 billion of corporate debts come due by the end of the year. The BCB continued to sell dollars in the spot market while sold $700 million with an agreement to buy them back (repo lines.) Also, the BCB rolled over almost the totality of the short $10.2bn exposure on currency swaps that came due on Feb 02.

-- Colombia: The nation was the first in Latin America to cut interest rates to fend off the impact of the global recession. Banco de la República cut interest rates again in January, this time by half a percentage point, the second such cut in the cycle; more rate cuts lay ahead, with a number of bank directors having pushed for a bigger move. A weakening of the peso led the Banrep to auction off $180 million in dollar call options.


-- Argentina: The government completed the local tranche of the Guaranteed Loans swap auction securing an almost complete participation rate. The government started a similar swap round with
foreigners yesterday and speculation is that the Fernández administration will afterwards move onto the holdout situation. The government also declared a state of emergency for the agricultural sector, made up primarily of tax deferments.

-- Mexico: Peso weakness led the CB to sell foreign exchange through auctions last week. There is growing pressure for the authorities to announce new measures to tackle the crisis.

-- Peru: The government began using $1.4 billion of planned stimulus package moneys. The package includes investments in infrastructure and tax breaks for exporters. The Ministry of Finance approved a $400 million
increase to the budget to help finance the program.

Riots in Paraisópolis, a São Paulo Slum, Made us Remember of Adoniran Barbosa

The military police of São Paulo last night occupied the slum of Paraisópolis, in southern São Paulo, after citizens allegedly protested the death of a 25-year-old drug lord popular in the area. Police repression against drug gangs is heavy-handed in Brazil, as some of you may know.

Following a series of violent attacks by organised crime in May 2006 in the city, South America's largest, the police launched several counter-offensives in which more than 180 people died. Police often conduct raids in Rio de Janeiro shantytowns too in search of drugs, weapons or to capture gang leaders, which (often) result in the deaths of innocent bystanders caught in the crossfire.
Anecdotal evidence provided by some newspaper stories showed that two Paraisópolis residents were wounded (one got shot in his chest and shoulder, and the other one on his chest too while returning from work.) Three PMs (military police) were wounded too. Civil unrest in Brazilian favelas is growing, and it doesn't seem that any government wants to seriously deal with this problem at all.

I am not taking sides -- allow me to make that clear. But while reading the stories on the media about Paraisópolis, I began to hum one song by Adoniran Barbosa (photo) that deals with this very serious social problem.
Barbosa was a popular singer and composer in the 1940s through the late 1960s, and is considered as the greatest sambista ever come from São Paulo. Check this link, with a version of Despejo na Favela (1969) (which means ''Slum Eviction´´ in Portuguese language.) The song lyrics follow (they are also in Portuguese.)

DESPEJO NA FAVELA 

QUANDO O OFICIAL DE JUSTIÇA CHEGOU
LÁ NA FAVELA
E CONTRA SEU DESEJO ENTREGOU PRÁ SEU NARCISO
UM AVISO,
UMA ORDEM DE DESPEJO,

ASSINADA: SEU DOUTOR,
ASSIM DIZIA A PETIÇÃO.
DENTRO DE DEZ DIAS QUERO A FAVELA VAZIA
E OS BARRACOS TODOS NO CHÃO,
É UMA ORDEM SUPERIOR

Ô, Ô, Ô, Ô, Ô, MEU SINHÔ,
É UMA ORDEM SUPERIOR

NÃO TEM NADA NÃO, SEU DOUTOR
NÃO TEM NADA NÃO
AMANHÃ MESMO VOU DEIXAR
MEU BARRACÃO
NÃO TEM NADA NÃO, SEU DOUTOR
VOU SAIR DAQUI
PRÁ NÃO OUVIR O RONCO DO TRATOR
PRÁ MIM NÃO TEM PROBREMA
EM QUALQUER CANTO ME ARRUMO
DE QUALQUER JEITO ME AGEITO

DEPOIS,
O QUE EU TENHO É TÃO POUCO,
MINHA MUDANÇA É TÃO PEQUENA
QUE CABE NO BOLSO DE TRÁS

MAS ESSA GENTE AÍ, HEIN?
COMO É QUE FAZ?
Ô, Ô, Ô, Ô, Ô, MEU SINHÔ,
MAS ESSA GENTE AÍ, HEIN?
COMO É QUE FAZ?

Lula Approval Ratings Rose to Record 84 Percent. Brazilians Seem to Love State Intervention Announcements


Numbers from Instituto Sensus, graphs from Estado

Read this story in O Estado de S. Paulo about President Luiz Inacio Lula da Silva's approval ratings. Positive assessments on the Lula administration rose to a record 84 percent, according to Belo Horizonte, Brazil-based pollster Instituto Sensus. The poll was commissioned by the National industry Confederation and was released this morning in Brasilia.

One reader wrote on Estado's comments page: ''This is a joke.´´ It may well be, but citizens should credit Lula with having assumed a very proactive role during the crisis -- whether his purpose is the best for the country's interest is a question. Yet, we are still far from seeing the real impact of the wave of job dismissals on the president's popularity ratings.

Brazil Recession Started in Fourth Quarter, Part XXXIII


The Brazilian government said this morning that, in December, industrial production declined 12.4 percent on a month-on-month, seasonally-adjusted basis. The drop on a year-on-year basis was a worse-than-expected 14.5 percent! Both figures came much worse than estimates by economists in surveys carried out by Agência Estado, Bloomberg and Reuters. According to the statistics agency, known as IBGE, December's drop was the worst industrial production result on a monthly basis on record (data started to be compiled around 1991.)

According to a couple of economists who distributed their views on the data just after the release, the December industrial production data is likely to set the scenario for another interest-rate reduction of at least 100 basis points in the Selic rate target on March 10-11. Durable goods posted the worst performance, with credit-sensitive industries still showing the most dismal performance since the crisis broke out at the start of September. On the other hand, non-durable goods are outperforming other categories, signaling that people are paying right away for their purchases and giving up on credit. Retailers such as Grupo Pão de Açucar and Lojas Americanas SA as well as clothing companies Marisa and Coteminas may profit from this situation (hey! remember that consumption is falling but a slower pace in these sectors than at credit-dependent ones like durable goods) at the expense of Casas Bahía, Ponto Frío and other home appliance makers.


This morning we mentioned in another posting that Morgan Stanley is predicting further central bank policy front-loading, with the Selic ending the year below 10 percent. This output number is lending further strength to that hypothesis -- that about policymakers being very aggressive to reducing rates to stave off the recession.

Bloomberg Reports Interesting Development in Hybrid Bonds Market as Fears of Bank Nationalisations in the U.S. Mount

Click on this link to read a story by Bloomberg reporters Caroline Salas and Neil Unmack. Their conclusion is simply that government action (in the form of capitalisations) is failing to revive investor confidence in subordinated bank securities, which support the capital on their balance sheets. Hybrid bonds, or securities with characteristics of both debt and equity that banks have been using to prop up their capital and ''which typically count as regulatory capital to cushion against losses,´´ are key for lending. The drop in demand and prices for hybrid bonds, the reporters found, is curtailing new lending.

Borrowing Costs Soar in Brazil. Check New Domestic Debt Issuances in www.debentures.com.br

Maturities have been shortened and terms have been toughened in the domestic market for debt, according to Andima. Yields for three-year debt are hovering around the equivalent of 125 percent of the CDI, the benchmark rate for interbank lending. The CDI is currently trading at around 12.63 percent.

According to Andima, a lobbying group for financial institutions in Brazil, issuers are having a hard time offering their debt to investors, who are demanding more and tougher guarantees for those bonds. The 610 million reais sold in Bradespar bonds on Jan. 22 were sold only until the holding company of Banco Bradesco SA offered to pay 125 percent of the CDI for three years -- in Brazil a year ago the benchmark maturity for a local bond was five years and maturities were as long as ten years less than two years ago. It was widely believed not long ago that local banks would take up the slack as international lenders, wounded by the impact of the credit crisis, were scaling down their credit operations in Brazil. But resources have become scarcer by the day and risk-taking has turned very restricted. Two years ago, a AAA rated company would offer eight-year bonds at less than 105 percent of the CDI; less than a year ago, yields were close to 108 percent of CDI.

Two companies have filed for permission to sell debt in coming weeks: Votorantim Finanças, which is planning a 500 million real domestic bond sale, and ETEO, which might offer up to 123 million reais in notes. One source recently told me that the role of the BNDES in this thing might be crucial. By lending failed and healthy companies, the BNDES is triggering distortions in capital markets. It is also hampering the development of debt and derivatives instruments, creating distortions in price formation, etc. The way the BNDES is pricing some issues that it buys through private placements is unclear, or even worse, far from transparent. While credit might be urgently needed by corporates, the BNDES is derailing an efficient allocation of resources by impeding a market-based debt pricing mechanism to operate normally -- one that takes into account the current scarcity of financial resources, the limited risk-taking appetite and rising government intervention (call it the likelihood that rules might be changed in favour of the government at the expense of private investors.)

Colombian Brokerage Alianza Valores Bets on Aggressive Rate-Cutting in First Half

Colombia was the first Latin country that joined the global monetary policy easing in full fashion. Alianza Valores, a local brokerage, is betting that the rate-cuts will be aggressive in the first six months of 2009 -- and offers a good number of reasons for its reasoning. First, the numerous dissent that called for a higher easing than the 50 basis-point reduction that took place last week. Second, the language about inflation risks was way softer than before. Third, the Banco de la Republica board of directors was concerned about growth trends, citing the worrisome behaviour of the external, manufacturing and services sectors going forward. And, last but not the least, fourth, the bank is clearly pointing to more reductions in the Repo rate. Enough reasons, isn't it? Well, my comment is that now that the government open its cards about the fiscal trends, the bank felt much more assured about using monetary policy as an effective anti-recession instrument.

Morgan Stanley Bets on Massive Brazil Interest-Rate Front-Loading

Morgan Stanley's Brazil economist Marcelo Carvalho is betting on a more proactive approach by Banco Central do Brasil. The first economist I remember saying that Brazil would fall into recession by the fourth quarter of 2008 is now wagering that Brazil is fully into the global monetary easing cycle after last week's larger-than-expected rate cut. He says ''in light of this aggressive policy action and subsequent dovish policy minutes, we are cutting our interest rate forecast´´ that will bring a 400 basis-point (from 200 basis points before) for the 2009 year. ''We look for three consecutive rate cuts of 100 basis points each, on top of January’s initial 100 point cut already implemented.´´ Thus, the Selic rate target should fall to 9.75 percent by mid-2009 from the 11.75 percent previously forecast, staying there through year-end.

Vitro Ratings Downed to D as Company Fails to Make Coupon Payment

Standard and Poor's downgraded Vitro SAB's credit ratings to D from CC, and said recovery rates for its bonds is now at 3. Vitro failed to make good on promises to pay $13 million in interest for its 2012 bonds and $32 million for its 2017 bonds. The company will forgo a 30-day grace period to pay interest on the debt that expires on Mar. 3. As some of you might remember, Vitro lost millions of dollars in August following bad bets it made on derivative contracts.

Another Round of Painful Job Cuts ...

Another round of job reductions took place on Monday:

MACY'S -- Cut 7,000 jobs, or 4 percent of its workforce as retails sales fell for a six straight month in December.
MORGAN STANLEY -- The New York-based bank may cut up to 1,900 jobs as business slows in the financial industry.
CHINA -- Reuters reported that more than 20 million jobs have been lost in the third largest economy in the past months.
COLOMBIA -- Unemployment rates for the youth, at about 20 percent, are twice as much the national rate.

Una Temporada en el Infierno -- A Break From All the Awful News in Finance ...

Here is a wonderful poem by Arthur Rimbaud, French poet who produced the bulk of his work during his teens. This is pure evocation, a master piece. Click here for a link to his biography. I hope you, dear reader, enjoy it.

** A Une Raison **


One stroke of your fingers on the drum discharges all the sounds and begins the new harmony.


One step of your feet is the calling up of new men and their marching off.


You turn your head away from us: the new love.

You turn your head back to us:the new love.


``Change our fate, crush our scourges beginning with the scourge of time,'' these children cry to you.

``Raise up somewhere, anywhere, the substance of our fortunes and our prayers,'' we beseech you.

Arrived from always you will go away everywhere.