Tuesday, 3 March 2009

S&P Reaffirms It: Peru, Where 40% of Its Citizens Live With $2 or $3 a Day, is a First-World Country ... Uhhmm ...

Poor but happy? No, that's unfair

Brother blog Inca Kola News yesterday posted a note about contrasts in telecom data for big Latin economies, and mentioned something about Peru that both our blogs have been insisting on for a while: the definition of an investment-grade country is either an incomplete and biased set of information about the supposed creditworthiness of a country (it assesses non-payment risks for one creditor, but nor for others -- citizens and taxpayers are ignored) or simply crap.

In a market comment today,
Citigroup Inc. (one of the least creditworthy banks around the world these days) lauds Standard and Poor's decision to reaffirm Peru's investment-grade rating and stable outlook. Says Citigroup, citing S&P analyst Sebastián Briozzo, ''the government’s reaction to the global economic crisis has been appropriate, while the credit quality of the country’s assets has not showed any meaningful change.´´ The bank adds its assessment of the move: ''Positive: In our view, there is a rising probability that recently upgraded credits in Latin America may lose their investment-grade ratings in 2009. Nonetheless, we believe Peru is likely to maintain its investment-grade status unless the global recession extends beyond 2010, requiring additional government spending to contain social tensions.´´

''Social tensions´´ ... In a country where most people live on $2 or $3 a day social tensions are the rule, not the exception. Otto writes -- his post was about wireless phone penetration in markets seen as foes of capitalism: ''And what's that one coming up the rear? Oh yeah, it's that investment grade country ... y'know, the one with 40% of people living on $2 per day. The one that is made out to be the new spearhead of modern society.´´ If one policy in the crisis makes a government effectively responsive to it is the degree of importance it gives to reducing inequality and buffering an increase in poverty during times of ''financial stress.´´

Peru will continue to be a member of the first world for some people, but not for its citizens. That is bad.

Reuters Columnist James Saft and His View on Bank Nationalisations in the U.S.

Here's the man

This is James Saft's column for this week.

''Another week, another set of protestations that U.S. banks will remain in private hands, apparently almost regardless of the consequences. It is clear that nationalization violates a sacred value for U.S. policymakers, or perhaps they believe it to be a sacred value held by voters. As we know from behavioral economics, when people are confronted by a conflict between material advantage and their ideas of the sacred, they tend to opt surprisingly often for the sacred ...´´

For the full story, please click here.

Cuba Cabinet Shuffle Isn't Surprising: Check Previous Postings. Castro Deals a Blow to Wishful Thinkers By Reasserting Power of Armed Forces


Cuban President Raúl Castro, facing one of the most serious economic times in the Caribbean island since the early 1990s, shuffled his cabinet yesterday. The wide-sweeping, ambitious cabinet reorganisation can be interpreted as a further step by the younger Castro to reasserting the power of the Armed Forces in his government while pursuing efficiency and pushing his brother's closest allies away.

Check our previous two Cuba postings (Cuba 2 and Cuba 3, published one or two days after the 50th anniversary of the Revolution.) There's been lots of wishful thinking seeking to present Raul Castro’s presidency and his recent reforms as a new chapter in the economy and political life of Cuba. The policies so far implemented (boosting access to mobile phones and hotels and giving out land to private farmers) will hardly make a difference in terms of economic life or political freedom for Cubans. Raul and the men who control Cuba are the men of the revolutionary generation. Vice Presidents Jose Ramón Machado Ventura and Abelardo Colomé are old-guard. Why would you expect a new departure from three men well into their 70s?

Although the whole reshuffle was expected, some of the specific changes were surprising. Longtime Fidel Castro loyalist Felipe Pérez Roque, foreign minister for 10 years, was ousted and replaced by his deputy -- showing Raúl is in full control of bureaucracy at the ministry. One change in the ministry's focus I might dare say is clearly a different attitude towards the U.S. embargo. Now that the U.S. is beginning to show some willingness to talk with the Cubans, the presence of Pérez Roque would be uncomfortable. We wonder what will happen next to diplomats in allied countries such as Venezuela and Bolivia.

In another important change, Vice President Carlos Lage was replaced as secretary of the council of ministers by an army general who was Raúl Castro's chief of staff at the defence ministry. However, he retained his most important post. Lage's departure from the council leaves the Cabinet in the hands of members of the armed forces. Says The Nuevo Herald: ''Cuban exile leaders in Miami fear that the dozen personnel moves announced on Cuban television's midday newscast after the sports and weather reports show Castro is closing ranks and consolidating power.´´

Fears justified. The political and economic scenario may be different within three to five years, but not even closer to the scenario painted by wishful thinkers who believe Cuba is moving towards more political openness, a Chinese-like economic system and less state intervention. While it is possible that maybe at that point there is going to be a new discussion in Cuba, it is unrealistic for now to think the final caretaker of the Revolution will change the premises of the Cuban economy and political system in the next 18 months to three years. There may be a business upturn five years from now, when the revolutionary generation had already stepped down or died, replaced by a generation mostly led by soldiers. The latter is the one that that is taking over Cuban politics this week. In my view, the military-led entrepreneurial revolution isn't that bad at all. It calls for efficiency and productivity, it does believe in private initiative (obviously restricted) but it is quite corrupt.

I say efficiency because the moves signal Raúl Castro is ready to run a leaner government. With the shuffle, the Foreign Trade, Foreign Investment, and Economic Cooperation Ministries will be merged. The Food Ministry and the Fishing Ministry will be combined too. ''Several of the people named to top posts are unknown technocrats, which shows Castro is trying to streamline the country's bureaucracy and put the best people forward,´´ the Nuevo Herald said in its report.

Independencia in Trouble; Second Meat Company in Brazil to Face Worrisome Credit Events

Independencia Alimentos, which not long ago sought state financing aid from state development bank BNDES (Brazil's equivalent to a hospital of ailing companies) last week filed for reorganization proceedings under Brazil's bankruptcy law. The company stopped operating last week (we apologise for not having written about it, but the work burden has been absurd these days!) Under the bankruptcy-like filing, Independencia must submit a reorganization plan within 60 days, and once a regional court accepts the case all actions and claims -- except for certain secured creditors -- are subject to a 180-day stay.

Although Brazil's corporate sector is far from facing a systemic crisis, domestic bankruptcy filings soared 146 percent last year -- especially during the last four months. In industries such as food processing, which for years benefited from strong external demand and easy credit (most these companies sold billions of dollars in bonds since 2005,) defaults will continue to rise. Refinancing and non-payment risk will probably be more concentrated on the ethanol, food processing and agribusiness sectors, investors in the corporate bond market told us recently. Three ethanol distillers filed for protection in the past six months. Meatpackers, poultry producers and other food manufacturers will see consolidation through mergers and acquisitions, some of them state-sponsored as the BNDES seeks to avert foreign takeovers of some of these ailing companies.

Earlybird, March 3, 2009

Well, after a week or so, there you go:

MARKETS -- German Real Estate Companies Face Heavy Debt Repayment Calendar (click here for link to Bloomberg News' story): Germany’s real estate companies are braced for a heavy debt repayment calendar this year, with short-term maturities that are as much as 18 times their market value amid a declining value of their assets.

BRAZIL -- Lula Condemns MST Killings; Groups Says It Reacted to Violence (click here for link to Estado story): The biggest test for the Luiz Inácio Lula da Silva administration in his first term was posed by the growing unrest of social movements that supported him. But things got out of control, partly because the president and his ruling Workers' Party were too lenient on those groups -- the most prominent of them being the Landless Peasants' Movement (MST.) Here are the consequences of such leniency. We have anticipated growing risk of unrest as the global recession cuts agribusiness revenues, sparks more rural unemployment and deprives farmers of money that would otherwise be funneled to ease demands by the MST and peers.

VENEZUELA -- Crime Gets Out of Control: More Than 400 Deaths Registered in Caracas Last Month (click here for link to El Nacional story): President Hugo Chávez won the first round but not the fight. And his inaction to combat crime and urban violence will at some point erode support for him and his Bolivarian Revolution -- now that oil revenues are dwindling and he is urging Venezuelans to prepare for harder times.


COLOMBIA -- Ingrid Betancourt Was a Pain, According to Late Guerrilla Leader Raúl Reyes (click here for link to Espectador story): Ha! Well, the Americans let the cat out of the bag. Now are the guerrillas, complaining about Betancourt's behaviour in the jungle. Who will be next? Check yesterday's MM posting on the Ingrid Betancourt revelations -- and see that all that glitters ain't gold.

U.S. -- Bad Bank Idea Gets Revamped; Policy Makers Back to the Idea of Buying Bad Assets Jointly With Private Investors (click here for link to WSJ story): The Barack Obama administration may create multiple investment funds to purchase the bad loans and other distressed assets that lie at the heart of the financial crisis, people familiar with the matter told the WSJ. The venture comes from the ''bad bank´´ plan that would have required the government alone to buy up $1 trillion in toxic assets. The government jettisoned that idea after ''running into the thorny issue of pricing,´´ says the WSJ.

LATIN AMERICA -- Investment Funds Are Luring Customers, Fending Off Massive Redemptions (click here for link to Valor Econômico story): Latin American equity funds raised $800 million in the week ended Feb. 26, the only asset class in the emerging markets funds universe that averted net redemptions and withdrawals, according to EFPR. Well, potential for profit? Perhaps. That Latin America is de-coupled from the rest of the world? No way! Brazilian funds lured money for the fifth straight week. And they will probably keep luring more money after the Bovespa yesterday dropped 5 percent.

Panama Gets Nod by Obama Administration on Free Trade Agreement. Is This Also Good News for Colombia, Korea?

U.S. President Barack Obama gave a boost to a free-trade agreement with Panama yesterday by urging lawmakers to pass the accord and set benchmarks for future trade agreements. Does this mean Colombia and South Korea will get their respective accords passed too? It well could mean that, says Bulltick LLC. In a report, the first detailing Obama's position on trade, according to Bulltick, the government ''stated its intention to rework provisions of the North American Free Trade Agreement with Canada and Mexico to make it more socially and environmentally conscious,´´ the shop says. This is interesting. We here at MM doubted the Colombia FTA would even be considered or bolstered before 2010.