Friday 3rd July 2015
NEWS TICKER: THURSDAY, JULY 2nd 2015: Deutsche Börse says a new iShares ETF from BlackRock's product offering has been launched on Xetra and Börse Frankfurt today. The iShares MSCI EMU USD Hedged UCITS ETF launched on Xetra ETF provides access to euro-zone equities with currency hedging against US dollar. The exchange organisation says the ETF enables investors to participate in the performance of stock corporations in the euro zone while also benefiting from currency hedging against the US dollar. This protects investors against an appreciation of the US dollar against the euro. - The Straits Times Index (STI) ended 3.3 points or 0.1% lower to 3327.84, taking the year-to-date performance to -1.11%. The top active stocks today were UOB, which gained 0.82%, DBS, which closed unchanged, Singtel, which declined 0.24%, CapitaLand, which declined 1.13% and Global Logistic, with a 0.78% fall. The FTSE ST Mid Cap Index declined 0.06%, while the FTSE ST Small Cap Index rose 0.02%. The outperforming sectors today were represented by the FTSE ST Basic Materials Index, which rose 0.82%. The two biggest stocks of the Index - Midas Holdings and NSL- ended 1.59% higher and 0.67% lower respectively. The underperforming sector was the FTSE ST Real Estate Investment Trusts Index, which slipped 0.67%. CapitaLand Mall Trust shares declined 2.30% and Ascendas REIT declined 2.41% - According to Flightglobal, China’s state aviation supplier has tentatively signed for up to 75 Airbus A330s in an agreement which will help bridge a production gap to the re-engined A330neo. General terms of the agreement inlcude an order for 45 jets plus a memorandum of understanding for another 30 options. The deal took place during an official visit to France by Chinese premier Li Keqiang. Airbus has long been negotiating the landmark agreement following a preliminary deal to establish an A330 completion centre in Tianjin. The pact with China Aviation Supplies Holding, which is likely to include several aircraft configured in the lower-weight regional version. Meanwhile, Airbus CEO Fabrice Bregier says the package is a “new vote of confidence” in the twinjet. “China is today the most important market for aviation in the world,” he adds - Morningstar has upgraded the Royal London UK Equity Income fund to a Morningstar Analyst Rating of Silver. The fund was previously rated Bronze. Experienced manager Martin Cholwill has, over his decade-long tenure on the fund, consistently applied his proven investment process to good effect. His strategy is sensible for delivering yield and competitive total returns for investors, with a focus on free cash flows and valuations. The fund also enjoys a cost advantage over its rivals, with ongoing charges lower than the category norm. These factors have led to a strong and consistent performance profile over a number of years - The amount of outstanding Euro commercial paper (CP) and certificates of deposit (CD) declined significantly in the week ending July 1st, according to CMDPortal data. Outstandings dropped by $11.80bn to $861.59bn during the week. Sovereign, supranational and agency CP outstandings dropped by $2.80bn to $219.44bn. Corporate CP outstandings declined the most during the week by $5.56bn to $89.83bn. Meanwhile financial CP outstandings declined by $3.04bn to $503.37bn - SWIFT says that BTG Pactual, one of Latin America’s largest financial services firms, has joined the Know Your Customer (KYC) Registry, a centralised repository that maintains a standardised set of information about correspondent banks required for KYC compliance. For the KYC Registry, banks contribute an agreed ‘baseline' set of data and documentation for validation by SWIFT, which the contributors can then share with their counterparties. Each bank retains ownership of its own information, as well as control over which other institutions can view it - Laurel Powers-Freeling is to join the board of Atom, the UK’s newest bank, as its senior independent non-executive director. The appointment comes hot on the heels of Atom’s announcement that the Prudential Regulation Authority and the Financial Conduct Authority have approved its digital business model. Powers-Freeling was recently appointed as Chairman of Sumitomo-Mitsui Banking Corporation Europe - China has guaranteed that 100% foreign-owned firms (typically known as WFOEs – Wholly Foreign-Owned Entities) will be able to manufacture and market their own products for sale to mainland clients, operating under exactly the same rules as local private funds. The announcement comes at the end of the US-China Strategic and Economic Dialogue, which appears to have resulted in unprecedented rights for foreign firms participating in China’s financial markets. Greater access to China’s Interbank Bond (IBB) market has also been granted, with the elimination of firm-level ownership quotas in addition to improved access and operating rights for foreign banks. Finally, Shanghai’s Free Trade Zone (FTZ) has been specified as the testing ground where foreign owners can establish wholly-owned futures companies with access rights to domestic exchanges. China’s opening-up to foreign asset managers is now moving faster than our most optimistic predictions. With that speed in mind, we predict that all of the above opportunities will be available to foreign owners by the end of 2015.

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Argentina - Ten years on from the default

Friday, 15 June 2012
Argentina - Ten years on from the default In the hubble and bubble in the press around Greece and Spain, some commentators have lately drawn comparisons with Argentina, suggesting that is the way forward. Humbly, we suggest they might be wide of the mark. Greece will exit from a currency union; Argentina has its own currency and can set its own interest rates. In other ways too, the countries are way different and drawing comparisons between them is not helpful to Greece or Greek bondholders. Vanja Dragomanovich explains the long term impact on Argentina of its latest default (back in 2001) and what, if any, lessons might be drawn from that debacle and the long term impact on the Argentine financial markets. http://www.ftseglobalmarkets.com/

In the hubble and bubble in the press around Greece and Spain, some commentators have lately drawn comparisons with Argentina, suggesting that is the way forward. Humbly, we suggest they might be wide of the mark. Greece will exit from a currency union; Argentina has its own currency and can set its own interest rates. In other ways too, the countries are way different and drawing comparisons between them is not helpful to Greece or Greek bondholders. Vanja Dragomanovich explains the long term impact on Argentina of its latest default (back in 2001) and what, if any, lessons might be drawn from that debacle and the long term impact on the Argentine financial markets.

In the hubble and bubble in the press around Greece and Spain, some commentators have lately drawn comparisons with Argentina, suggesting that is the way forward. Humbly, we suggest they might be wide of the mark. Greece will exit from a currency union; Argentina has its own currency and can set its own interest rates. In other ways too, the countries are way different and drawing comparisons between them is not helpful to Greece or Greek bondholders. Vanja Dragomanovich explains the long term impact on Argentina of its latest default (back in 2001) and what, if any, lessons might be drawn from that debacle and the long term impact on the Argentine financial markets.

As Greece edges closer to political and economic immolation, market watchers have been in a flurry, casting around for examples of how a country could survive leaving the eurozone and a hard default. One example being touted around the markets is Argentina, which went through a spectacular default ten years ago but managed to follow it up with a decade of fast growth, a boom in commodity exports and a golden period in banking. Argentina’s finances are in relatively good shape. At $185bn, the country’s total debt load last year equated to just 41.3% of GDP. That’s better than both Spain, whose debt-to-GDP ratio stands at 70%, and Italy, which is saddled with an ­eye-popping 120% burden. Moreover, with GDP growth at 4% and funds available from central bank reserves, pension funds and YPF’s coffers, Argentina has ample cash.



Argentina’s expansion was fuelled by two things: liberal policies and a sharp rise in the prices of com­modities. Argentina is one of the world’s largest exporters of wine, soy, corn and wheat and China is its enthusiastic buyer. And while Greece may try to emulate the policies component of the Argentina story, unless the Chinese take to drinking retsina and cooking with olive oil it will have difficulty replicating the Latin American country’s recovery.

Argentina has also come good on almost 93% of its initial debt obligations, but to this day has not been able to return to international financial markets. In large part this is because of an ongoing dispute with two hedge funds. The bulk of the outstanding amount is owed to the Paris Club, a total of $6.4bn. “Technically, Argentina is not locked out of international markets the way it was in 2001 and 2002 when nobody would lend them money. In theory they could try to raise money but in practice they can’t go back because they would risk a seizure of assets while the [legal] cases are pending,” explains Michael Henderson, emerg­ing markets economist at Capital Economics in London

In 2001 the country defaulted on $100bn of its sovereign debt. Four years later, Argentina’s president at the time, Nestor Kirchner, offered to swap the defaulted bonds for new ones worth 70% less, in a similar deal to what Greece is hoping for. Around three quarters of the bondholders agreed. The process was repeated in 2010 by current president Cristina Fernandez de Kirchner who said at the time that this was the final deal being offered to remaining bondholders.

Two distressed-debt hedge funds opted for litigation in US courts while a group of Italian bondholders asked for an arbitration award at the World Bank’s International Centre for Settlement of Investment Disputes.

The US courts are still pondering the issue. Initially the courts ruled that NML Capital Fund, one of the funds suing Argentina, was entitled to a repayment of $1.6bn, including the payment of interest, only for this to be overruled this spring. Now the remaining debt holders are collectively appealing to the US Court of Appeal with the case due to be heard in mid-June.

While this is going on, not only is Argentina not in a position to issue bonds, it has also little hope  of raising loans from major international institutions as the United States is actively blocking the country’s loan applications on the grounds that it is a recalcitrant debtor. In September last year the US, which holds a 30% voting share in Inter-American Development Bank, voted against a $230m loan to the country.

 Of the remaining debt, $6.4 billion is still owed to the Paris Club of official creditors and Argentina has yet to reach agreement with the Club on how to reschedule the repayments. “For that Argentina would need to get the approval from the IMF and that is not likely to happen as they have a strained relationship,” says Henderson. He argues that that would mean that Argentina would have to let the IMF carry out a health check on its economy and in the process the government would have to admit that the country’s official statistics have been doctored. Just how far the country’s figures have been massaged was made clear by Carlos Maria Regunaga, a former adviser-in-chief to the Argentina’s secretary of commerce and a director at Menas Argentina. Regunaga cites the fact that although consumer price inflation in 2011 was around 22%, “the government denies this and insists that inflation is only 9.5%.”

So where does this all leave Argentina? Over the years it has been turning increasingly inwards for solutions. The government’s tactical arsenal has included printing money, dipping into central bank reserves, seizing the assets of pension funds, controlling imports and exports to tweak its trade balance and privatising pension funds. Moreover, both Kirchner presidents have been fuelling growth by heavy public spending. Despite some questionable actions, the economy has grown. Again, according to official statistics, economic growth came in at over 8% in 2010 and 9% last year. 

Even so, growth has come at a price and the high public expenditure is now a major problem, says Regunaga.  “Historically, the public sector represented an average of 30% of GDP. The Kirchners have increased it to a level of 45% of GDP,” leading to a financial shortage in the public sector, he says. In 2011, for instance, 70% of public sector spending has been financed by printing more pesos and reaching into central bank reserves.

Government raids

The government has been raiding what there is to raid in the country. In April it said it would borrow almost $3bn from the state-run bank Banco de La Nación to cover its funding needs, $2.36bn in 12 instalments and the rest as a lump sum. Argentina also regularly issues bonds directly to pension fund agency Anses, which operates the bulk of Argentina’s pension money after the government nationalised all private pension funds in 2008.“There are no signs that the government will go back any time soon on the nationalisation of pension funds. Why would it?” says a Buenos Aires banker who did not want to be named. “The move has achieved two major objectives: not only did it give the government access to a large sum of money but also major stakes in top companies and seats on their boards of directors,” the banker adds.

This and other political decisions such as strict exchange controls, import and export restrictions and the recent nationalisation of oil company YPF, formerly majority owned by Spanish oil producer Repsol has alienated Argentina from foreign mutual funds and private equity investors. Julio Lastres, managing director at Darby Private Equity, part of Franklin Templeton Investments, explains: “In order to make an investment you have to see how the local capital market has been developing, to see if you can fund the company in the local market and exit through an IPO. And then you typically have the growth of local pension funds that fuel the growth of the local market. But what we hear in Argentina makes it challenging to take a long term view and invest there. You have better places to invest in Latin America.”

Argentina has some presence in the international financial markets through GDP warrants, which were issued as part of two debt restructuring instalments (one in 2005, the other in 2010) to sweeten the deal for bond holders caught out by the country’s default on $100bn of debt in 2001.

The warrants are structured in such a way that the government will pay investors as long as the GDP grows by 3.3% per year, based on the annual GDP. Although initially there was little appetite for these GDP warrants in the open market, as the country’s economy grew so did niche investors’ interest. “We had very good volumes on Argentina’s GDP warrants, hedge funds in particular like them,” says Gabriel Sterne, director at frontier markets investment banking boutique Exotix.

This is also about to change as falling commodity prices and heavy government spending are catching up with Argentina’s economy. While the government predicts that growth this year will be 6% Henderson at Capital Economics forecast that the number will be closer to 2.5%. “Our belief is that Argentina is headed for a recession, most likely next year,” says Henderson, particularly if the global economic backdrop deteriorates over the next year, which could possibly lead to a more disorderly adjustment. With Argentine state accounts under pressure, it would be handy not to have to pay warrant holders. But that might do no favours to Argentina’s already rocky investment reputation. For now, warrant payments are hanging in the balance. Ultimately though, while Argentina has some mounting troubles, it is a story of rich resource management and a deep economy; very different from that of Greece. 

Greece’s economic recovery may also not be as certain as in Argentina’s case as it cannot devalue and does not have such a strong export market to boost its coffers. So if Greece is looking for a blueprint for the exit from the euro and a default it might be better looking somewhere other than Argentina. Or perhaps better yet, try and avoid the default in the first place. n

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