Friday 27th May 2016
NEWS TICKER: THURSDAY, MAY 26TH - Dan Carter has been appointed lead manager of the Jupiter Japan Income Fund, with immediate effect. Dan, who is currently deputy manager of the fund will take over from Simon Somerville, who will be leaving Jupiter after eleven years. Carter has 12 years’ experience of analysing and managing Japanese equities, and has worked alongside Somerville for eight years. He has also lead managed the Jupiter Japan Select Sicav fund, aimed at international clients, since 2013, having been deputy manager for two years. There will be no change to the investment philosophy of the fund says Jupiter and the funds will continue to be managed alongside each other, ensuring continuity for investors. There is a significant overlap between the two portfolios in terms of the companies they are invested in. The funds seek to own long-term positions in cash-generative, income-paying Japanese companies that are run for shareholders, have a genuine competitive advantage and offer real, identifiable growth opportunities that he believes are underappreciated by the market. Carter joined Jupiter in 2008 as an analyst on the Far Eastern Equities team. Before that he was a Fund Manager at Odey Asset Management on the Japanese equities team, and was previously at Baillie Gifford & Co, where he was an investment analyst for both the Japanese equities and UK large-cap equities teams - CME Group Executive Chairman and President Terry Duffy will appear before the Illinois House Revenue and Finance Committee today to discuss how imposing a proposed tax on financial transactions would harm Illinois consumers, agricultural producers, businesses and the state economy. "Imposing a financial transaction tax will not alleviate the state's budget crisis, and instead would have a negative impact on consumers because the cost of hedging their business risks would go up as much as 800 percent," said Duffy. "If enacted, every business that uses any risk management tools would face higher costs as bid/ask spreads widen. Farmers, ranchers and other businesses in Illinois and all over the country would be forced to pass along those costs to consumers, who would pay more for food, gas, airline tickets and other products. Additionally, a transaction tax would put the largest exchange in the US, which is headquartered in Illinois, at a competitive disadvantage in the global marketplace." The hearing is scheduled for 10:00 am CT in the Capitol Building in Springfield, Illinois. Duffy's testimony will be available on at the same time as the hearing - Moody's has upgraded to A3 from Baa1 the senior unsecured debt ratings of Autoroutes du Sud de la France (ASF). Concurrently, Moody's has upgraded to (P)A3 from (P)Baa1 the rating on the company's €8bn medium-term note (EMTN) programme. The outlook on the ratings is stable. The upgrade reflects ASF's strengthening financial profile on the back of a strong traffic performance and expected future traffic growth, says the ratings agency. ASF is expected to exhibit funds from operation/debt metrics firmly in the mid-teens in percentage terms, which Moody's considers commensurate with the A3 rating level. In 2015, ASF reported traffic growth of 3.1% compared to the previous year. “We expect traffic growth to moderate during the year, although the 2016 annual traffic increase is anticipated to be at least 2%. The positive traffic trends, which offset the financial impact of the 2015 tolls freeze and the relatively limited toll increases in 2016(1.63% for ASF and 1.18% for Escota), are supportive of ASF's credit profile in the context of the group's increasing investments associated with the implementation of the so-called Plan de Reliance Autoroutier (a government stimulus plan),” says Moody’s. ASF is expected to implement capital expenditure worth €800m per annum over the next three years - The European Parliament has approved aid on Thursday worth €6,468,000 for 557 redundant workers from the “Larissa” supermarket in Greece and €5,146,800 for 2,132 former drivers for the road haulage and delivery firm MoryGlobal SAS in France. The European Globalisation Adjustment Fund (EGF) aid will still need to be approved by the Council of Ministers on June 6th. In Greece, Larissa’s 422 employees and 135 worker-owners were made redundant when the cooperative supermarket was declared bankrupt. In France, MoryGlobal’s 2,132 lorry drivers and their delivery colleagues lost their jobs due to its bankruptcy and closure. Both bankruptcies resulted from the prolonged global financial and economic crisis which has devastated the Greek economy and deeply affected the road haulage sector. The measures, co-financed by the EGF and the Greek and French governments, would help the workers to find new jobs by providing them with occupational guidance and other assistance schemes. The aid request from France was passed by 540 votes to 73, with 2 abstentions. The request from Greece was approved by 551 votes to 67, with two abstentions. The European Globalisation Adjustment Fund (EGF) was introduced in 2007 as a flexible instrument in the EU budget to provide support, under specific conditions, to workers who have lost their jobs as a result of mass redundancies caused by major changes in global trade (e.g. delocalisation to third countries). The EGF contributes to packages of tailor-made services to help redundant workers find new jobs. Its annual ceiling is €150m. Redundant workers are offered measures such as support for business start-ups, job-search assistance, occupational guidance and various kinds of training - Pirum Systems says Ben Challice will be joining as chief operating officer, responsible for strategic product and market development. Challice joins from Nomura, where he headed up Global Prime Services – which included Equity Finance, Prime Brokerage and Delta One at Nomura and previously held senior positions at Lehman Brothers and Goldman Sachs - Catella has appointed Antti Louko to head its Finnish operations and to establish a new corporate finance unit in Helsinki. Louko will join Catella as managing director of Catella Property Oy and head of the new corporate finance unit, from November. Louko joins Catella from a role as head of real estate at Advium Corporate Finance Oy where he headed the real estate team. He previously worked as the director responsible for transactions at SRV Group, and at Aberdeen Property Investors - Advanced payments tech firm SafeCharge says Umberto Corridori has been appoint vice president of sales for Europe. Corridori has held senior roles in large companies such as Dell Italy and joins after a long tenure at PayPal where he served as head of sales Italy & iGaming CEMEA - AIM-listed Xtract Resources PLC says it has entered into an agreement to sell the Manica Gold project in Mozambique to Nexus Capital and Mineral Technologies International Ltd for $17.5m in cash. The firm says some of the proceeds will be used to settle outstanding payments owed to Auroch over the acquisition of the Manica licence. Xtract adds that it expects to have remaining cash proceeds of approximately $12m. Under the agreement, Xtract will sell its 100% interest in Explorator Limitada, the entity which holds title to the Manica mining licence 3990C on completion of the deal. Xtract said it is expected that a bankable feasibility study, to assess the viability of developing and mining a hard rock gold deposit identified within the Manica licence, will be completed in the second quarter of 2016, Mine construction is planned to begin in the fourth quarter, with first production to follow in the final quarter of 2017. Mining of the alluvial gold deposit is planned for the third quarter this year – The European Bank for Reconstruction and Development (EBRD) is providing up to €294m in local currency equivalent for two ground-breaking projects to increase the use of domestically produced natural gas and largely replace the use of coal in Kazakhstan. The first project is the upcoming modernisation and refurbishment of the underground storage in Bozoi in the Bank’s first-ever cooperation with the national gas company KazTransGas (KTG). An EBRD loan equivalent to €242m in local currency to the KazTransGas subsidiary Intergas Central Asia will allow for the upgrade of the storage to its full capacity of 4bn cubic metres (bcm), from the current limit of 2.6 bcm - United Utilities reported a 0.6% rise in full year revenue to £1.73bn this morning, although the new regulated price controls contributed to a 9% drop in underlying operating profit to £604m. The company says it is confident of reaching its targets for capital expenditure in the first year of the new regulatory period and announced plans to invest £100m across the 2015-2020 period in renewable energy projects, mainly solar power. The final dividend was raised 2% to 25.6p, making a total of 38.45p for the year – Ahead of its planned initial public offering in Australia, fantasy sports app Sports Hero has raised an additional $2.4m in funding. SportsHero is a new app that lets sports fans dabble in match predictions and show their skills off against friends and other game-watchers. The app is made by the team behind Singapore-based TradeHero, a virtual trading app backed by more than $10m from investors. - DONG Energy has set an indicative price range for its planned stock market listing of 17.4% of its shares at DKR200 to DKR255 per share, giving the group a market value of DKR83.5bn to DKR106.5bn ( between $12.6bn and $16bn), making it Europe’s biggest float this year. The state-controlled company, is one of the world’s largest offshore wind farm developers -

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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.

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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