Monday 8th February 2016
NEWS TICKER: Friday, February 5th: According to Reuters, Venezuela's central bank has begun negotiations with Deutsche Bank AG to carry out gold swaps to improve the liquidity of its foreign reserves as it faces debt payments of some $9.5bn this year. Around 64% of Venezuela's $15.4bn reserves are held in gold bars, which in this fluid market impedes the central bank's ability to mobilise hard currency for imports or debt service. We called the central bank to confirm the story, but press spokesmen would not comment - The Hong Kong Monetary Authority (HKMA) says official foreign currency reserves stood at $357bn (equivalent to seven times the currency in circulation or 48% of Hong Kong M3) as at the end of January, down compared with reserve assets of $358.8bn in December. There were no unsettled foreign exchange contracts at month end (end-December: $0.1bn) - BNP Paribas today set out plans to cut investment banking costs by 12% by 2019 to bolster profitability and reassure investors about the quality of its capital buffers. The bank is the latest in a line of leading financial institutions, including Credit Suisse, Barclays and Deutsche Bank which look to be moving away from capital intensive activities. BNP Paribas has been selling non-core assets and cutting back on operations including oil and gas financing for the last few years as it looks to achieve a target of 10% return on equity. Last year the bank announced a €900m write-down on its BNL unit in Italy, which pushed down Q4 net income down 51.7% to €665m - Johannesburg Stock Exchange (JSE)-listed tech company, Huge Group, will move its listing from the Alternative Exchange (AltX) to the JSE main board on March 1st - Moody's says it has assigned Aaa backed senior unsecured local-currency ratings to a drawdown under export credit provider Oesterreichische Kontrollbank's (OKB) (P)Aaa-rated backed senior unsecured MTN program. The outlook is negative in line with the negative outlook assigned to the Aaa ratings of the Republic of Austria, which guarantees OKB’s liabilities under the Austrian Export Financing Guarantees Act – As the first phase of talks between Greece and its creditors draws to an end, International Monetary Fund chief Christine Lagarde stressed to journalists in Greece that debt relief is as important as the reforms that creditors are demanding, notably of the pension system. "I have always said that the Greek program has to walk on two legs: one is significant reforms and one is debt relief. If the pension [system] cannot be as significantly and substantially reformed as needed, we could need more debt relief on the other side." Greece's pension system must become sustainable irrespective of any debt relief that creditors may decide to provide, Lagarde said, adding that 10% of gross domestic product into financing the pension system, compared to an average of 2.5% in the EU, is not sustainable. She called for "short-term measures that will make it sustainable in the long term,” but did not outline what those measures might be. According to Eurobank in Athens, IMF mission heads reportedly met this morning with the Minister of Labour, Social Insurance and Social Solidarity, Georgios Katrougalos, before the team is scheduled to leave Athens today. According to the local press, it appears that differences exist between the Greek government and official creditors on the planned overhaul of the social security pension system. Provided that things go as planned, the heads are reportedly expected to return by mid-February with a view to completing the review by month end, or at worst early March. In its Winter 2016 Economic Forecast published yesterday, the European Commission revised higher Greece’s GDP growth forecast for 2015 and 2016 to 0.0% and -0.7%, respectively, from -1.4% and 1.-3% previously - Fitch says that The Bank of Italy's (BoI) recent designation of three banks as 'other systemically important institutions' (O-SIIs) has no impact on its ratings of the relevant mortgage covered bond (Obbligazioni Bancarie Garantite or OBG) programmes. Last month, BoI identified UniCredit, Intesa Sanpaolo. and Banca Monte dei Paschi di Siena as Italian O-SIIs. Banco Popolare and Mediobanca have not been designated O-SIIs. This status is the equivalent of domestic systemically important bank status under EU legislation. Fitch rates two OBG programmes issued by UC and one issued by BMPS, which incorporates a one-notch Issuer Default Rating (IDR) uplift above the banks' IDRs. The uplift can be assigned if covered bonds are exempt from bail-in, as is the case with OBG programmes under Italy's resolution regime and in this instance takes account of the issuers' importance in the Italian banking sector – Meantime, according to local press reports, Italian hotel group Bauer and special opportunity fund Blue Skye Investment Group report they have completed the rescheduling and refinancing of Bauer’s €110m debt through the issue of new bonds and the sale of non-core assets, such as the farming business Aziende Agricole Bennati, whose sale has already been agreed, the Palladio Hotel & Spa and a luxury residence Villa F in Venice’s Giudecca island – Meantime, Russian coal and steel producer Mechel has also agreed a restructuring of its debt with credits after two intense years of talks. The mining company, is controlled by businessman Igor Zyuzin - Asian markets had a mixed day, coming under pressure. Dollar strengthening worries investors in Asia; from today’s trading it looks like dollar weakening does as well. Actually, that’s not the issue, the dollar has appreciated steadily over the last year as buyers anticipated Fed tightening; but it has hurt US exports and that has contributed to investor nervousness over the past few weeks, which is why everyone is hanging on today’s The nonfarm payrolls report, a bellwether of change – good or bad in the American economic outlook. Back to Asia. The Nikkei 225 ended the day at 16819.15, down 225.40 points, or 1.32%; and as the stock market fell the yen continued to strengthen. The Nikkei has shed 5.85% this week. The dollar-yen pair fell to the 116-handle, at 116.82 in afternoon trade; earlier this week, the pair was trading above 120. It is a hard lesson for the central bank, whose efforts to take the heat out of the yen by introducing negative interest rates has done nothing of the sort. Australia's ASX 200 closed down 4.15 points, or 0.08% after something of a mixed week. The index closed at 4976.20, with the financial sector taking most of the heat today, with the sector down 0.7%. In contrast, energy and materials sectors finished in positive territory, buoyed by gains in commodities. The Hang Seng Index closed at 19288.17, up 105.08 points (or 0.55%) while the Shanghai Composite was down 0.61%. down 17.07 points to 2763.95. The Shenzhen composite dropped 20.36 points (1.15%) to 1750.70, while the Kospi rose marginally by 0.08% to 1917.79. Today is the last day of trading on the Chinese exchanges for a week.

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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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