Archive for the ‘Argentina’ Category

Latin America: Economist Special Report

September 19, 2010
Latin America: anti-inflation consensus and strong fx reserves  Source:
Latin America: anti-inflation consensus and strong fx reserves Source:

The Economist’s lengthy Special Report on Latin America last week is worth a read (see leader below), even though it failed to emphasize and adequately explain two critical causes of the region’s recent success — 1) the consensus among Latin American politicians that conquering inflation has benefitted the poor and strengthened democracy; and 2) the massive build-up in fx reserves that has insulated the region from the global crisis, driven in part by healthy macro policies.  These issues were mentioned in passing by The Economist, but not given the focus deserved.  On the other hand, the longer articles in the Report on education, the informal economy and productivity were rich in detail and deserve a read. 

Latin America’s performance during the global economic crisis that began in 2008 was notable for the fact that the recession there was mild and the subsequent rebound robust.  One used to say that when the United States sneezed, Latin America caught the flu, but this time, the region has been inoculated against the contagion that has spread throughout the advanced economies.  In the 1980s, 90s and early 2000s, when economic shocks occurred in the advanced economies — including rising interest rates and lower prices for commodities and financial assets, this led to fiscal and balance of payments crises in Latin America, and often near or outright sovereign defaults (a la Greece).  This time, the Latins were ready.  The reason — strong fx reserves immunizing them from shifts in international capital flows.  How did they achieve this Gibraltar of reserves?  Through higher demand for their commodities from China and others, to be sure, but also through sound macro policies — floating exchange rates, an inflation-targeting monetary policy, and at least some fiscal restraint.  These policies have ensured that the balance of payments (the supply and demand of foreign exchange) adjusts to shocks, thereby bolstering investor confidence, which in turn limits capital flight during a crisis.  It’s a completely new ball game for most Latin countries.  Let’s hope they don’t let the weakest of these pillars — the commitment to fiscal prudence — slip, or they risk a return to the bad old days of boom and bust, especially when commodity prices inevitably weaken.

The Economist likewise points to Latin America’s strengthening democratic institutions as providing the political stability required to promote growth.  No argument there, but I would give a lot of credit for this to the taming of the inflation monster in the region.  After years of hyperinflation, driven by fiscal deficits and monetary accommodation, Latins broke the cycle in the nineties.  When leftists subsequently came to power, the fear of a fiscally-induced return to inflation rocked the capital markets.  President Lula was a case in point (see my post on the matter).  During his election to a first term in 2002, the bond markets sold off to default spreads, but recovered early in his tenure when they realized that this leftist, former union leader, imprisoned by Brazil’s military regime in the 1970s, retained much of his predecessor’s macro policies.  He did so because he understood that his constituency, the poor, had been hurt by inflation more than any other segment in society.  You see, the poor cannot index to inflation.  The understanding of this dynamic has led to a broad consensus in Latin society on economic policy, even when political institutions are weak and ineffectual, as in Peru and Mexico and to some extent in Brazil.  Deeper reforms that would underpin improvements in productivity, education, and the state bureaucracy remain elusive.  However, the three key pillars to macroeconomic stability (and to the political consensus) — again, flexible exchange rates, inflation targeting and fiscal prudence — remain largely in place.  With GDP growth averaging 5.5% per year in the five years to 2008, the impetus to reform is currently lacking.  See my in-depth analysis of Latin democracy here in Scherblog, written during the region’s last major election cycle (2005-07), when I discussed the delicate balance between populism and reform.   

As  a long-time Latam hand (I managed Fitch’s Latin American Sovereign Ratings group for seven years), I believe more emphasis than you will find in The Economist Special Report should be paid to the region’s 1) anti-inflation consensus, and 2) victory over the rollercoaster of balance of payments crises.   Have a read in any case…

Leader on Latin America from The Economist (Sept. 11-17):

The United States and Latin America

Nobody’s backyard

Latin America’s new promise—and the need for a new attitude north of the Rio Grande

Sep 9th 2010

THIS year marks the 200th anniversary of the start of Latin America’s struggle for political independence against the Spanish crown. Outsiders might be forgiven for concluding that there is not much to celebrate. In Mexico, which marks its bicentennial next week, drug gangs have met a government crackdown with mayhem on a scale not seen since the country’s revolution of a century ago. The recent discovery of the corpses of 72 would-be migrants, some from as far south as Brazil, in a barn in northern Mexico not only marked a new low in the violence. It was also a reminder that some Latin Americans are still so frustrated by the lack of opportunity in their own countries that they run terrible risks in search of that elusive American dream north of the border.

Democracy may have replaced the dictators of old—everywhere except in the Castros’ Cuba—but other Latin American vices such as corruption and injustice seem as entrenched as ever. And so do caudillos: in Venezuela Hugo Chávez, having squandered a vast oil windfall, is trying to bully his way to an ugly victory in a legislative election later this month.

Yet look beyond the headlines, and, as our special report shows, something remarkable is happening in Latin America. In the five years to 2008 the region’s economies grew at an annual average rate of 5.5%, while inflation was in single digits. The financial crisis briefly interrupted this growth, but it was the first in living memory in which Latin America was an innocent bystander, not a protagonist. This year the region’s economy will again expand by more than 5%. Economic growth is going hand in hand with social progress. Tens of millions of Latin Americans have climbed out of poverty and joined a swelling lower-middle class. Although income distribution remains more unequal than anywhere else in the world, it is at least getting less so in most countries. While Latin American squabbling politicians blather on about integration, the region’s businesses are quietly getting on with the job—witness the emerging cohort of multilatinas.

As they face difficulties in an increasingly truculent China, no wonder multinationals from the rich world are starting to look at Latin America with fresh interest. Sir Martin Sorrell, a British adman, talks of the dawn of a “Latin American decade”. Brazil, the region’s powerhouse, is the cause of much of the excitement. But Chile, Colombia and Peru are growing as handsomely and even Mexican society is forging ahead, despite the drug violence and the deeper recession visited on it by its ties to the more sickly economy in the United States.

Two things lie behind Latin America’s renaissance. The first is the appetite of China and India for the raw materials with which the continent is richly endowed. But the second is the improvement in economic management that has brought stability to a region long hobbled by inflation and has fostered a rapid, and so far sustainable, expansion of credit from well-regulated banking systems. Between them, these two things have created a virtuous circle in which rising exports are balanced by a growing domestic market. Because they were more fiscally responsible during the past boom than in previous ones, governments were able to afford stimulus measures during the recession. There is a lesson here for southern Europe: Latin America reacted to its sovereign-debt crisis of the 1980s with radical reform, which eventually paid off.

The danger of complacency

Much has been done; but there is much still to do. Building on this success demands new thinking, both within Latin America and north of the Rio Grande.

The danger for Latin America is complacency. Compared with much of Asia, Latin America continues to suffer from self-inflicted handicaps: except in farming, productivity is growing more slowly than elsewhere. The region neither saves and invests sufficiently, nor educates and innovates enough. Thanks largely to baroque regulation, half the labour force toils in the informal economy, unable to reap the productivity gains that come from technology and greater scale.

Fixing these problems requires Latin America’s political leaders to rediscover an appetite for reform. Democracy has brought a welcome improvement in social policy: governments are spending on the previously neglected poor, partly through conditional cash-transfer schemes, a pioneering Latin American initiative. But more needs to be done, especially to improve schools and health care, if everyone is to have the chance to get ahead. Also needed is a grand bargain to tackle the informal economy, in which labour-market reform is linked to a stronger social safety-net. And, even if some things like infrastructure and research and development plainly need more government spending, the worry is that triumphalism over escaping the financial crisis may prompt a return to a bigger, more old-fashioned state role in the economy—despite the failure of these policies in the region in the past.

Getting these things right will be easier if relations with the United States improve. Latin America needs to shed its old chippiness, manifest in Mr Chávez’s obsession with being in the hated yanqui’s “backyard”. More sensible powers, notably Brazil, should be much louder opponents of this nonsense. As they start to pull their weight on the world stage, working with the United States will become ever more important.

The attitude of the United States needs to change too. Worries about crime and migration—symbolised by the wall it is building across its southern border—are leading it to focus on the risks in its relationship with the neighbours more than on the opportunities. This is both odd, given that Latinos are already the second-largest ethnic group north of the border (see article), and self-defeating: the more open the United States is towards Latin America, the greater the chances of creating the prosperity which in the end is the best protection against conflict and disorder. After two centuries of lagging behind, the southern and central parts of the Americas are at last fulfilling their potential. To help cement that success, their northern cousins should build bridges, not walls.

Argentina rejoins the world economy?

October 23, 2009
Argentina's populist leaders, Juan and Eva Peron in 1951.  Source: Wikimedia Argentina’s populist leaders, Juan and Eva Peron in 1951. Source: Wikimedia
Argentina's current first couple, former President Nestor Kirchner, and current President Cristina de Kirchner  Source: Google Images Argentina’s current first couple, former President Nestor Kirchner, and current President Cristina de Kirchner Source: AFP

In 2001, Argentina defaulted on billions of dollars of sovereign bond debt, closing itself off from access to the international capital markets.  For years thumbing its nose at global capital, the Argentine government left the country’s borrowers severely underfunded, and infrastructure and other important investment spending suffered.  Once thought of as a rich country and a middle power (say, around 1900), Argentina’s long slide has been the result of economic mismanagement stretching back a century, including by Argentina’s most famous first couple, Juan and Evita Peron (pictured above).

Argentina’s current first couple, who managed to pull off a “Hillary” in 2007 by transferring power from husband to wife, which even the actual Hillary couldn’t pull off thanks to Barack Obama, has launched a second bond restructuring this week that Carola Sandy of CreditSuisse (see below) believes will include 90% of the defaulted bonds.  If Cristina and Nestor pull this off, Argentina can once again re-enter the global capital markets, and with its riches and economic potential, may have a shot at becoming a regional power again.  With good economic management, Argentina could once again represent a counterweight to rival Brazil, our textbook rising power.  This rivalry under the stars of the southern hemisphere is fought not only on the soccer field.  Have a look at the thorough CreditSuisse note below. 

Carola Sandy
+1 212 325 2471
Yesterday evening (22 October), Economy Minister Boudou announced that the government had accepted a proposal submitted by a group of investment banks to restructure the untendered bond debt. Boudou said that the proposal received was a “good base” to define the final terms of the new restructuring. Thursday’s announcement did not have as many details as the market might have been hoping for, but, in our view, it was still a positive development for two reasons. First, the government outlined concrete steps that it plans to take in the near term – it will seek approval for the transaction from the Argentine congress and from securities regulators. Second, according to Boudou, the proposal is backed by holders of about $10bn worth of defaulted bonds (50% of the outstanding amount of defaulted bonds). The fact that holders of such large amounts of defaulted bonds are on board suggests, in our view, that the terms of the upcoming transaction (albeit still unknown) cannot be much worse than those offered in the 2005 swap.
The government will send to congress, on Monday 26 October, a bill to seek congressional approval for this transaction. In 2005, congress approved a law – the so-called Bolt Law or Ley Cerrojo – that precludes the government from carrying out a new debt swap without congressional approval. The Kirchner coalition and its allies have majorities in both houses of congress and, thus, we expect the bill to be approved relatively quickly (in recent weeks, the government has obtained congressional approval for more controversial legislation, such as the media reform bill).
Boudou said that the financial terms of the new restructuring will be more favorable for the country than those of the 2005 bond swap. The prospectus filed with the 2005 debt swap included a so-called “most favored creditor” clause that said that if the government were to come to a more favorable agreement with creditors in the future, all creditors who had accepted the 2005 offer would have the opportunity to trade up to the better deal. Thus, it was broadly expected that the terms of any new restructuring would likely be worse, from the bondholders’ perspective, than those offered in 2005. We think that, by offering worse terms in the new restructuring, the government also seeks to build domestic political support for the transaction. In fact, Minister Boudou said the bill that will be sent to congress will expressly note that the new transaction will be “more beneficial for Argentina” than the one carried out in 2005. Boudou also noted that the government will not pay the fees of the investment banks (and, thus, we assume that these will be picked up by the bondholders).
Boudou also said that the government will seek a haircut to the principal in default of “at least 65%”. The haircut in the 2005 restructuring was 66.3%. Our base-case scenario is that if the government does seek a larger haircut to the principal in default than it did in 2005, it will be a token increase from the previous 66.3%, i.e., the size of the haircut will be increased a couple of percentage points. If the government were to seek a significantly larger haircut, we believe this would not be consistent with its objectives of having high participation in the transaction and of re-entering the international capital markets in the future.
The new restructuring will have a “new cash” component. Bondholders who tender defaulted bonds in the swap will have to buy new bond. Boudou said that the government will seek to raise about $0.10 for each $1 worth of defaulted bonds that investors tender in the swap (this is in line with our expectations). Boudou noted that the government has not defined yet the characteristics of the new bond (its currency or maturity), but he observed that the government “aims to pay a single-digit interest rate” on the new bonds. Boudou said that retail investors would not be asked to put in new money to participate in the swap (the government will probably exempt small orders from the “new cash” component).
We expect the government to announce additional details of the transaction in coming days. Boudou said that the government hopes to close the transaction “as soon as possible”. Thus, we expect more details to emerge in the very near term. At Thursday’s press conference, Boudou made no reference to how the government will compensate bondholders for the interest accrued since 2005, and did not explicitly say whether the new offer would include the GDP warrants. However, Boudou did say that the GDP warrants “were a good instrument for both the government and the bondholders,” thus implying that these would be again part of the deal. Our expectation is that the government will issue a bond in the middle part of the curve to compensate bondholders for the interest accrued and for the past payments on the GDP warrants. Given that we still have no official details about the exchange proposal, we refer our readers to our Debt Trading Monthly published on 16 October 2009 for estimates of the fair value of the exchange under different scenarios (these values are in the 40-50 range as a percent of the claim amount).
Boudou said that the government expects that at least 60% of the defaulted bonds will be tendered in the swap. The improvement in credit market conditions bodes well for a successful bond restructuring – i.e., 60% and possibly more of the defaulted bonds could be tendered – if the terms of the new swap are reasonably aligned with those acceptable to bondholders. We think that this is likely to be case. As we noted above, we view the fact that holders of $10bn worth of defaulted bonds have expressed their intention to participate in the swap as an indication that the proposal being considered by the government is not much worse than the one offered in 2005. If participation in the new swap is at least 60%, this would imply that 90% of the bond debt that was defaulted in 2001 has been restructured (and this would help the government deal with remaining lawsuits by holdout bondholders and would increase the chance of an upgrade of the country’s sovereign credit rating).
The government will start filing today (Friday 23 October) the required paperwork with the SEC in the US, and with securities regulators in Germany and Italy. It is unclear how long it will take the SEC (and the other regulators) to complete the review of the documentation submitted by the government. In our view, the timetable of the transaction will be largely driven by how quickly the security regulators approve the documentation (a process that could take a few weeks). However, even if the process of obtaining SEC approval goes smoothly, we would not rule out delays due to legal challenges. Boudou was quoted by Reuters as saying that the government expects to close the transaction in 45 days. We think that it will be very difficult to close the transaction so quickly; instead, we expect the bond swap to settle sometime in Q1 2010.
Boudou noted that the restructuring of the untendered debt is one of the steps the government is taking to enable Argentina to re-enter international capital markets. We think that the restructuring will lead to a further tightening of Argentina’s sovereign credit spreads and, thus, it will be a significant step towards accessing international capital markets again. Other steps that would help with this objective (which the government said it plans to follow) are re-establishing a relationship with the IMF, curing arrears with the Paris Club and restoring credibility to the official statistics.