Archive for the ‘Credit’ Category

Africa’s bond rush: Handle with care

African governments must use bond revenues to address critical growth constraints, while global conditions are in their favour.

Sub-Saharan Africa has a $7bn potential bond pipeline in 2013. Zambia and Rwanda recently issued heavily over-subscribed bonds, and analysts anticipate issuances from Nigeria, Angola, Ghana (its second), Kenya and Zambia (again). Tanzania has hired a rating adviser as a precursor to a bond issuance in due course, with Mozambique an outside bet.
This is only partly a response to the continent’s robust growth. Low yields elsewhere (especially in the eurozone and the US) – as well as excess global liquidity due to quantitative easing – are the global trends pushing bond-hunters to Africa. “There is a lot of excess liquidity internationally and some of that is being used to buy high-yielding assets in Africa,” says Mason Cranswick, director of fixed income credit at Credit Suisse.
So the current window of opportunity will not last forever, meaning funds raised must be used by African governments to address critical growth bottlenecks such as infrastructure; highlighted by both recent issuers as an investment priority. “Once liquidity starts drying up, there is a risk that some of the funds will be pulled from Africa. But I think if we keep our momentum we can still attract that capital,” says Mr Cranswick. “If we can keep up with the infrastructure, I think we can stay attractive with the rest of the world.”
While government bonds could help address Africa’s enormous infrastructure deficit, it is no magic bullet. “The binding constraint is debt sustainability issues around these countries,” says Mthuli Ncube, chief economist for the African Development Bank. Rwanda could not go much further than $430m, he says. Regional infrastructure bonds can supplement government’s efforts, and innovative moves – such as Ethiopia’s diaspora bond to raise funds for the Renaissance Dam – can also help. But in the longer term, says Mr Ncube, “what is needed is a deepening of domestic capital markets. That is a process that requires an incredible sequence of reforms.”

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Should Greece follow Argentina’s path? 
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[VftG] Argentina: Opportunity or Renewed Crisis

Posted 2 August 2011, 17:20 BST

by Josh Rosner, Graham Fisher & Co

Over the past several months commentaries have repeatedly drawn comparisons between the current Greek situation and Argentina’s default. Some so-called “experts” have even urged the Greek government to follow Argentina’s model, defaulting on their obligations to creditors, breaking their peg to an external currency and then restructuring in a manner that relieves them of their burdens. These comparisons are both misinformed and dangerous.

I have spent much of the past year working on problems of peripheral European economies and, as part of my research of prior sovereign defaults, recognized a massive disconnect between Argentina’s fairly good fundamentals and the market pricing of their risks. Over the next few months I will be looking more closely at the opportunities, risks and likeliest path Argentina will take in the face of these rising macro-economic risks.

While the default is now a decade past, Argentina remains locked out of international capital markets, distrusted by neighboring governments and once again heading toward a narrowing and difficult set of choices that could impair their ability to best serve the needs of their domestic economy and their populations.

There are clear and obvious solutions to their problems, and a once in a generation opportunity to embrace a solution that could secure Argentina’s position as the next Latin American economic miracle, and an example to the troubled economies of peripheral Europe. Unfortunately, there is little evidence that the current government sees these opportunities or intends to embrace them.

When Argentina chose to default on $81 billion in bonds in 2001, its debt to GDP was relatively paltry – 62%, compared to Greece’s 150%. Since their default, the Argentines have entered into agreements to restructure more than 91% of their defaulted debt by haircutting those creditors by 70%. In the process the country has eliminated $57 billion of principal obligations and has avoided interest payments of almost $59 billion, after considering the $6.5 billion of interest payment on the exchange securities offered to those creditors in settlement. This is a spectacular success for Argentina’s debt negotiators. However, there remains a relatively small amount of defaulted debt still to be resolved: Paris Club arrears, outstanding ICSID awards, and some bonds in the hands of holdouts who do not appear to be going away anytime soon.

The government has been engaged in ongoing legal battles with remaining bond creditors that have resulted in the United States Federal Court, Southern District awarding over 100 judgments against the government for $7 billion. The government has chosen to ignore these judgments, and refused on principle to negotiate with its holdout creditors. It has adopted a similar attitude vis-à-vis the ICSID awards, and has dragged out its Paris Club negotiations, repeatedly submitting proposals that the bilateral creditors consider unserious.

By standing on principle, the government has locked itself out of the global capital markets, even though their debt level is far below their realistic borrowing capacity. Besides the fact that, because of their selective default rating, interest rates on Argentine bonds would be hugely expensive, any attempt to sell new debt into international markets would expose the bond proceeds to attachment by creditors. As long as the judgments against it remain unresolved, Argentina has little chance to access foreign capital and, instead, must rely on domestic funding for its economy.

Herein lies the real crisis that awaits Argentina and should be recognized as reason enough for Greece not to look to Argentina as an example. While Argentina’s economy is large, diversified and has per-capita gross domestic product that is more than twice that of its peers, it is over-reliant on domestic funding and a long-in-the-tooth commodity boom to support its economy.

As a result, the government has seized central bank reserves and nationalized pension fund assets to pay its performing debt, and, unlike virtually any other commodity-based economy in the world, Argentina has avoided using any of the funds generated by the commodity boom to create a countercyclical reserve fund. Even with the benefit of record exports of U.S. dollar-priced soybeans, central bank reserves have barely budged from their $50 billion level for several years. Where most of their neighbors have benefitted from foreign capital inflows, the Argentines have suffered from massive capital flight – US$10 billion, or about $100 million a day, during the first half of 2011 alone. In trying to address this capital flight, the government has harmed relations with both domestic and international businesses by requiring all domestic businesses that import foreign goods to become exporters as well. The results of these social policies are all manner of distortions: companies like BMW are exiting Argentina and domestic auto importers are being forced to enter unrelated businesses such as wine exporting.

The government’s unwillingness to resolve outstanding legal battles with remaining creditors and its reliance on expansive domestic measures have resulted in persistently high rates of inflation which continue to unnecessarily hollow out the economy. Thus, instead of capitalizing on a comparatively positive fundamental picture, Argentina is heading toward one of two dead ends: either draining the domestic economy to service debt and fund government spending, or defaulting on domestic and international debt once again. As in 2001, the ruinous consequences of this policy will impact the Argentine people first and foremost. With the monetary base increasing 41% y/y, inflation is hurting Argentina’s savers just as any future default would disproportionately harm domestic creditors.

In 2012, Argentina will be faced with almost $20 billion of debt service payments. The government has said that it expects to fund this through a primary surplus of about $5 billion, rolling over about $5 billion of multilateral and public sector organizations debt, further use of international reserves, new debt “sales” to domestic public sector agencies and cash advance from the central bank. But there are unacknowledged limits to such an approach. Public sector agencies, including the National Social Security Administration, already hold 46.8% of all Argentine government debt, and this portion of the debt grew by 9.5% in 2010. Meanwhile, with the expansion of the peso supply, the margin of central bank reserves available for external debt servicing is shrinking. In spite of its benign debt to GDP ratio, Argentina risks cannibalizing its economy if it does not re-enter international capital markets soon.

What’s a Government to do?

If the government is able to move past its ideological distaste for resolving disputes with the Paris Club, non-tendering bondholders and ICSID award holders, it would position the people of Argentina to finally put the entire default behind them and, given their relatively low debt/GDP, reap the benefits of a massive and well executed reentry into global capital markets.

If, rather than continuing to raid the domestic economy, the government chose to settle the $7 billion of outstanding creditor judgments, either by using some portion of reserves or by issuing new notes, the cost of settlement, even at the full nominal value of all claims, would be more than offset by savings within three years. This approach would allow the Argentine government to efficiently and effectively manage their economy without the risk of further hollowing it out through artificial interventions.

Moreover, with the threat of litigation and further attachments of bond proceeds behind it, the major rating agencies would be forced to recognize that Argentina’s fundamentals should merit a higher grade. Such a change in Argentina’s credit risk profile suggests that it could, in short order, achieve the Baa3/BBB ratings of its major peers.

On that basis, CDS spreads on Argentina would likely collapse by between 400 and 550 basis points, converging with the levels of its investment grade peers. The CDS spread compression that would accompany such settlements and the ensuing upgrades in ratings would net the federal government interest savings of between $15 and $22 billion over the next 8 or 9 years. The benefits would extend beyond the federal government and would result in a reduction of interest expenses on the billions of dollars of provincial debt by several hundred million dollars a year. The reductions in sovereign interest expense would, as a logical consequence, also reduce the cost of borrowing by private industry.


[Savings calculation assumes that $78bn of Argentine public debt (excluding bilateral and multilateral obligations) maturing through 2018 are refinanced at a credit spread of 1.40% (the average 10 year CDS spread among Brazil, Chile, Colombia, Mexico, Panama, and Peru) rather than a credit spread of 6.50% (the 10 year CDS spread for Argentina, as of 7/26/11)]

Moreover, and maybe more important a factor in driving growth and productive capital allocation, an accommodation with the Paris Club, and payment of outstanding ICSID awards would remove barriers to foreign direct investment, and Argentina could then join its Latin American peers in benefiting from recent capital inflows. As capital re-enters the country, the cost of borrowings by public companies would fall, public company equity multiples would increase and securities held on behalf of the Social Security Administration would reap the benefit of massive price appreciation.

When is a Default a Success?

To properly evaluate whether a default has been successful, the correct measure is not the nominal haircut to the amounts owed to foreign creditors, but, rather, the ne t present value of those savings weighed against costs, explicit and implicit, borne by the population. By that measure, Argentina’s 2001 default has not yet been anything close to a success, nor is it a model that Greece or any peripheral European economy should emulate. While a reduction in foreign debts provides some short-term benefit and may be a prerequisite to successful economic turnaround in the short-term, debt reduction alone cannot be judged a success until the government has restored broad access to international capital markets at rates that reflect the economy’s positive fundamentals. For Argentina, there is a clear path to such an outcome. Unfortunately, until the government takes the decision to travel down that path – a decision that is justified regardless of its antipathy toward its Paris Club, ICSID and “vulture” creditors – it will not have achieved a successful restructuring. In fact, Argentina is on the cusp of wiping out the benefit of the debt forgiveness that it has already forced on creditors in the 2005 and 2010 exchange. With dwindling reserves, a declining surplus, high inflation, and an eventual end to the commodity boom, there is an increasing risk that Argentina will hit the wall, again, and that Argentines will find that an ideologically driven economy promises much, but delivers little to the man in the street.


Joshua Rosner is Managing Director at independent research consultancy Graham Fisher & Co and advises regulators and institutional investors on housing and mortgage finance issues. Previously he was the Managing Director of financial services research for Medley Global Advisors and was an Executive Vice President at CIBC World Markets. Mr. Rosner was among the first analysts to identify operational and accounting problems at the Government Sponsored Enterprises and one of the earliest in identifying the peak in the housing market, the likelihood of contagion in credit markets and the weaknesses in the credit rating agencies CDO assumptions.


Disclaimer: The opinions expressed in “View from the Ground” columns do not necessarily reflect those of the FT Tilt editorial team. FT Tilt may edit the columns for clarity; any errors of fact or omission are the authors’ own.

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Drunken Ben Bernanke Tells Everyone At Neighborhood Bar How Screwed U.S. Economy Really Is

AUGUST 3, 2011 | ISSUE 47•31
The intoxicated Federal Reserve chairman informs bar patrons of the dangers of reckless spending.
SEWARD, NE—Claiming he wasn’t afraid to let everyone in attendance know about “the real mess we’re in,” Federal Reserve chairman Ben Bernanke reportedly got drunk Tuesday and told everyone at Elwood’s Corner Tavern about how absolutely fucked the U.S. economy actually is.
Bernanke, who sources confirmed was “totally sloshed,” arrived at the drinking establishment at approximately 5:30 p.m., ensconced himself upon a bar stool, and consumed several bottles of Miller High Life and a half-dozen shots of whiskey while loudly proclaiming to any patron who would listen that the economic outlook was “pretty goddamned awful if you want the God’s honest truth.”
“Look, they don’t want anyone except for the Washington, D.C. bigwigs to know how bad shit really is,” said Bernanke, slurring his words as he spoke. “Mounting debt exacerbated—and not relieved—by unchecked consumption, spiraling interest rates, and the grim realities of an inevitable worldwide energy crisis are projected to leave our entire economy in the shitter for, like, a generation, man, I’m telling you.”
Enlarge ImageA drunken Bernanke attempts to find the Aerosmith song “Back In The Saddle” on the bar jukebox.
“And hell, as long as we’re being honest, I might as well tell you that a truer estimate of the U.S. unemployment rate is actually up around 16 percent, with a 0.7 percent annual rate of economic growth if we’re lucky—if we’relucky,” continued Bernanke, nearly knocking a full beer over while gesturing with his hands. “Of course, if everybody knew that, it would likely cripple financial markets across the entire fucking globe, even in various emerging economies with self- sustaining growth.”
After launching into an extended 45-minute diatribe about shortsighted moves by “those bastards in Congress” that could potentially exacerbate the nation’s already deeply troublesome budget imbalance, the Federal Reserve chairman reportedly bought a round of tequila shots for two customers he had just met who were seated on either side of him, announcing, “I love these guys.”
Numerous bar patrons slowly nodded in agreement as Bernanke went on to suggest the United States could pass three or four more stimulus packages and “it wouldn’t even matter.”
“You think that’s going to create long-term economic growth, let alone promote job creation?” Bernanke said. “We’re way beyond that, my friend. There are no jobs, okay? There’s nothing. I think that calls for another drink, don’t you?”
While using beer bottles and pretzel sticks in an attempt to explain to the bartender the importance of infusing $650 billion into the bond market, the inebriated Fed chairman nearly fell off his stool and had to be held up by the patron sitting next to him.
Another bargoer confirmed Bernanke stood about 2 inches from her face and sprayed her with saliva, claiming inflation was going to “totally screw” consumer confidence and then asking if he could bum a smoke.
“Sure, we could hold down long-term interest rates and pursue a program of quantitative easing, but c’mon, we all know that’s not going to make the slightest bit of difference when it comes to output, demand, or employment,” Bernanke said before being told to “try to keep [his] voice down” by the bartender. “And trust me, with the value of the U.S. dollar in the toilet, import costs going through the roof, and numerous world governments unprepared for their own substantial debt burdens, shit’s not looking too good for us abroad, either.”
“God, I’m so wasted,” added Bernanke, resting his head on the bar.
Later in the evening, Richard Kampman, a truck driver who was laid off in 2010, said Bernanke approached him in the men’s restroom and attempted to strike up a conversation about various factors contributing to the current financial crisis.
“He stumbled up to the urinal and started mumbling on about the depressed housing sector or something,” said Kampman, who claimed Bernanke had to use both hands on the wall to steady himself. “Then after a while he just sort of stopped and I couldn’t tell if he was laughing or crying.”
“Then he puked all over the sink and the mirror,” Kampman added.
Customers at the bar told reporters the “shitfaced” and disruptive Bernanke refused to pay for his drinks with U.S. currency, claiming it was “worthless.” Witnesses also confirmed that near the end of the evening, Bernanke put money into the jukebox and selected Dire Straits’ “Money For Nothing” to play five times in a row.
“This is what it’s all about,” said Bernanke, who reportedly danced alone in the middle of the dark tavern. “Fucking love this song.”

The Onion (@TheOnion)
8/3/11 4:05 PM
Drunken Ben Bernanke Tells Everyone At Neighborhood Bar How Screwed U.S. Economy Really Is

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In this dire economy, even the Tooth Fairy is pinching pennies

(CNN) — Getting the Tooth Fairy to pony up in this sagging economy has been like pulling teeth.

A recent survey found that the national going rate has seen a 40-cent decline this year: From $3 to $2.60.

What’s worse? A full 10% of kids are reaching under their pillows … and coming up empty. Compare that to last year when just 6% of kids found no reason to flash that toothless grin.

“It’s a cardinal sin not to (pay),” said Rakshanda Liaqat, a mother of two in Phoenix. “It’s about a child losing a part of her and the warm belief that the tooth fairy will take care of her precious tooth.”

“Now, on the other hand, counting the number of teeth your kid loses. And that, too, multiple times in a year? And that, too, having two kids? I can understand the economic recession the Tooth Fairy goes through in terms of her salary.”

Liaqat tried to leave $10 for every tooth her son lost — “but my son didn’t lose much of his teeth after the recession hit.”

“He lost it right on time. Before the debt crisis,” she said. “Amen to that!!”

The telephone survey of 1,006 adults was conducted on behalf of Visa and is intended to get parents talking to kids about money management.

It found that the economic pinch has taken a bite out of the Tooth Fairy’s generosity most dramatically in the eastern United States. Kids there received just $2.10 — a 38% decline from $3.40 last year.

In the West, kids pocket more than the national average: $2.80 and up 4% from last year’s $2.70.

That doesn’t surprise Scott Rivers in San Diego.

He leaves about $5 for every tooth his children lose.

“It’s worth it just to see their eyes light up,” he said. “Plus, it gives us a chance to talk about what they want to do with the money and what they should. Like donating a bit to charity.”

But he’s in the minority. Just 18% of kids around the nation receive $5, the survey found.

The majority — 36% — receive a dollar or less.

And 18% get between $2 and $4.

“My 6-year-old niece just lost her first tooth last week and her parents gave her about $2 in coins,” said Jeanne Byrd of Fairfield, California. ” Our family has never really given large dollars for the tooth fairy though.”

Among the survey’s other findings:

— Kids in the Midwest receive an average of $2.80, a 3% decrease from last year’s $2.90

— But children in the South find the Tooth Fairy penny-pinching as well: $2.60 — a 21% cut from last year’s $3.30.

CNN’s Maria P. White contributed to this report.

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By Albert Edwards, Société Générale, London 

The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar deluded state of mind. Yet again, equity investors refuse to accept they are now locked in a Vulcan death grip and are about to fall unconscious.

The notion that the equity market predicts anything has always struck me as ludicrous. In the 25 years I have been following the markets it seems clear to me that the equity market reacts to events rather than pre-empting them. We know from the Japanese Ice Age and indeed from the US 1930’s experience, that in a post-bubble world the equity market merely follows the economic cycle. So to steal a march on the market, one should follow the leading indicators closely. These are variously pointing either to a hard landing or, at best, a decisive slowdown. In my view we are poised to slide back into another global recession: the data is slowing sharply but, just like Japan in its Ice Age, most still touchingly believe we are soft-landing. But before driving off a cliff to a hard (crash?) landing we might feel reassured when we pass a sign that reads Soft Landing and we can kid ourselves all is well

Read the rest of the story here  >  > >

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Exprinter Sells $626 Million of Notes Linked to Venezuela Debt
September 03, 2010, 10:09 AM EDT
Sept. 3 (Bloomberg) — Exprinter International Bank NV in the Netherlands Antilles sold $626 million of structured notes linked to Venezuelan bonds, perceived by investors as the riskiest debt in the world.
The notes, issued in six parts, are tied to the performance of Venezuela government debt including bonds of state-owned oil company Petroleos de Venezuela, according to data compiled by Bloomberg. The biggest portion is a $271 million issue of 20- year notes issued at 66.5 percent of face value yielding 14.5 percent. That compares with 15.2 percent on the underlying government bonds.
Credit-linked notes pay interest based on the price of the entities they reference and are usually bought by investors who aren’t able to trade the underlying securities because of regulations, cost or other reasons. Exprinter, based on the Caribbean island of Curacao, issued nine structured notes linked to Venezuela this year, Bloomberg data show.
Robin Powers, a U.S.-based lawyer at Rimon Law representing Exprinter, said the bank declined to comment on the deals.
The cost of insuring Venezuelan debt for 10 years with credit-default swaps jumped 17 percent this year to 1,120 basis points, the highest in the world ahead of Greece and Argentina. The contracts indicate a 78.4 percent probability of default on 10-year Venezuelan debt, according to data provider CMA.
Credit-default swaps are used to bet on or hedge against a borrower’s ability to repay debt. An increase indicates deterioration in the perception of credit quality. A basis point on a contract protecting $10 million of debt is equivalent to $1,000 a year.
Venezuela is rated BB- by Standard & Poor’s, three levels below investment grade, and two steps lower at B2 by Moody’s Investors Service.
The country’s economy shrank for a fifth quarter in the three months to June 30, making it the only Latin American country still in recession. Gross domestic product shrank 1.9 percent in the second quarter, and 3.5 percent in the first half.
–Editors: Andrew Reierson, Paul Armstrong
To contact the reporter on this story: Sarfraz Thind in London at
To contact the editor responsible for this story: Paul Armstrong at

Exprinter Sells $626 Million of Notes Linked to Venezuela Debt – BusinessWeek

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Second Leg of Crisis Beginning: Hedge Fund Manager

Published: Tuesday, 31 Aug 2010 | 5:38 AM ET
By: Patrick Allen
CNBC Senior News Editor
September and October hold bad news for stock markets and banks remain overleveraged as we head into the second leg of the financial crisis according to Pedro De Noronha, the managing partner at Noster Capital in London.

“We are seeing one of the most challenging years for investors ever,” De Noronha told CNBC Tuesday. “Major investors are simply leaving the market. When it looks like markets are about to fall off the cliff they rally and vice versa.

“There are problems coming from the resetting of US mortgages and (the) euro area remains a big worry,” he said.
“Germany is unwilling to save any other European country,” De Noronha said. “Merkel used up lots of political capital saving Greece and she saved the Greek bond market in order to save the French and German banking system from more big losses.”
“There are four or five countries that have major structural problems that should not be in the euro,” he said. “I still have (yet) to see a politician who will shoot themselves in the head on austerity.”
“The Greeks have no choice but to cut, the others like Spain are not doing enough, I am with the ‘Austerian’ school and do not buy the Keynesian argument,” he said.
On Monday, Nobel-prize-winning economist Paul Krugman called for another big stimulus program for the US, saying “(e)verything is pointing to the need for more spending.”
Laughable Tests?
De Noronha said he is also very worried about the banking industry and is shorting five of the biggest bank stocks in Europe: UBS, Barclays cnbc_comboQuoteMove(‘popup_barc-ln_ID0EGGAC15839609’);[BARC-LN 308.30 5.90 (+1.95%) ] cnbc_quoteComponent_init_getData(“barc-ln”,”WSODQ_COMPONENT_BARC-LN_ID0EGGAC15839609″,”WSODQ”,”true”,”ID0EGGAC15839609″,”off”,”false”,”inLineQuote”); , Intesa Sanpaolo, Unione de Banche and BBVA.
“The recent stress tests made me laugh,” he said. “We only stress tested what the banks told us, I did not see anyone testing anyone until they had gone broke.”
“When I look at Tier 1 Capital ratios, I find things propping them up that are not assets that can be drawn on in a crisis,” he said. “The real capital 1 ratio of some major banks is just 1.7 percent and I am shorting five major European banks as a result.”
The majority of banks remain over leveraged going into what could be the second leg of the financial crisis, De Noronha added.

“The regulators used 6 percent as the threshold for defining the minimum capital ratios, but that 6 percent number includes non-cash assets such as deferred tax assets and goodwill,” he said. “If you use only tangible book equity the 6 percent of the biggest offenders turns into closer to 2 percent which implies a leverage ratio of 50 times. That is hardly conservative for current the current economic reality.”

On Tuesday, Credit Suisse took a different stance, boosting its rating on banking to “overweight” from “market weight,” saying that economic risks are “overplayed” and that “funding should be less costly than initially feared.”
© 2010

Global Economy – Second Leg of Crisis Beginning: Hedge Fund Manager – CNBC

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