Tag Archives: sovereign debt

World’s Toy: the African Country

Ouagadougou City Burkna Faso. image from wikipedia

Investors are yanking their cash from African assets, until recently a popular play for the adventurous, as a toxic confluence of factors overhangs the continent.Crashing commodity prices, a Chinese slowdown and a string of policy failures are forcing investors to reassess the risk of investing in Africa after years of optimism about its growth prospects.Stock markets and currencies have been selling off across the continent, especially in commodity-dependent economies. Nigeria, the continent’s largest economy and longtime investor darling, has one of the world’s worst-performing stock indexes this year, down by 14% since the start of 2016. The S&P Zambia Index has fared even worse over the past year, plunging 45% as the country’s copper exports tumbled on softening Chinese demand. President Edgar Lungu last September called for a day of national prayer to petition God to shore up Zambia’s currency, the kwacha. At the time, the kwacha had lost 45% of its value against the dollar in 2015.  The declines mean African equities are performing worse than any other frontier markets. The MSCI Africa index tumbled 19% last year, significantly more than the overall MSCI Frontier Markets index….The upshot is that frontier investors are moving their money from Africa to Asian countries like Pakistan, Bangladesh and Vietnam; net energy and commodity importers which have shown more commitment to industrialization….

The shift has also pushed up the costs of sovereign borrowing, even as African countries slow down their issuance of bonds in international capital markets. In 2014, African sovereigns issued $12 billion worth of bonds in international capital markets; last year it was half that, according to Deutsche Bank.Ghana, mired in an economic crisis, issued the most expensive African Eurobond in history late last year, paying a whopping 10.75% for $1 billion; far higher than the single-digit interest rates the government had become accustomed to paying for international bonds in recent years….

[T]here are important exceptions to the rule: Kenya, which has a more diversified economy, and Ivory Coast, the world’s top producer of cocoa, are still attracting frontier investors…..

“One of the biggest flaws when investors look at Africa is that they think of it as a country and not a continent composed of very unique countries and companies,” says Laura Geritz, who runs U.S.-based Wasatch Frontier Emerging Small Countries with $1.1 billion under management.

Excerpts from  Africa Bruised by Investor Exodus, Wall Street Journal, Feb. 26, 2016

Greek Debt Unsustainable: the Wikileaks Cables

Greek protests in front of Greek parliament

2011 Euro-crisis, Wikileaks Cables

Discussing the Greek financial crisis with her personal assistant on 11 October, German Chancellor Angela Merkel professed to be at a loss as to which option–another haircut or a transfer union–would be best for addressing the situation. (The term “haircut” refers to the losses that private investors would incur on the current net value of their Greek bond holdings.) Merkel’s fear was that Athens would be unable to overcome its problems even with an additional haircut, since it would not be able to handle the remaining debt. Furthermore, she doubted that sending financial experts to Greece would be of much help in bringing the financial system there under control. Within the German cabinet, Finance Minister Wolfgang Schnaeuble alone continued to strongly back another haircut, despite Merkel’s efforts to rein him in, while France and European Commission President Jose Manuel Barroso were seen to be in favor of a gentler approach. European Central Bank President Jean-Claude Trichet was solidly opposed, with IMF Managing Director Christine Lagarde described as undecided on the issue. Finally, Merkel believed that action must be taken to enact a Financial Transaction Tax (FTT); doing so next year, she assessed, would be a major step toward achieving some balance in relief for banks. In that regard, the Germans thought that pressure could be brought to bear on the U.S. and British governments to help bring about an FTT.

Euro-crisis Wikileaks Cables: EU Summit: Germans Prepared to Oppose Special Solutions for Greek Financial Crisis

…German Chancellery Director-General for EU Affairs Nikolaus Meyer-Landrut provided on 14 October, 2011 an overview of what Berlin planned to ask for and would be prepared to support. First, the German government wanted solutions that work within the context of current European legislation; accordingly, it would not agree to giving the European Financial Stability Facility (EFSF) a banking license, establishing a joint EFSF-European Central Bank Special Purpose Vehicle, or any other measures that would require legislative changes among the member states. On the other hand, the Germans would support a special IMF fund into which the BRICS (Brazil, Russia, India, China, and South Africa) nations would pool funds for the purpose of bolstering eurozone bailout activities. Meyer-Landrut also believed that a resolution of the Greek crisis will require greater private-sector involvement than was first thought, and that the eurozone must look beyond the technical aspects of a deal and focus instead on the actual progress that Greece will have to make, as regards both legislation and implementation. It was his further opinion that a full-term team will have to be ensconced in Athens for the purpose of monitoring the situation.

Energy Self-Sufficiency v. Environmental Costs: Argentina

Lake Huechulaufquen, Neuquén basin in southwest Argentina. image from wikipedia

Despite the precipitous fall in global oil prices (from 110 dollars in 2014 to under 50 dollars in 2015), Argentina has continued to follow its strategy of producing unconventional shale oil, although in the short term there could be problems attracting the foreign investment needed to exploit the Vaca Muerta shale deposit,  Argentina’s energy trade deficit climbed to almost seven billion dollars in 2014, partly due to the decline in the country’s conventional oil reserves.

Eliminating that deficit depends on the development of Vaca Muerta, a major shale oil and gas deposit in the Neuquén basin in southwest Argentina. At least 10 billion dollars a year in investment are needed over the next few years to tap into this source of energy…

“In the short term, it would be best to import, rather than exploit the shale resources,” Víctor Bronstein, the director of the Centre of Studies on Energy, Policy and Society, told IPS.“But taking a more strategic view, investment in and development of these resources must be kept up, since oil prices are going to start climbing again in the near future and we have to have the capacity to produce our own resources when that happens,” he added.  That is how President Cristina Fernández saw things, he said, when she set a domestic price of 72 dollars a barrel – “40 percent above its international value” – among other production incentives that were adopted to shore up Vaca Muerta.

According to the state oil company Yacimientos Petrolíferos Fiscales (YPF), Vaca Muerta multiplied Argentina’s oil reserves by a factor of 10 and its gas reserves by a factor of 40, which will enable this country not only to be self-sufficient in energy but also to become a net exporter of oil and gas. YPF has been assigned 12,000 of the 30,000 sq km of the shale oil and gas deposit in the province of Neuquén.

The company admits that to exploit the deposit, it will need to partner with transnational corporations capable of providing capital. It has already done so with the U.S.-based Chevron in the Loma Campana deposit, where it had projected a price of 80 dollars a barrel this year….YPF has also signed agreements for the joint exploitation of shale deposits with Malaysia’s Petronas and Dow Chemical of the United States, while other transnational corporations have announced their intention to invest in Vaca Muerta.

Excerpts from Fabiana Frayssinet, Plunging Oil Prices Won’t Kill Vaca Muerta, PS, Apr. 10, 2015

Rating Agencies on Fire

The ruling in the Federal Court of Australia on November 5th held Standard & Poor’s (S&P) jointly liable with ABN AMRO, a bank, for the losses suffered by local councils that had invested in credit derivatives that were designed to pay a high rate of interest yet were also meant to be very safe. The derivatives in question were “constant proportion debt obligations” (CPDOs). These instruments make even the most ardent fans of complex financial engineering blush: they are designed to add leverage when they take losses in order to make up the shortfall. S&P’s models, which the court said blindly adopted inputs provided by ABN AMRO, gave the notes a AAA rating, judging they had about as much chance of going bust as the American government.

S&P denies that its ratings were inappropriate, and plans to appeal. But evidence before the court suggests a world of harried analysts being outsmarted by spivvy bankers. It also indicated a disturbing lack of curiosity by S&P analysts and a desire to cover up for the firm’s failings even when they fretted about a “crisis in CPDO land” and worried that some buyers of these products were “in no hurry to stay in front of the truck”. Instead of warning investors that it had made mistakes, the court found that the firm continued to provide glowing opinions on new CPDOs coming out of the ABN AMRO factory.  There is nothing in the ruling to suggest the shoddy behaviour that took place in this instance was widespread across the firm. It would be a mistake to attribute all ratings that subsequently turn out to be wrong to negligence. Making predictions is hard, as Yogi Berra, a famously quotable baseball player, noted, especially when they are about the future.

But the Australian case does challenge a central part of the defence proffered by S&P and other ratings agencies (Moody’s and Fitch are the other two big ones) in some 40 ongoing cases worldwide alleging negligence. They argue that ratings are merely opinions and protected by constitutional safeguards on free speech, and that only imprudent investors would take decisions solely based on them.  This defence has already worked in a number of high-profile cases in America. Investment analysts and lawyers reckon that there is no sign that courts elsewhere are likely to follow the Australian ruling; it may not even survive the appeal. But the reasoning in the Australian case is persuasive. The judge argued that agencies could not wash their hands of all responsibility if investors took their ratings at face value and then lost money. “The issuer of the product is willing to pay for the rating not because it may be used by participants and others interested in financial markets for a whole range of purposes but because the rating will be highly material to the decision of potential investors to invest or not,” the judge wrote.

The tendency of investors to rely on ratings is reinforced by the privileged access that agencies have to information about issuers. The agencies’ defence that theirs is just an opinion wears thin when, having looked under the hood and kicked the tyres, they then tell investors to make up their own mind from a distance. It would help if regulators forced issuers of bonds and other rated securities to provide more public information. That would allow investors to do more of their own due diligence and enable more competition between agencies to provide the best analysis to investors rather than the best service to issuers.

Ratings agencies: Crisis in ratings land?, Economist, Nov. 10, at 74

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Italian prosecutors filed suit against five former employees of Standard and Poor’s (S&P) and two former employees of Fitch [corporate websites] for allegedly manipulating the market and abusing privileged information that led to the rating agencies’ downgrades of Italy. Though magistrates in Rome and Milan have refused to support the claim, prosecutors from the southern town of Trani contend that the agencies failed to respect European rules of transparency.-