No More Learning

Its collective action provision required 85 percent approval of the terms and 98 percent participation resulted. The exchange documents recognized the risk of additional write-downs in view of Fund cash-flow analysis and further concessional funding from the Inter-American and Caribbean Development Banks to cover gaps with debt/GDP still at 85 percent. Immediate servicing costs fell to 15 percent of revenue aided by oil discovery and tourism FDI increase, but economic growth was just 2 percent with consecutive weather disasters and rising crime. The government then nationalized telecom and electricity companies with compensation due the former owners representing 15 percent of output in contingent claims. In the 2012election Prime Minister Barrow ran on a platform of super-bond relief that dropped the secondary price to 40 percent of face value. Bondholders controlling $200 million organized to respond as the new leadership skipped interest payments and S&P downgraded the sovereign rating to default. The initial proposal for steep haircuts was rejected, but another 30 percent NPV cut was eventually accepted by all investors in early 2013. The compromise included novel legal commitments to creditor engagement and data transparency as well as clarification of pari passu and other technical language. The Fund completed Article IV consultations at the same time and offered debt management advice and training. Partial guarantees were considered as in the Seychelles and St. Kitts and Nevis cases but the authorities did not formally request them.

Total cash-flow help came to $375 billion over 15 years and the rating was soon returned to B-minus as the price jumped to 65 cents. However the outstanding utility seizure payments are essentially equal to the super-bond write-off leaving long-term sustainability in question without historic fiscal adjustment, the paper believes. In an admonition applying to neighbors and other small nation borrowers it concludes that a workable process did not produce successful outcomes. The second negotiation evolving from a political campaign pledge was viewed by major creditors as unwillingness rather than lack of capacity to honor the previous deal in a man-made tragedy.

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Global Sukuks’ Feisty Feast Period
2014 August 4 by admin

Posted in: General Emerging Markets
First half sukuk issuance mainly from Malaysia, Saudi Arabia, the UAE and Turkey was up over 8 percent to $65 billion as the total outstanding neared $300 billion according to Kuala Lumpur’s Islamic Finance Center. Second quarter volume “surged” to $35 billion despite the shortened Ramadan holiday stretch. Malaysia’s corporate and sovereign share was two-thirds at $40 billion including a pioneer real estate investment trust and the GCC followed with one-quarter of the sum consisting of $9 billion in Saudi and $4 billion in Emirates instruments. Turkey’s sharia-compliant banks accounted for $1. 5 billion in Q2 with a ringgit-denominated operation. The UK debuted with 200 million pound offering in June oversubscribed a dozen times with 40 percent domestic buyers. The mid-year sovereign-corporate breakdown was $50 billion-$15 billion as the latter’s financial sector was increasingly active for Basel III capital-raising. The power and real estate industries are also prominent, and yields have come down in the key markets with Malaysia’s 5-year benchmark easing 7 basis points and Turkey’s 65 basis points after 2013’s brief Fed tapering bump. The report cited the first insurance company flotation and geographic diversification into Africa with a launch by Senegal preceding a conventional Eurobond. The full 2014 pace should exceed last year’s $120 billion with 30 countries and offshore centers like Hong Kong and Luxembourg participating. The Saudi local market could open to non-residents along with the announced equity access beginning in early 2015 under a qualified institutional investor scheme. In Egypt the Al-Sisi government could pursue the channel as recommended by Gulf aid providers as it asserts fiscal discipline to cut the deficit to 10 percent of GDP with fuel subsidy changes. Reserves have been steady at $16. 5 billion despite the Sinai border hostilities between Israel and the Palestinians, as Suez Canal revenue rose 5 percent through June. Indonesia with the world’s largest Moslem population has been a focus and President-elect Jokowi has been a proponent of sound borrowing alternatives in his previous official posts. Although candidate Prabowo has contested the results, the currency has firmed at 11,500/dollar and benchmark bond yields at 8 percent with the victory. Although the current account gap may be around 3 percent of GDP on oil and gas imports portfolio inflows over $20 billion should help close it as growth repeats at 5 percent.

In Turkey, Islamic banks have heeded the Prime Minister’s call as he runs for a more powerful Presidency to lower lending costs as the central bank continues its own easing under an annual 7. 5 percent inflation forecast. In Nigeria federal sukuks were due to follow state taps but plans are on hold with monetary authority and political leadership transitions. The former’s new head kept rates in place in his inaugural meeting as foreign reserves topped $40 billion to support the naira. Petroleum industry overhaul remains stuck in the legislature as Boko Haram terror attacks multiply to depress securities appetite into the election cycle.

The East Caribbean’s Spent Spearfishing
2014 August 4 by admin

Posted in: General Emerging Markets
St. Kitts and Nevis exited its IMF program after commercial debt restructuring as another Eastern Caribbean Currency Union member Grenada attempted repeat operations on both fronts after the new government came to power a year ago unable to service the 110 percent of GDP in outstanding obligations on meager 1. 5 percent growth. Tourism lagged versus neighbors with additional UK air passenger charges, with fishing, resort construction and the offshore medical school the main drivers. The current account deficit was over 25 percent of GDP, financed by external arrears accumulation as deflation also arrived on economic slack and negative credit extension. The bad loan ratio was 15 percent under local norms as capital also eroded on exposure to Trinidad and Tobago’s bankrupt CL Group. The primary budget gap was 4 percent of output and coupon payment for the 2025 step-up bond from the previous rescheduling was unmanageable as $650 million or 70 percent of total debt was targeted for official and private relief. A standstill has been in place since the request, which triggered a sovereign ratings downgrade to selective default as advisers were hired for creditor negotiations. Specialist funds hold $15 million and non-Paris Club export agencies in China and Taiwan are a big class, with the latter suing in New York under pari passu clauses where the judge rejected settlement interpretation as in Argentina’s case. The Fund document supporting a resumed $20 million facility projects medium term 2 percent growth and inflation and higher exports as nutmeg rebounds from hurricane damage. Commodity sectors will be liberalized under an “internal devaluation” cost and wage push alongside business climate and infrastructure modernization. Tax administration and social safety nets will be overhauled with World Bank and Caribbean Development Bank technical assistance, and an indicative 50 percent principal haircut was proposed for 2025 bondholders in April, with regional Treasury bills and central bank loans spared. The civil service pension and salary bill at 10 percent of GDP is to be cut under the agreement, and banks, credit unions and insurance companies will be stress tested for public debt vulnerabilities. The combined application and Article IV report commends the adjustment ambition offset by track record “weakness” as the last attempt derailed in 2013. It notes “satisfactory progress” with bond exchange discussions but reiterates the underlying sustainability need within the context of an overall strategy.

In Francophone Africa another serial defaulter Cote D’Ivoire re-tapped private markets after regular successful placements on the West African regional bourse. Senegal followed suit after a no-interest sukuk was launched as the largest Sub-Saharan effort to date. Zambia after a recent issue is in talks on a renewed IMF arrangement which may not be inked for several months. Ghana after a ratings downgrade has spurned that route for now but will also refrain from holding 5-year auctions with runaway deficits and inflation spoiling the catch.

Japan’s Slung Arrow Aroma
2014 July 30 by admin

Posted in: Asia
Japanese investment trusts with over $40 billion in assets continued their EM bond outflow streak offsetting US and European inflows as domestic equities were first half global laggards awaiting additional “arrows” beyond massive monetary easing in the Abenomics quiver. Uridashi issuance in their currencies has been decent with half of the $15 billion annual pace in the Brazilian, Mexican and Turkish units as the Russian ruble and South African rand were dissed. Samurai bond action has turned mainly to multinational companies diversifying into yen, with Australian offerings popular after a bilateral economic partnership pact was signed lifting curbs in civilian and military trade. The consumption tax preliminary rise from 5 percent to 8 percent could shrink output 5 percent in Q2 as both domestic demand and exports suffer as business’ unspent cash pile exceeds half a trillion dollars. Auto companies are contemplating Thailand relocation with indefinite military rule and bank local lending has been flat despite central bank special facilities and tentative real estate rebound after decades of decline. Inflation has picked up to over 1 percent but long-term government bond yields have not budged as monetary stimulus pauses. The focus now is on enacting other elements of the reform package unveiled a year ago including company income tax reduction, more stock and risk-taking leeway in the giant $1 trillion pension fund’s allocation guidelines, and agriculture and labor market opening. Corporate governance change is also a thrust after a series of scandals at firms with large cross-shareholdings and foreign ownership, with enactment of a new Stewardship Code. The Transpacific Partnership negotiations with the US and other Asian and Latin American parties are still active official insist despite the trade impasse evident during President Obama’s recent visit. Diplomatic and military initiatives have sidetracked commercial momentum, critics argue as the Prime Minister pursues the other pillars of his campaign platform to revise the wartime constitution and assume a higher regional leadership profile. With China and Korea in mind, the self-defense force capability will be expanded and overtures to Taiwan and Pyongyang are likely and in domestic political terms may have cost the ruling LDP in by-election losses, particularly among young voters concentrated on the employment and training agenda.

Korean shares were barely ahead through July as the won continues to surge toward the 1000/dollar handle despite stepped up official intervention cited in the US Treasury’s latest manipulation report. Bellwether Samsung revealed poor earnings as investors called for further conglomerate spinoffs and management overhaul to realize value. The GDP growth forecast is now below 4 percent with the central bank on hold with inflation at 2 percent. Newly appointed Finance Ministry officials are preparing targeted industry and consumer incentives to boost competitiveness and activity after an initial round introduced by the President to redeem campaign promises expired. Shipbuilding has been positive despite naval confrontations with the North hurling insults and projectiles.

Frontier Sovereigns’ Rookie Issue Mistakes
2014 July 30 by admin

Posted in: General Emerging Markets
An IMF working paper looking at $15 billion in debut external frontier country bonds mainly from Africa the past decade advised “risk-mitigating policies” to meet currency, refinancing, and management challenges as it fleshed out generic warnings from Director Lagarde in recent Sub-Sahara visits. The two dozen issues covered were at least $200 million from the central government also in Asia, Europe, Latin America and the Middle East and prompted both by demand and supply conditions. During the 2008-09 crisis only Georgia and Senegal came to market but since 2010 yield search with low global interest rates opened the floodgates to 15 peers. Most have been in dollars with fixed-coupon bullet maturities from 5-10 years and junk ratings. Their chief use was infrastructure projects that local markets could not fund and graduation from lower to middle-income status likewise reduce previously available concessional lines to motivate international private access. The proceeds as well went for budget coverage, debt restructuring, and corporate benchmarking, as official relief under bilateral and multilateral programs cut ratios below 60 percent of GDP. Credit ratings upgrades to the BB-minus range were the norm before placement especially in Asia and Latin America. Growth and inflation indicators improved, with half the sample projecting annual 5 percent medium-term expansion, as economic and debt burden strides paralleled the early emerging market efforts post-Brady Plan in the 1990s, according to the Fund. Unlike then new issuers have solid reserve positions to withstand capital “sudden stops,” but budget and current account imbalances have often worsened. They have paid a “novelty premium” of 50 basis points, and in some cases like Tanzania’s 2013 floating rate note structures were poorly chosen to increase costs. Building on previous research secondary market spreads are driven by economic indicators, financial and institutional development, and risk appetite modeled in statistical regressions, and they are typically wider than in the core EMBI. During last year’s Fed taper fright they sold off less than more widely-held liquid instruments, bur the study suggests possible convergence over a longer correction period. Their dedicated and real money investor base is “more stable,” with African paper bought equally by US and European houses. Sustainability is at issue where the amounts represent 15-20 percent portions of output as with Mongolia and Seychelles, as the latter subsequently conducted an exchange supported by an IMF arrangement after missing interest and principal payments in 2008.

Currency mismatch is another problem as Gabon and Tanzania already have high FX debt. Maturity profiles with “bullets” amortizing entirely at the end are potential complications, particularly as rising global rates deter rollover. Debt management capacity and governance and investor relations and independent advice are often lacking, the survey finds. Credit ratings should be obtained in advance to reduce costs, and outside legal and financial help unassociated with the underwriters must be enlisted to ensure longer-term benefits with encore performances as in Ghana and Bolivia, it adds.

Russia’s Sanctions Sneer Straddle
2014 July 28 by admin

Posted in: Europe
Russian shares again veered toward double-digit falls dragging Eastern European markets along as the US Treasury imposed the first institutional energy and financial sector sanctions respectively on Rosneft- Novatek and Gazprombank-VEB barring them from long-term dollar borrowing. Their portfolio values plunged immediately as investors scrambled to gauge the wider boycott dimensions, especially as further punishment loomed with a civilian jet downed soon after by pro-Russian Ukrainian rebels, as their bonds were removed from the benchmark CEMBI index. The names should be able to rely on central bank and alternative international lines for refinancing through year-end, but the external bond window could again close indefinitely after syndicated loans dropped 80 percent to a post-crisis low of $3. 5 billion in the first half. Officials revealed $80 billion in capital flight for the period although the current account surplus also rose on higher oil prices to 3. 5 percent of GDP on 1 percent overall growth. The softer ruble off 5 percent against the dollar aided the balance as President Putin and his team reaffirmed increased trade ambitions with the rest of the BRICS at a Brazil summit launching their development bank and foreign exchange reserve backstop. Moscow will appoint top executives to steer infrastructure projects due to begin in 2016 as Shanghai won the headquarters nod. Even before the falling out over Crimea annexation it had criticized Washington for failure to implement the 2010 IMF quota and governance changes, a lapse which helped motivate “New Bank” creation and spur Fund Director Lagarde to consider moving ahead without US ratification. Congress rejected the recent Obama Administration attempt to insert the appropriation into approval for Ukraine bilateral and multilateral aid, as the second program installment is poised for release amid worsening fiscal and output indicators. Eastern disruption will add half a percent to the deficit as the economy is projected to shrink 5 percent, according to the Finance Ministry. The benchmark interest rate was nudged 3 percent to 12. 5 percent in mid-July as consumer price inflation stood at 12 percent and the currency crashed 30 percent versus the greenback. The 2017 bond settled around the pre-war 8. 5 percent yield as S&P improved the ratings outlook to stable. The stock market up 25 percent through July has been a top MSCI frontier performer despite the capital account turning negative to the tune of 1. 5 percent of GDP. Foreign banks have not pulled out pending the results of industry stress tests and likely recapitalization under the Fund arrangement, as restrictions remain in place on hard-currency access and trading.

Slovenia’s banking difficulties were prominent in another round of elections where newcomer Cerar, son of a famous gymnast, won with 35 percent of the vote on a platform slowing the privatization drive designed to cover bailout and social welfare spending. Fund-raising needs are covered through early 2015 after EUR 3 billion was allocated for bank cleanup, but S&P downgraded the outlook on poll results minimizing the mess.

Malaysia’s Fraternal Merger Feelings
2014 July 28 by admin

Posted in: Asia
Malaysian shares retained modest gains through July as Islamic finance powerhouse CIMB run by the prime minister’s brother reprised merger negotiations with RHB, potentially creating a national banking champion able to expand regionally as envisioned in the latest development blueprint. State investment funds with big stakes have pledged to purge political influence from the outcome and instead apply corporate governance rules under a new code. The deal focus coincides with a slight 25 basis point benchmark rate rise and further fuel subsidy cut postponement into next year as the government struggles with popularity erosion after the missing airliner fiasco. GDP growth should top 5 percent on a combination of solid exports and domestic demand such as recent approval for another industrial hub. A smooth presidential handover across the peninsula in Indonesia will aid sentiment as equities and the rupiah kept their surge on initial reports Jokowi beat the old guard’s Parabowo whose backers control major Jakarta exchange listings. The election commission will certify the outcome as foreign investors with three-quarters of the share free float and one-third of local bonds kept their nerve, as the central bank paused on 7 percent inflation and a monthly return to trade surplus although the oil and gas gap jumped. Jokowi’s economic platform was murky as he stressed trouble-shooting skills as a mayor and then Jakarta governor but hinted at further FDI restrictions and gas subsidy delays. His running mate Kalla is expected to recruit seasoned technocrats for cabinet posts, with the Energy and Finance Ministries under particular scrutiny. However a personal ally could get the latter appointment as in India, where Minister Jaitley unveiled a maiden budget to lukewarm receptions, as the top Asian stock market sold off after $20 billion in international inflows the past six months anticipating breakthroughs. He targeted a 4 percent of GDP fiscal deficit and hiked permitted insurance industry overseas ownership to 49 percent, and agreed to improve external settlement of local bonds and exempt bank infrastructure-related debt placement from reserve requirements. The plan will pursue tax reform and anti-poverty transfer overhaul as 7 percent-plus growth is the medium term goal on low single-digit inflation, despite the current poor monsoon compromising both aims.

The Philippines was also ahead almost 20 percent on the MSCI gauge in the teeth of another devastating typhoon and an unexpected 25 basis point increase in the special deposit account rate. The economy advanced 5 percent in Q1 but the current account surplus was offset by capital outflows in the portfolio and errors and omissions categories. President Aquino has been criticized for unilaterally accelerating spending under special provisions without legislative debate. That check is absent altogether in Thailand with the military at the helm and stocks still up double digits despite the forecast growth rollback to 1. 5 percent. The junta has imposed price controls on staples and approved $20 billion in backlogged projects although tourists and automakers stay away expressing disapproval.

Egypt’s Subsidy Attack Subtext
2014 July 25 by admin

Posted in: MENA
Egyptian shares were up over 10 percent through July as President El-Sisi under Gulf donor prodding hiked fuel prices and taxes to limit next year’s fiscal deficit to 10 percent of GDP, and ordered the security forces into the streets to control protests and gouging. Urban inflation could tip again into double digits with the subsidy slash, and Treasury bill yields rose immediately in response. Capital gains tax and VAT will be levied in another measure as power shortages persist to cap GDP growth at 3 percent. On the balance of payments, reserves have steadied at over $15 billion with the GCC infusions but tourism is off 60 percent by the latest figures on FDI under $2 billion. State debt to foreign oil suppliers is above $5 billion and a dozen previous privatization deals were undone to add to official obligations. A new investment authority aims to facilitate approvals and raise the World Bank Doing Business score in the bottom third of the listing. Tunisia has embarked on its own outreach program in the US, Europe and Asia with stocks flat there before historic presidential and parliamentary elections following constitutional compromise between Islamic and secular parties. Under its IMF program monetary policy was tightened to combat 5 percent inflation as reserves are down to just three months’ imports. Gradual subsidy reform is designed to reduce the 8 percent of GDP budget deficit, although strikes continue to hurt investment off one-third through mid-year. Moroccan equities have not budged either despite another Fund precautionary arrangement which tackles sensitive pension outlays as phosphate exports dipped 15 percent. Economic growth is put at around 3 percent assuming good rainfall for agriculture and continued Gulf aid. Jordan’s $1 billion US government-guaranteed bond helped lift its MSCI component 5 percent, but resumed internal conflict in Iraq with the terrorist-led ISIS claiming vast swathes of territory will choke 15 percent of exports. Lebanon has been roiled by Syria’s and the reignited Israel-Palestinian confrontation with refugees now one-quarter of the population and the direct and indirect costs totaling almost $5 billion according to officials.

In the Gulf Saudi Arabia and the UAE as major Egyptian backers have experienced their own setbacks as the former’s non-oil sector weakened in Q1 with sentiment hurt by the mysterious MERS virus, and the latter bourse corrected sharply post-MSCI upgrade, with bellwether Arabtec falling 60 percent on property and management worries. Dubai corporate and sovereign bonds were well-received but issuers like Dana Gas and Abu Dhabi Energy have large Iraq exposures. Dubai’s Knight Frank housing index was up 30 percent in Q1 as annual credit growth runs at a 15 percent clip despite central bank macro-prudential curbs. Saudi bank private loans are advancing 10 percent, but public ones have jumped 30 percent as infrastructure spending ramps up to accompany oil production fluctuating on Libyan and Iraqi violence transfers.

Central America’s Framed Youth Fears
2014 July 25 by admin

Posted in: Latin America/Caribbean
As thousands of unaccompanied child migrants crossed the US border seeking haven from Central American crime and poverty, bond investors rethought positions as performance vacillated against the core EMBI’s 10 percent jump through mid-year. El Salvador has been shunned with the leftist FMLN keeping power on a disappointing recent fiscal and structural reform record as 2 percent GDP growth remains the sub-region laggard, according to the IMF. Public debt split almost evenly between domestic and foreign, is 60 percent of GDP and legislative elections in early 2015 will maintain borrowing and spending impetus. The trade gap is nearly in double digits on chronically soft exports in the dollarized economy, and competitive overhaul is a priority aid target in the bilateral Partnership for Growth with Washington, which has been sidetracked over governance disputes. Guatemala’s output is up at double the pace as first-half remittances rose to $2. 25 billion on a 2 percent of GDP budget deficit. Official debt/national income is only 25 percent although the trade hole is close to 15 percent of GDP on commodity price swings. The Dominican Republic has been an overweight following April’s $1. 25 billion global bond as the Medina government which may pursue a repeat term settled mining complaints and enacted tax changes recommended under former IMF programs. In tourism and financial services it benefited from uncertainty in Puerto Rico where utility and municipal debt will be restructured with the initial acceptance of large international fund managers. Costa Rica’s new President Solis took office after a Q1 10 percent currency depreciation and closure of the key Intel assembly plant. Inflation is 5 percent and modest tax reform aims to narrow the fiscal shortfall to 5 percent of GDP. Panama also welcomed a surprise incoming chief executive with just a dozen seats in Congress as economic growth slowed to 6 percent despite a near 10 percent climb in Canal revenue on heavy traffic, as the widening final timetable was pushed to the end of 2015 after contractor clashes. Construction and tourism were firm as President Varela pledged to shift emphasis to working-class education and social spending.

The penultimate immigrant destination is Mexico, where the central bank cut the benchmark rate 50 basis points to 3 percent after first quarter measly 1 percent growth souring business and consumer confidence. Flat stock market results have reflected the letdown after the excitement of the Pena Nieto Administration’s reform burst, where anti-monopoly powers have forced billionaire Slim to divest media and telecom assets. The final rules for Pemex private partnerships have yet to be approved under the outline of a lighter preliminary royalty regime, as states concentrate on election and fiscal decentralization revisions. In the sovereign ratings sweepstakes, a Moody’s upgrade for Peru has put it at the same A3 with an estimated $5 billion in mining projects to go ahead in 2014 with business climate improvement to allay developer anxiety.

Iceland’s Molten Bond Rumblings
2014 July 23 by admin

Posted in: Europe
European debt crisis forerunner Iceland re-entered the euro-denominated sovereign bond space with excess orders for the EUR 750 million at a 100 basis point premium over Spanish yields, as the IMF cited the still perilous capital account liberalization path from post-2008 controls in a mid-year after-program update. The year-old coalition government has pressed further to resolve the banking crash legacy as tourism and fishing exports and private consumption enable 3. 5 percent GDP growth, although 4 percent unemployment is above the historical average. Inflation rose just 1. 5 percent as tighter monetary policy bit and the fiscal balance moved into surplus. Public debt remains at 90 percent of GDP and is almost double that amount including guarantees, and household burdens will be reduced under a new medium-term plan that is budget-neutral, according to the Fund. The strong trade position boosted the krona 2 percent against the euro in the first half on occasional central bank intervention as reserves stood at over $4 billion at end-2013 or 90 percent of short-term debt. Non-resident holdings frozen in place are 70 percent of the sum and domestic pension funds and companies barred from external transfer could likewise trigger large capital outflows with opening. Bank capital ratios were high last year, but net lending is negative on NPLs at 12. 5 percent of the total. Annual Eurobonds are set through 2016 for refinancing when offshore liquid currency restrictions should also be removed. Global market volatility and delays in unwinding the old bank estates may complicate the timetable, as existing mechanisms for release via auctions remain slow, the report comments. Deposit insurance will be aligned with EU directives, but the housing finance fund continues as a big contingent liability which should be phased out under an indicative deadline, it suggests.

The latest small European country rescue in Cyprus was again reviewed after the March disbursement was approved and the primary deficit target was lowered to 1. 5 percent of GDP. Another tranche was authorized despite “mixed compliance’ with structural benchmarks. Coops were successfully merged but the new social welfare system and Bank of Cyprus-Laiki audit and asset disposal procedures are pending. Debt/GDP is 140 percent and NPLs are at 40 percent of the combined portfolio. Deflation has set in although the economy may only shrink 3 percent. The island too managed a bond market return with the spread at 425 basis points as the stock exchange rebounded 15 percent from last year’s collapse. The current account balance should be positive as Russian and Ukrainian visits increase amid the border skirmishing at home. Kiev is on track to get the second installment of IMF cash as its current account deficit could come down to 5 percent of GDP on a 20 percent import drop outpacing exports hurt by the Eastern fighting. Bilateral and multilateral donors could stump up $10 billion this year but Fund repayment from the lapsed program and Gazprom arrear settlement will muffle the tectonic shift.

Bulgaria’s Cemented Cyber Attack Toll
2014 July 23 by admin

Posted in: Europe
Bulgarian shares were upended by orchestrated electronic message runs on two oligarch-controlled lenders, one in partnership with Russia’s VTB, accounting for 15 percent of assets which prompted the authorities to seek EU aid on the heels of a successful EUR 1. 5 billion Eurobond at record low yield despite a sovereign ratings downgrade to BBB-minus. Foreign groups led by Austria’s Raiffeisen and Italy’s Unicredit own 70 percent of the system and the IMF has praised its post-2008 crisis stability as well as the currency board backing and low 20 percent of GDP public debt. Deposits are protected by the single market 100,000 euro directive but the population lined up for withdrawals given the past history of financial collapse and ruling coalition political infighting resulting in a call for fresh October elections three years ahead of schedule. The Socialists in power were pummeled in the May European Parliament runoff and the government splintered further as the South Stream Russian gas pipeline deal fell apart under Western opposition. The energy-reliant economy is at the top of the vulnerability list from Crimea annexation sanctions as car exports already suffered. European diplomats are also upset at electricity sector maneuverings sidelining Czech Republic and Austrian utilities in favor of Moscow bidders. The central bank decried the “false information campaign” and police detained the alleged perpetrators who used anonymous postings to warn of the duo’s imminent insolvency. That institution was under siege in a separate on-line “criminal conspiracy” in Poland as wiretaps from an unknown source were circulated raising questions about senior economic official behavior and forcing Premier Tusk to ask for a narrowly-won confidence vote. He stood by governor Belka as QI GDP growth at 3. 5 percent was the fastest in two years with borrowing costs at a record bottom. Construction and fixed outlays picked up as the zloty firmed at 4 to the euro and government bond auctions drew eager domestic and foreign investors despite continuing spillover from Ukraine’s unrest. Geopolitics has reignited interest in joining the single currency but policymakers have refused to set a timetable and insisted on full participation in future governance and supervision.

Hungary was embroiled in its own scandal hurting stocks as the media was saddled with an onerous advertising tax presented as a budget balance device but widely believed to be in retaliation against a negative portrayal of Prime Minister Orban’s top aide. The IMF’s latest report noted economic recovery with continued shock potential including from deflation as sovereign ratings were maintained after Fidesz’s second term victory.
An immediate priority which will again dent bank balance sheets is compensation for past foreign currency mortgages as officials vow to end the practice and shift the system to majority domestic hands. Initial estimates of payments owed under pending legislation come to EUR 1. 5 billion equal to one-tenth of industry capital as the ECB repeated criticism of the self-inflicted attacks.



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The BIS’ Boom Cycle Backpedaling
2014 July 17 by admin

Posted in: General Emerging Markets
The Bank for International Settlements’ annual report dedicated a chapter to post-crisis disconnect in business and financial cycles, with emerging markets in a decade-long asset and credit upsurge only “briefly interrupted” in 2008-09 on private sector borrowing up 10 percent annually. Both banks and non-banks have contributed, with signs of a “stalling boom” in Brazil, China and elsewhere. Global liquidity-driven inflows have magnified domestic growth with developing economies raising over $2 trillion abroad the past five years. These figures are based on residency and may understate the total by one-third with offshore affiliates often used by the same company for bond issues in particular as they have displaced traditional syndicated and project lending. Average nominal long-term yields have fallen from 8 percent in 2005 to 5 percent last year or just 1 percent in inflation adjusted terms. Credit/output ratios have deviated over 10 percent from the historic trend in many countries indicating imminent strains, according to the organization. Corporate debt service remains manageable but an interest rate reversion such as 2004’s 250 basis point hike would touch “critical thresholds. ” The other side of the equation is slower economic growth which has taken hold, with global commodity exporters especially linked to China’s rebalancing. The nature of risk is now different with bond markets, and although immediate rollover needs at an annual $100 billion or one-tenth the total can be met capital outflows could suddenly accelerate due to internal or external factors. Brazil, China, India and Turkey are in the boom category, while Central and Eastern Europe, Korea, Mexico and South Africa show “mixed signals. ” The BIS notes the increasingly short-term horizon of ETF investors who account for one-fifth of bond and equity fund allocation since their launch over a decade ago. They can be sold off easily, despite redemption problems at the height of the post-2008 period and Fed tapering fright, and exiting retail buyers may never return. Corporate debt contagion from overseas to local channels may also occur as deposits are pulled to cover lost access in mid-size places like Chile, Indonesia, Malaysia and Peru where they represent 20 percent of bank footings.

Relatively minor redeployment of global money managers’ $70 trillion in assets could have “systemic implications,” as a 5 percent move would be equivalent to 15 percent of emerging market securities outstanding, and correlated positions would exacerbate swings. Currency exposure has essentially been ignored with 90 percent of international bonds in G3 units, and property and utility firms heavy borrowers without matching payment streams. To the extent hedges exist they are incomplete and typically unavailable with large fluctuations. To restore sustainability regulatory changes are overdue in many countries to allow business and household restructuring, as scenarios such as in Brazil and Korea suggest a debt trap based on longstanding monetary and real estate model explosions.

Brazil’s Scathing Score Embarrassments
2014 July 17 by admin

Posted in: Latin America/Caribbean
Brazilian shares tried to sustain positive momentum after a lopsided semi-final World Cup loss to Germany followed on the heels of abysmal primary surplus and industrial output numbers combining to place popular opinion in an anti-Dilma funk with her re-election bid underway. Without one-time revenues in May the surplus reading was 0. 5 percent of GDP as the President raised social spending and extended auto and retail tax breaks and state development bank subsidized lending. The March freeze was swamped by new public sector outlays, although net debt remains manageable at 35 percent of output worsened by the currency’s resumed appreciation. Manufacturing and durable goods production continue to be negative three months ahead of the poll with the incumbent at 40 percent of likely voters, double her closest challenger as respective media time is allotted. Inflation and slow growth are the main campaign themes as Workers Party predecessor Lula came to the government’s defense in hailing the inherited policy model’s “strong job creation record. ” He acknowledged the need for better infrastructure and technology investment, but described them as “smaller reforms” in comparison with neighbors’ economic and financial stability challenges. He avoided comment on the portfolio expansion at state-run BNDES and Caixa as they prepare to sell distressed debt holdings to specialist funds. Asset managers are desperate for fresh funds as the $1 trillion industry reported the lowest inflows in a decade through mid-year on foreign investor net redemptions. Some of this money was diverted into Argentina debt and equity which bounced 20 percent over the period despite recession, the peaking of agricultural export proceeds, and wider parallel market depreciation. Following the US Supreme Court’s denial of a New York judge’s $1. 5 billion repayment order to holdout creditors, indirect negotiations have begun through a mediator as an end-July default deadline looms on blocked normal bond service. The two sides have taken out full page ads in leading newspapers to press their cases there as Economy Minister Kicilof has used his post to lambaste “vulture blackmail” during international organization speeches. Holders of euro-denominated instruments have requested clarification on the extraterritorial reach to the Euroclear system as banks there otherwise bridle at the large sanctions penalties meted out to groups like BNP Paribas, which will pay a $9 billion fine for Iran and Sudan dealings and be suspended from correspondent relationships.

Chilean stocks have lagged however as President Bachelet toured world capitals to explain her agenda for change in the longstanding economic model there, including higher taxes and loophole elimination and new constitutional formulas for military and state copper company Codelco funding. Consumer loan expansion has also drawn central bank caution and private pension asset pools have frozen domestic and foreign allocations pending possible guideline and operating revisions. The government pledges to leave the rainy day sovereign wealth fund intact as it envisions venture capital-related wealth creation after previous attempts were undermined.

Pakistan’s Air Raid Recoil Tendencies
2014 July 15 by admin

Posted in: Asia
Pakistan stocks lost ground but held on to 10 percent mid-year MSCI gains following dramatic Taliban airport and airliner attacks and renewed border insurgency prompting military counter-terror sweeps. The army will no longer entertain dialogue with this enemy although presidential candidates due to succeed Afghan President Karzai continue to entertain the possibility as occasional talks convene out of Qatar. The violent spurt coincided with another wave of kidnappings and bombings in the commercial capital Karachi, as well as the arrest in London of a prominent MQM movement leader on money laundering suspicions which sparked rioting by followers. The events swamped the afterglow of the $2 billion successful Eurobond return in April after a 7-year pause at a 550 basis point spread over US Treasuries, with annual $1 billion sovereign external issuance plans through end-decade. They also diverted attention from “mostly positive” performance in the IMF’s June program review, as this fiscal year’s GDP growth was raised above 3 percent as inflation stays in single digits and the budget and current account deficits improve slightly. Manufacturing and services are the main economic drivers with agriculture stuck “at the same level. ” International reserves reached $8. 5 billion on good remittance and development lender flows alongside the debt placement but import coverage is still under two months and FDI “disappointingly weak. ” Fiscal targets remain elusive to push the tax revenue/output ratio over 10 percent as special concessions are phased out and telecoms license sales and limited state enterprise privatizations are prepared. Income and sales levies are due to be harmonized for individuals and companies and between Islamabad and the provinces, as a new capital gains charge goes into effect. On the balance of payments Saudi Arabia recently provided a $1. 5 billion grant as the exchange rate continues to appreciate at odds with Fund call for greater flexibility. Central bank autonomy will be aided by updated legislation but private banks need to hike capital to meet standards and deposit insurance and insolvency schemes await action, according to the report. Public sector exposure is around half of assets and NPLS exceed one-tenth the total, posing system risks. Powers sector reform accompanied the Sharif administration’s return to office as circular arrears were settled but subsidy and tariff changes can be hastened in parallel with overhaul in the general business climate which has “lagged,” the Fund believes.

Vietnamese shares’ advance was also halted at the same range as riots against Chinese-owned firms in protest against South China Sea maneuvers spooked investors. The regime offered compensation to damaged operations and devalued the currency 1 percent as first half growth came in at 5 percent. The bilateral confrontation may hit FDI-led exports up 15 percent though the period, as interest rates may also be cut to stimulate activity despite bank balance sheet cleanup under the new central disposal agency which now must contend with geopolitical messes.

South Africa’s Rotating Blade Damage
2014 July 15 by admin

Posted in: Africa
South African shares preserved a modest MSCI uptick through mid-year as President Zuma’s second term team pared back GDP growth estimates to 2 percent on another mass worker walkout, and ratings agencies warned quasi-sovereign Eskom could lose investment-grade standing barring large funding injections and tariff hikes. Global investors maintained local bond exposure to bridge the 5 percent of GDP current account hole as popular opinion remained transfixed on the Pistorius “blade runner’’ murder trial and comparisons between the country’s 2010 hosting and current conduct of the World Cup competition in the context of larger BRICS rivalry now extending to headquarters and management control of their new development bank. The central bank has been on rate hold despite inflation nearing 7 percent as the fiscal outlook remains squeezed by the combination of foregone production and higher promised social spending. The power utility faces an imminent S&P downgrade unless it gets a $2 billion recapitalization and at least a 10 percent rate increase from the independent regulator, according to experts. The budget shortfall could widen to 5 percent of output over the medium term, endangering a two-decade reputation for prudence should capacity and operating weaknesses persist and the National Development Plan the ANC campaigned on keep its expensive education and health commitments. VAT hikes are likely in the next budget blueprint to offset the outlays, which could further erode consumer sentiment already burdened by debt. The load has decimated the stock price of unsecured lender African Bank expected to merge with a competitor to stay afloat. Portfolio inflows have temporarily stabilized the rand at 10-10. 5 to the dollar, but fundamental volatility could resume on diminished Chinese precious metal demand and the inability of thin reserves to smooth fluctuations. Radical ruling party factions have severed ties altogether in some cases and urged tighter capital controls along with government intervention in the mining and other strategic industries. Pre-election legislation in this direction has been softened since Zuma’s decisive victory but he continues to hint at “bold, historic” valedictory policies in part to deflect scrutiny over lingering corruption investigations. The populist potential along with negligible rebalancing has frozen the “fragile five” label in place as the rest of last year’s group progressively sheds it, with even reluctant Turkey bowing to market monetary tightening preferences. Johannesburg’s business and financial community did not see allies appointed to the new cabinet and are in doubt over the true intentions of the ANC’s deputy leader despite his prolific past black economic empowerment deal-making.

They are also disturbed by prospects in neighboring Botswana and Zimbabwe, both in the negative MSCI frontier column after early year decent performance. Agriculture and diamond exports have been mixed in the former and President Mugabe allegedly in declining health has not yet named a successor and recently reiterated his indigenization mandate to consider outright foreign ownership seizure. Through end-June only Kenya showed a double-digit Africa advance as it ignored terrorist incidents with the Nairobi exchange powering its own listing.

The Middle East’s Bruised Bond Guarantees
2014 July 10 by admin

Posted in: MENA
Jordan and Morocco on the back of IMF and Gulf assistance easily placed respective $1billion and EUR1billion bonds, with the former carrying a US government guarantee and the latter selling at a 3. 5 percent yield equal to investment-grade credit Turkey. Their MSCI frontier stock market components are also up through mid-year on decent growth and political transition prospects in the regional context, despite the continued economic and humanitarian fallout from the Syrian crisis. Jordan’s parliamentary elections were boycotted last year by the Muslim Brotherhood but the results were accepted although relations remain frayed between the King and lawmakers. According to the Fund’s June update the effects of the refugee influx and Egyptian gas disruption should fade to enable a 3. 5 percent GDP increase in 2014 driven by commodities and infrastructure spending, on 2 percent inflation. The fiscal and current account deficits should narrow on lower energy import costs and reduced state electric company losses, as the exchange rate peg continues to attract capital and tourism flows. Utility subsidies have contributed to the estimated 90 percent of GDP public debt and should be further consolidated as the maturity profile is extended for domestic instruments, the Fund advises. Income tax reform is also in the works as less than 5 percent of the population pays the levy. The long-term debt/GDP goal is 60 percent but higher global interest rates may delay progress and erode currency confidence. Banks have a conservative 70 percent loan-to-deposit ratio and capital and liquidity meeting international standards but NPLs are 7. 5 percent and assets are heavily weighted to government bonds. Arab Bank has extensive cross-border operations where supervision may be lacking and anti-money laundering and terror funding deficiencies must still be addressed. Poverty and unemployment rates are 15 percent, and the business climate could be improved by better collateral and insolvency procedures. After rebuilding reserves with bilateral and multilateral support the central bank has cut rates, but the social situation is “stretched” with the Syrian and Iraqi influx and more grants are needed, the review urges.

Morocco’s ruling coalition was reconstituted after the Islamic party resigned in protest over gradual fuel and food subsidy cuts as the Finance Minister vowed to hit the 5 percent of GDP budget deficit target during the bond road show. With normal cereal output and export, FDI and remittance pickup from Eurozone stabilization economic growth should be 4 percent. The central bank will shift to a more flexible exchange rate over the next three years and widen small business credit access through new facilities and reporting systems as liquidity remains tight and many banks focus instead on African expansion. In Lebanon, where shares were also ahead slightly at mid-year as a capital markets regulator was launched, institutions were pioneers in regional diversification in light of their heavy exposure to the sovereign’s 140 percent of GDP debt. Spreads have been steady as S&P recently upgraded the outlook to stable and another Eurobond rollover/swap was completed for tentative assurance.

Asia Bonds’ Stiff Bounce Bearings
2014 July 10 by admin

Posted in: Asia
The Asian Development Bank’s QI Local Bond Monitor hailed renewed “bounce” after the Fed tapering spook as market size topped $7. 5 trillion on 10 percent annual growth, with China representing 60 percent of the total and two-thirds the quarterly rise. Vietnam’s spurt was the fastest from a slim base and government and corporate instruments respectively came to $4. 5 trillion and $3 trillion. East Asia activity is almost 60 percent of GDP and foreign investor shares have been steady with Indonesia’s at one-third heading into July presidential elections. Yields fell everywhere outside the Philippines over the period, and following its hosting of the ADB annual meeting, Kazakhstan has joined publication coverage with its $55 billion market, $35 billion in the corporate category. Infrastructure and secondary trading are underdeveloped as a sukuk regime is being finalized, the review comments. Most currencies gained during the quarter against the dollar with the exception of the Chinese renimbi as authorities tried to slow capital inflows, and Korea’s $1. 5 trillion market at one-third China’s outstanding accounted for one-fifth of QI’s increase. Hong Kong has the largest sum of regional central bank bills at $90 billion as one of the most popular holdings in the EMTA industry association survey. The Philippines had the biggest corporate leap as eight companies issued over $2 billion before the central bank tightened monetary policy. Foreign allocation was firm in the ten tracked markets with outflows only in Thailand as the military prepared to seize control after a lengthy political standoff. Hard-currency dollar, euro and yen placement was also strong through April at $65 billion, close to half the 2013 total, with Chinese sponsors like the state oil company and property firms taking 40 percent and banks also active from Korea and Malaysia. Both short and long-term official paper yields declined, while corporate spread trends were mixed. Among key regulatory initiatives Korea’s covered bond framework was launched and Hong Kong and Malaysian authorities agreed to pursue Islamic debt cross-listings.

The Kazakhstan study pointed out that domestic government maturities were up to 10 years and foreign ones were phased out after the 2007 sovereign and banking crises. The central bank manages the money supply with securities offers, and corporate bonds are listed on the stock exchange with mandatory ratings and target pension and insurance funds, although bank credit remain double that volume. Financial and energy names are 90 percent of the market at current 5-year yields over 10 percent, and banks as major investors are confined to the top ratings grade. The buy and hold nature of the market impedes benchmark yield curve formation, and clearing and settlement systems are inefficient and decrease liquidity, according to the ADB. Sukuk financing could take off after implementing rules are adopted and bond market development has assumed urgency after consecutive bank collapses that led BTA to default twice on external obligations with bounced checks.

China’s Treading IPO Trance
2014 July 8 by admin

Posted in: Asia
Chinese stocks with a 5 percent MSCI decline through mid-year were roused from their torpor as IPOs suspended for months resumed worth $90 billion as hundreds of companies awaited approval. Under revised rules daily price fluctuations cannot exceed 20 percent and underwriters will be responsible for placement and after-market support. The domestic supply comes as banks and brokers attempt their own capital-raising to meet prudential ratios, and headline transactions are pending abroad such as CITIC in Hong Kong and Alibaba in the US. The formal financial services providers intend to strengthen their position versus “shadow” intermediaries which have lost monthly share after a squeeze on interbank and wealth management activity. Trusts narrowly avoided default after the “Credit Equals Gold” recent rescue, but with an estimated RMB 5 trillion coming due this year, one-tenth real estate-related, the prospect continues to hang over the sector. The “entrusted loans” company to company channel reported non-payments in June, as they were up at double the pace of corporate bonds in Q1. According to S&P the latter amount outstanding pips the US at almost $15 trillion including the $3 trillion in local government funding platforms. Reuters puts external bond issuance at one-fifth the emerging market total and on-shore and offshore transactions combined at $170 billion through the first half. With land sales dropping as their main revenue source, cities and provinces won approval from Beijing for $65 billion in straightforward municipal bonds this year which will no longer be backed by the Finance Ministry. Fitch Ratings praised the move toward on balance sheet obligations with greater transparency but noted the transition would be rocky. On the all-important property front sales in 300 cities were down almost 50 percent on an annual basis according to the latest tracking, with prices off in half of the nationwide sample in May. Official data calculates unfinished projects with a value of 20 percent of GDP as developers struggled in the second quarter to raise over $5 billion in offshore debt. Their leverage is at records by traditional measures but many specialists contend that short-term cash and liquidity are the overriding ratios with larger players not at risk short of outright collapse.

Premier Li has pledged to extend 7. 5 percent growth as he implemented a mini-stimulus infrastructure package that hiked spending 15 percent. PMI readings continued around 50 amid subdued 2. 5 percent inflation and flat retail sales increases. Trade data was lackluster in May with imports off and exports ahead slightly as FDI was at a year and a half low. A Bloomberg investor survey predicted the overall near-term debt/GDP ratio at 250 percent as the IMF and World Bank have become more strident in urging fixes. Deposit insurance, interest rate liberalization, currency flexibility and fiscal decentralization were among the recommended priorities which have stalled along with the equity pipeline.

UNCTAD’s Direct Investment Optimism Optics
2014 July 8 by admin

Posted in: General Emerging Markets
The UN Trade and Development Commission expressed FDI “cautious optimism” after it rose almost 10 percent last year to $1. 5 trillion, with developing and transition economies taking 60 percent of the figure led by the Asia region. The industrial world share is at an historic low and emerging markets are half the top 20 destinations with China second globally. Their transnational corporations also account for 40 percent of outward direct investment, and poorer states in Africa and elsewhere rely only 10 percent on extractive industry while 90 percent of inflows are now for manufacturing and services. In North America shale gas and worldwide pharmaceuticals have experienced major takeovers as the latter had Q1 M&A of $25 billion in 50 deals. Private equity firm assets surpassed $1 trillion in 2013 but net allocation of $85 billion was “subdued” and concentrated on the US and Europe, according to UNCTAD. Less than 2 percent of sovereign wealth funds’ $6. 5 trillion is FDI-directed but state-owned multinationals represent one-tenth the global total. Emerging market private and government-run firms had $1 trillion in cash on hand as they expanded overseas faster than developed country competitors. Africa’s number rose 5 percent to $55 billion with only the Central and West sub-regions dropping. Intra-African commitments from South Africa, Kenya and Nigeria for greenfield projects were one-fifth of activity. Asian inflows dwarfed other regions at $425 billion, $125 billion into China, where outflows of $100 billion were almost equal. Southeast Asia collectively received the same sum, while the subcontinent got $35 billion. Latin America-Caribbean’s take was $300 billion, but South America’s component fell 5 percent, and Brazilian and Chilean companies’ outbound investment slumped one-third to $30 billion. Transition Europe rose 30 percent to $110 billion mainly to Russia, where companies also spearheaded reverse FDI into CIS and EU economies. Advanced country inflows of $550 billion were almost half into the EU, with Germany rebounding and France and the UK in “steep decline. ” Japanese outflows were $135 billion as Abenomics accelerated offshore establishment. The poorest countries in Asia and Africa had an uptick in energy projects, but small islands suffered from the loss of apparel and fishing trade preferences. On investment policy the decade-long liberalization trend was partially eroded with one-quarter of new measures in a sixty-country universe restrictive, the agency found.

Incentives are geared mostly to information and business services, and 45 additional international treaties were signed last year. “Megaregional” agreements such as the European-US TTIP and pan-Pacific TPP are now prominent, with a half-dozen ongoing negotiations involving 90 countries, but they could “create inconsistencies and marginalize third parties,” the reference warned. The interlocking networks have fostered record arbitration filings, with 575 disputes outstanding. Intra-EU cases dominated the latest round, and investor-state conflict resolution has been highlighted as a key feature of future pacts with panel procedures and transparency subject to debate as in the existing government to government WTO mechanism with its own friction.



Jamaica’s Twisting Spiral Bounds
2014 July 2 by admin

Posted in: Latin America/Caribbean
Jamaican stocks were down slightly on the MSCI Frontier index as the IMF cited progress in reversing the “negative spiral” of recession, unemployment and debt one year after a new standby was inked preceded by a second domestic bond exchange with partial haircuts. The government with a two-thirds parliamentary majority has invited civil society and private sector participation for an economic advisory body to implement reforms as Q1 growth was 1. 5 percent with tourism and commodity improvement on 7. 5 percent inflation due to local dollar depreciation. In the last fiscal year the primary surplus was over 7 percent of GDP on reduced spending, as the current account gap shrank to 10 percent and international reserves neared $2 billion including inflows into central bank certificates of deposit. Monetary policy has tightened following the official debt swap lengthening maturities and cutting coupons with secondary trading essentially frozen, and private credit up just 5 percent annually and concentrated on short-term retail loans. NPLs are 5 percent of the total and capital adequacy is high at 15 percent of assets, although both banks and securities dealers retain large government exposures posing balance sheet and solvency risks. External funding from Venezuela’s discount oil import program could also be constrained and pressure could spread to other Caribbean islands with a Jamaican financial sector presence. Crime and natural disasters are persistent threats which can dent business and consumer confidence regardless of headline adjustments, the Fund commented. Supply-side bottlenecks to be overcome include high electricity costs, labor rigidities and tax compliance burdens, and infrastructure modernization and privatization will revamp the airport and roads. Agriculture has begun to respond to currency depreciation and additional flexibility is recommended over the medium term at the same time worker skills and training are upgraded. A long-range fiscal rule will confine public debt to 60 percent of GDP by 2025 with a cap on contingent liabilities. Civil servant wage hikes are under a multi-year accord and pension change could raise the retirement age 5 years to enable current debt/GDP at 140 percent to fall 50 percent by end-decade. Inflation-targeting could soon be considered as the central bank attains greater independence and technical capacity and a new banking law aids conglomerate supervision and resolution.

The retail repo securities broker model is slowly being phased out and replaced by collective investment schemes as a first step. Maturity mismatch and poor management practice haunt the industry but collapse has not occurred as with CL Group in neighboring Trinidad and Tobago, where stocks are up this year with hydrocarbon prices. Distressed buyers have focused more recently on Barbados, which was expected to follow the IMF rescue route after sovereign ratings downgrade but instead instituted mass public sector layoffs to keep debt/GDP below 100 percent. Its thinly-traded foreign bond has since rallied but labor and popular opposition to the cutbacks may resume the lethal spiral.

Sovereign Debt Rules’ Exasperating Exceptions
2014 July 2 by admin

Posted in: General Emerging Markets
As the US Supreme Court upheld the New York holdout payment order for Argentina and Grenada continued negotiations on a reopened bond deal, and the IMF previewed a new exceptional access policy post-Greece encouraging maturity lengthening as an early alternative, sovereign workout specialists have often minimized their initial impact. A National Bureau of Economic Research paper on Argentina’s case refutes claims of disruptive litigation and asserts that the singular remedy was due to “unprecedented disregard” for restructuring norms. In the absence of a supranational bankruptcy mechanism direct legal sanctions are limited on borrowers that instead are punished through denied access and reputation damage. Consensual talks are routinely conducted to resolve difficulties under IMF and IIF guidelines respectively for lending into arrears and promoting capital flow stability. Both codes mandate a good-faith effort and full information disclosure, but Argentina’s original 2005 offer was unilateral as the Fund criticized “no constructive dialogue” and the likely understatement of growth prospects to drive greater repayment reduction. The three-quarters creditor acceptance then was skewed by the 100 percent take-up by captive domestic institutional investors, and the congressional “lock” barring better future terms and discussions with non-participants. The hard line was in contrast with the approach by Dominica at the time as it “worked constructively” with individual holders to get exchange unanimity. In 2010 the same deal was repeated to bring overall subscription to 90 percent as opponents soured on the litigation process, according to the Bureau’s analysis. As of 2012 experts worried that enforcement under foreign law was too weak as no assets had been seized despite numerous collection judgments as they were commonly protected by sovereign immunity. Judicial recourse is a rare strategy given the expense and expertise requirements, as most portfolio managers cannot hold illiquid instruments and are eager to benefit from post-swap secondary market price increases. Big commercial and investment banks prefer to maintain relationships and often come under diplomatic and regulatory pressure to preserve balance sheet and geopolitical ties. Just one-sixth of restructurings over 35 years since the mid-1970s saw private lawsuits, with Argentina and Greece the exceptions over the past decade.

From a contractual standpoint governments now have an array of provisions at hand to overcome holdout challenges, the review adds. Collective action clauses with a 75 percent supermajority threshold are the New York norm since 2005, binding dissenters, and refinements in enforcement and aggregation can further block alternatives. Pari-passu provisions dating from the 2000s on privileging a particular class were interpreted broadly in Argentina’s covenants, but Italy and others have since removed equal payment wording. Loan agreements have sharing edicts so that creditors broadly receive awards from litigation. Local law transfer was a feature of the recent dramatic Greek 75 percent haircut with the retroactive application of instrument sweeps. Jamaica in its post-2008 exchanges set high minimum participation rates to forestall judicial action, and after Ecuador’s operation exit consents have been used to alter non-financial terms. The survey concludes that Argentina represents no broad precedent as Taiwan’s export-import bank has unsuccessfully tried the same pari-passu filing with Grenada without the “uniquely recalcitrant” debtor epithet.

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Ecuador’s Banished Pariah Posture
2014 June 30 by admin

Posted in: Latin America/Caribbean
Five years after a voluntary $3 billion default, Ecuador sold $2 billion in 10-year debt at an almost 8 percent yield on a $5 billion order book mainly from the Americas, seven times the originally contemplated placement. President Correa hailed the response on the heels of consecutive ratings upgrades due to high oil prices and an estimated $10 billion in Chinese loans in the past five years, along with an associated buyback of the remaining repudiated paper leaving around $100 million in outstanding bonds. In an indication of the need for normal commercial return gold representing one-fifth of reserves in the dollarized economy was reportedly swapped for liquid assets to cover public spending as legislators cited mounting arrears. The road show crossed the US and investor participation was driven by EMBI index inclusion and scarcity value even before the attractive pricing, according to the underwriters, and the proceeds could be used for refinancing $650 million in the honored 2015 instruments especially if a new Chinese oil refinery deal falls through. The watershed transaction coincided with EPFR fund flow numbers nearing positive allocation for the year as all asset class segments were re-embraced. The trade association EMTA’s Q1 survey captured the comeback as volume rose one-fifth from the previous quarter with local-currency taking over 60 percent of the total. The external portion was about evenly divided between corporate and sovereign and Mexico, Brazil and Russia were the most frequently traded countries. Argentina saw an increase in advance of the Supreme Court decisions on the New York judge’s pari-passu interpretation and litigating funds’ extraterritorial discovery efforts, and both issues were determined in the holdouts’ favor in mid-June with a looming $900 million interest payment due from the existing swap. Ratings agencies immediately assigned default-range CCC marks on the rulings, both on procedural and substantive grounds. The government has threatened to redirect relationships to local law jurisdiction to circumvent seizure and the over $1 billion awarded to the two lead distressed creditors could become $15 billion if other non-participants in the previous exchanges demand equal compensation, over half of Argentina’s foreign reserves.