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Wednesday, December 31, 2014
Tuesday, December 30, 2014
Rousseff's Gamble With $6.7bn Cuts
Brazil’s President Dilma Rousseff has taken one of her biggest political gambles yet to win back the trust of investors by cutting R$18bn ($6.7bn) a year in pension and unemployment benefits.
The government is set to publish rule changes on Tuesday that will save Latin America’s largest economy 0.3 per cent of its gross domestic product next year, shoring up the country’s finances and helping to preserve its all-important investment grade credit rating.
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“If we don’t act in a sustainable way now, future generations will have to pay a high price,” Ms Rousseff's chief of staff, Aloizio Mercadante, said after announcing the measures late on Monday. In a press release, the presidential palace described the cuts as a way to “guarantee the government’s fiscal balance in the coming years and attract investments so the country can resume economic growth”.
Once the darling of emerging markets, Brazil’s economy has slowed from 7.5 per cent growth in 2010 to around 0.1 per cent this year under the watch of Ms Rousseff. The country also risks suffering its first primary fiscal deficit on record in 2014.
However, after only narrowly winning re-election in October, the former leftwing guerrilla has been forced to make a series of market-friendly moves to put the economy back on track, delighting investors but angering many voters and fellow members of the Workers’ party (PT). After appointing the Chicago-trained banker Joaquim Levy as her new finance minister last month, Ms Rousseff even promised last week to sell off part of Caixa, the state-run bank responsible for administering the Bolsa Família social welfare programme.
“I just found out about the changes (to employment benefits) and, wow, I could not be more disappointed — they are taking money away from the poor,” one PT supporter tweeted on Tuesday as Brazilians interrupted their holiday celebrations to express their indignation on social media.
I just found out about the changes (to employment benefits) and, wow, I could not be more disappointed — they are taking money away from the poor
- Tweet by Workers’ party supporter
As part of Tuesday’s rule changes, workers will have to be employed for 18 months rather than six before they are eligible for unemployment insurance. Employees on low salaries will also have to work for six months rather than just one before they can receive a state-sponsored yearly bonus.
The government included further restrictions to limit fraud in the system and made it harder for the spouses of deceased workers to lay claim to their pensions.
Economists have long called for such changes to Brazil’s wildly generous employment laws as well as the pension system, which is often described as a “financial time-bomb”, ready to go off as more of Brazil’s relatively young population hit retirement age.
Brazil’s rapidly deteriorating fiscal situation as a result of the government’s toxic combination of state interventionism and populist tax incentives has only made such changes more urgent, they say. Brazil’s primary budget surplus, or excess revenue before debt payments, has fallen from 4 per cent of GDP in 2008 to an expected deficit this year, raising alarm among investors and credit rating agencies.
The government said it would enact Tuesday’s rule changes via a so-called provisional measure — a controversial legal tool designed for emergencies that allows the president to enforce immediate changes without the prior approval of Congress.
Rufo Expiry Will Test Argentina's Willingness To Settle Debt
Argentina’s willingness to end a gruelling legal dispute with a group of US hedge funds will be put to the test when a key clause in debt contracts expires on December 31.
The government has long insisted that the “rights upon future offers” (Rufo) clause in the contracts of bonds issued in 2005 and 2010 following Argentina’s 2001 default prevented it from paying its “holdout” creditors in full.
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- Argentina’s banking talent stays away
- Argentina pressed to strike creditor deal
- Early Argentina ‘holdouts’ deal in doubt
- UK court wades into Argentina debt crisis
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Its failure to make those payments in full by a July deadline, after the holdouts won a lawsuit against Argentina in the US, pushed the country into default for the eighth time in its history.
But despite the imminent removal of the apparent barrier that stopped Argentina from paying the hedge funds led by US billionaire Paul Singer’s NML Capital any more than the holders of its restructured bonds, analysts are sceptical that there will be any deal before President Cristina Fernández leaves power in December 2015.
“We will see whether Rufo was real or a red herring on January 1, but we think this government remains ideologically opposed to settling and is not prepared to pay the political cost of reaching a deal,” says Stuart Culverhouse, chief economist at Exotix, a London-based frontier market debt specialist.
Although a settlement would unblock Argentina’s access to the international capital markets and alleviate a severe shortage of dollars, Mr Culverhouse says that if Ms Fernández can avoid an economic crisis before presidential elections in October, she will try to pass the holdouts problem on to the next government.
If so, markets expect a new president — who would likely inherit an economy in recession as it struggles against a dollar drought, a gaping fiscal deficit and one of the highest inflation rates in the world — to then settle swiftly with the holdouts.
Despite investors shying away from the government’s botched attempt earlier this month to issue $3bn in new dollar debt under Argentine law and to swap $6.7bn in debt that matures next year, foreign exchange reserves have been shored up through a range of creative measures. These include an $11bn currency swap facility with China and pressuring grain exporters to cash in $5.7bn by the end of the year.
The stabilisation of central bank reserves — which have remained steady since a 20 per cent devaluation in January, recently rising above $30bn — may have emboldened the government’s hardline attitude towards the holdouts.
Negotiations so far have foundered because of the gap between the demands of the holdouts to be paid in full and what the government is prepared to pay.
“[The holdouts] will have to reassess their demands. We’re not crawling through the desert in search of every last dollar,” Axel Kicillof, economy minister, said recently.
Argentina's Banking Talent Stays Away
December 30, 2014 2:22 pm
When President Cristina Fernández explained her refusal to hire an investment bank to execute a complex but ultimately unsuccessful $10bn local debt deal this month, she described bankers as commission-hungry swindlers who inflict “permanent anguish” on Argentines.
The irony is that Argentina has a network of émigré financiers on Wall Street so dense and extensive that outsiders refer to it as a “club”. Ms Fernandez could have called on the club for advice and, what is more, it would have likely been only too willing to help.
ON THIS TOPIC
- Rufo expiry will test Argentina on debt
- Argentina pressed to strike creditor deal
- Early Argentina ‘holdouts’ deal in doubt
- UK court wades into Argentina debt crisis
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Having begun their careers in the 1990s, when Argentina had the largest capital markets presence of any emerging market, many of them have since been involved in trying to solve Argentina’s 13-year legal battle with a group of hedge fund holdout creditors. A potential solution, which many believe is possible in the new year, would enable the country to resume borrowing abroad and help reactivate its stuttering economy.
“You could say there is something of a rise of Argentine talent on Wall Street,” says Chris Gilfond, the Argentine head of Citigroup’s equity and capital markets division for the Americas.
The phenomenon is particularly apparent atJPMorgan, the largest US bank by assets, where Daniel Pinto is head of investment banking. Mentioned as a potential successor to Jamie Dimon, the chief executive, Mr Pinto also heads European and African banking at JPMorgan. Nicolás Aguzín, the head of JPMorgan Asia, is an Argentine, as is Martín Marrón, in charge of its Latin American operations.
Elsewhere, countryman Gerardo Mato is head of global banking in the America’s at HSBC.
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They pine for the debt policies of Argentina back then, and end up working for the bad guys, the holdouts
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| Agustín D’Attellis, economist |
The executives form part of an Argentine diaspora who left the country more than a decade ago to forge international careers. But unlike many of their Latin American peers who have returned to work in booming home countries such as Colombia, Argentina’s faltering economy has prompted many to remain abroad.
The success of its bankers stands in contrast to the country’s position as a near pariah on international financial markets since its 2001 default. Indeed, the country’s long history of economic instability has provided a natural learning ground for financiers, bankers say.
Mr Pinto described his background as an Argentine as helping him “to keep calm and maintain a cool head”.
“Argentines, because of the country’s history, are born to be economists,” says another senior Argentine banker on Wall Street. “You grow up learning about currencies, the macroeconomy and debt.”
“The mental flexibility [that dealing with Argentina always] requires puts them at an advantage over others and allows them to be better than average managers, risk-takers and problem solvers,” says a foreign executive working in Argentina.
Argentina’s huge presence on international capital markets in the 1990s, when the country was a market favourite, also helped develop local talent.
Between 1995 and 2001, Argentina issued almost $60bn in international bonds, roughly double that of emerging market giants like Brazil and Russia, according to Dealogic.
Although other Latin Americans also gained entry to banking at that time, the volume of Argentine talent in international finance is notable. Many of the country’s bankers moved abroad after investment banks shut local offices following the country’s financial crash in 2001.
Ms Fernandez continues to have a deep distrust of bankers, given the country’s 2001 sovereign debt default.
The question is how to get all those people to come back and work for Argentina
- Wall Street banker
“They pine for the debt policies of Argentina back then, and end up working for the bad guys, the holdouts,” said Agustín D’Attellis, an economist. “They want an end to the holdout situation as soon as possible, at any cost.”
That assessment is unlikely to be universally backed. Either way, the country’s deep need for fresh investment means Argentine financiers are likely to play a role in the country’s future, just as reimported talent has done elsewhere.
Miguel Galuccio, a former international executive at Schlumberger, the oil services group, has transformed YPF, the national oil company, since he returned to Argentina to become its chief executive two years ago.
“The question is how to get all those people to come back and work for Argentina,” said one Wall Street banker. “We can do much more of that.”
Monday, December 29, 2014
Petrobras In Deep Water
December 29, 2014 12:39 pm
There are not many executives who have asked their boss three times whether they should be fired and survived. Maria das Graças Foster, chief executive of Petrobras, Brazil’s crisis-stricken state-owned oil company, says she’s one.
She has offered her resignation to Dilma Rousseff, Brazil’s president, on multiple occasions in recent weeks but her close friend of more than a decade has stuck by her — so far.
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“The president thought I should stay,” Ms Graças Foster told reporters this week.
Petrobras, the pride of Brazil in 2007 after it announced the world’s largest offshore oil discoveries in decades, is today in danger of becoming a pariah among investors and a national shame for Brazilians.
The company has been thrown into disarray by an investigation by Brazilian police and prosecutors alleging that former senior executives, construction companies and politicians of Ms Rousseff`s Workers’ party-led ruling coalition creamed billions of dollars off Petrobras’ contracts.
This allegedly took place under the noses of Ms Rousseff, who was the company’s chairman until she took office in 2010, and Ms Graças Foster, who has led Petrobras since 2012.
Although neither are accused of direct involvement, the scandal has sparked an investigation by the US Securities and Exchange Commission and led the dual-listed company’s auditor, PwC, to refuse to sign off on its accounts until Petrobras has conducted its own inquiry.
If Petrobras is unable to satisfy PwC’s concerns and release audited financial results by April 30, the company, one of Brazil’s biggest corporate borrowers with debt estimated by Moody’s credit rating agency at $170bn, could trigger a technical default.
It is all part of a perfect storm facing the company after what critics say are years of misuse of Petrobras by the government as an instrument of industrial and monetary policy at the expense of minority shareholders.
“At the end of the day, all of this is happening because the PT (Workers’ party) has fostered monopolies and, to a certain extent, cartels which generate inefficiencies and an atmosphere that is conducive to corruption,” says Adriano Pires, founder of the Brazilian Centre for Infrastructure and energy adviser to the opposition PSDB party.
With revenue of more than $140bn in the 12 months to end of June this year and 86,000 employees, Petrobras produced 2.3m barrels of oil equivalent per day (b/d) domestically last year.
The company is also undertaking the world’s largest corporate capital expenditure programme, valued at up to $221bn over five years, to exploit its “pre-salt” discoveries, so-called because they lie under 2,000m of the compound up to seven kilometres beneath the waters of Brazil’s southeast coast.
Scandal is an Olympic hurdle for Brazil
Ever since Rio de Janeiro won the bid to host the 2016 Olympics five years ago, the game’s organising committee has faced growing scrutiny. Work has only just begun on the Deodoro Olympic Park, the site of the sailing events in Guanabara Bay and still dangerously polluted, and shoot-outs in the city’s favelas are as common as ever.
But since the discovery of the pre-salt, everything has gone wrong for Petrobras, critics say. To pay Brasília for the rights to the discoveries, it held the world’s largest share offering in 2010 amid controversy over valuation.
The government also made it the sole operator of the pre-salt fields, overburdening its balance sheet and reducing competition. It was also forced to adopt an expensive local content programme and to subsidise domestic fuel prices to help the government control inflation.
The company has routinely missed forecasts and production has declined since 2011, due to delays in equipment delivery and other problems. “Petrobras has broken many promises in the past. Production targets were consistently missed,” said Credit Suisse in a report.
The result of this and the corruption allegations is that Petrobras has lost 73 per cent for investors in the past four years, making it the worst-performing major oil stock, according to Bloomberg.
Domestic production is expected to turn around this year with forecasts it will rise to 2.5m b/d, the first step to doubling output by 2020. But now Petrobras must deal with the twin challenges of the corruption investigation, which is cutting off its access to capital markets, and the falling oil price, which threatens the viability of pre-salt.
To avoid violating covenants associated with its $57bn in capital market debt, Petrobras must release independently audited financial results within 120 days of the end of this year. If it fails to do this, it has another 60 days — to June 30 — to “cure” the default.
Analysts say the company, which has begun an internal investigation, does not need to wait for the criminal procedures to conclude to produce audited accounts. It could instead provision for any likely losses by taking a writedown on its capital. This has been estimated by Morgan Stanley at up to R$21bn assuming that projects were overstated in value by 5 per cent.
“This is not going to be a cash item,” said Nymia Thamara Cortes de Almeida, credit analyst at Moody’s. That is important because Petrobras, with its huge capital expenditure programme, has lost direct access to capital markets while it is waiting to release its audited results, leaving it vulnerable to a cash crunch given its huge capital expenditure programme.
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Most analysts believe the company has enough cash and other resources to last until the middle of next year but it cannot afford to delay capital expenditure as this will slow its increase in production and undermine its ability to repay its enormous debt load.
“An average delay of 12 months or more in bringing new production units online could significantly weaken Petrobras’s standalone credit quality and result in negative rating actions,” said Fitch Ratings analyst Lucas Aristizabal.
The other concern for Petrobras is the 45 per cent fall in the oil price to about $60 per barrel in recent months. Although Brazil is a net oil importer, if the price falls any lower than $50-55 a barrel, the entire pre-salt project becomes unviable, analysts say.
“The problem is when you invest with the oil price at one level and have to sell with the price at another level,” says one analyst at a foreign bank in São Paulo who, like many of his colleagues, now refuses to be quoted on the company.
These challenges are fuelling expectations that the government will need to bring fresh blood into the management at Petrobras and replace Ms Gracas Foster.
Mr Pires says market-friendly candidates would include Murilo Ferreira, chief executive of Vale, the iron ore miner, and Henrique Meirelles, a former central bank president.
“They need to bring professionals from the market to be chief executive and chief financial officer, not Petrobras insiders,” he says.
Sunday, December 28, 2014
International Contractors Caught Up In Brasil Graft Case
December 28, 2014 12:11 pm
Headlines in Brazil this month have been filled with allegations of corruption involving Brazil’s state-owned oil company Petrobras and the ruling coalition led by president Dilma Rousseff`s centre-left Workers’ party, or PT.
But while it has received less attention, another long-running scandal involving São Paulo’s commuter railway system is also coming to a head. This time, international contractors and the main opposition party, the PSDB, are in the hot seat.
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Earlier this month, police indicted 33 people and froze more than R$600m (US$223m) in assets of six companies, including five foreign enterprises, among them Germany’s Siemens and France’s Alstom, embarrassing the PSDB, which has run the state of São Paulo for 20 years.
The Supreme Court is also considering whether to try two opposition politicians, including one from the PSDB, José Aníbal, over the case, in which contractors are accused of running a cartel to win construction tenders with the co-operation of politicians.
“A group of companies, among them Siemens and Alstom, joined together and formed a consortium to win an international tender for the construction of line five of the São Paulo metro with the intention of diminishing competition in an activity configured as a cartel,” the attorney-general said in a petition to the Supreme Court.
The alleged manipulation of tenders to build São Paulo’s underground Metro system and its above-ground CPTM lines are an embarrassment to the PSDB, whose candidate, Aécio Neves, came close to winning elections against Ms Rousseff in October.
Mr Neves repeatedly attacked Ms Rousseff and her party over the Petrobras scandal, in which scores of politicians, including ministers, are alleged to have collaborated with construction companies to receive kickbacks from Petrobras contracts.
The scandal has developed into a crisis for Brazil’s biggest company, which is being investigated by the US Securities and Exchange Commission, and is testing Ms Rousseff, who is resisting calls for her friend, Petrobras chief Maria das Graças Foster, to step down.
But the São Paulo commuter railway scandal, which allegedly spans 15 years of PSDB governments from 1998 to 2013, shows that corruption in public contracts is a Brazilian problem, not just a single-party challenge, say analysts.
“Conditions in Brazil are favourable to cartels,” said Carlos Ari Sundfeld of FGV, an academic institution in São Paulo.
Police have not named the 33 individuals and their companies indicted in the metro cartel case.
But the case first came to light after Brazil’s antitrust agency, Cade, offered Siemens leniency in exchange for co-operating with its investigations.
Cade earlier this year began proceedings alleging 18 companies, including Siemens, Alstom, Japan’s Mitsui, Canada’s Bombardier and others, and 109 individuals colluded to win tenders amounting to R$9.4bn across the country.
Conditions in Brazil are favourable to cartels
- Carlos Ari Sundfeld, FGV
It gave details of secret talks and other communications between alleged cartel members.
“These practices occurred since at least 1998 and extended at least until raids [by authorities] in July 2013,” Cade said in the administrative action.
Siemens said it was assisting in the case, which it said originated from information it voluntarily handed to authorities after an internal audit. Alstom said it was co-operating with the authorities. Lawyers for Mr Aníbal did not respond to requests for comment.
Mitsui said “if requested” it will collaborate with authorities on the case, while Bombardier said it observes the “highest ethical standards” and has been co-operating with the investigation.
The attorney-general’s office told the Supreme Court in its petition that companies involved in the case bribed public officials.
“We highlight the payment of undue advantages to public agents to assure victory,” it said.
Mr Sundfeld of FGV said the prosecution of the trains and Petrobras cases by Brazil’s public prosecutors’ office and federal police showed the development of more effective law enforcement institutions in the country in recent decades.
But he said Brazilian policy still encouraged the formation of cartels. Public authorities were required to hold open tenders, meaning companies that were suspected of collusion and price-setting could not be excluded from auction processes.
Brazilian local content rules that forced companies to produce equipment onshore also limited the field of competition in large projects, such as in the construction of rail lines or carriages, due to the limited number of companies globally with the capacity to fulfil such conditions.
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