Archive for the ‘Paraguay’ Category

Is a new bubble in risky investments on the way?

January 23, 2013

As I used to report on the Bank for International Settlements (BIS) as a financial journalist in Switzerland, I remain interested in certain clients it has (they’re all central banks).  Take Argentina for example. It holds nearly all its reserves at the BIS, which is unusual – most other central banks keep about 4%.

Argentina does this because at the BIS its money is protected from attachment by unpaid creditors. I’ll return to this in a later blog.  It’s the subject of arcane arguments in American courts at present. If you look at http://blogs.reuters.com/felix-salmon/tag/argentina/, you’ll see what I mean.

Paraguay is another case, and it’s more topical – see my two recent blogs. It holds all its reserves at the BIS, also to protect them from creditors it decided not to pay.

Last week that did not deter a good number of investors from subscribing to Paraguay’s first-ever public international bond issue.  The risk is theirs, you may say. However it does uncannily remind me of the years leading up to the crash of 2008, when banks sold little-explained investment vehicles to gullible investors who did not understand them and asked no questions because of their greed for high yields.

In Paraguay’s case, lead manager Citibank did not inform subscribers in the prospectus that the country keeps all its reserves at the BIS, let alone why. So if the next Paraguayan government repudiates the debt – this has happened several times in the past and the next election is in April – investors were not made aware that a key means of legal redress is blocked.

The ratings agencies were not much put out by this. S&P’s BB- rating and Moody’s Ba3 seem not too bad.

A week before the bond was launched, I myself asked the Paraguayan Finance Minister: “How will you convince potential bondholders that a future Paraguayan Government will not repudiate the bond issue transaction and protect itself from claims by accumulating further funds at the BIS?”

I received no answer, even though the Central Bank had been communicating with me before. Towards the end of last year, Paraguayan ministers were saying in the local media the bond would be launched in mid-February. Now it has popped out just after the New Year. Looks like a rushed job.

Are we at the start of a new cycle of peddling dubious assets which nobody can quite fathom? History shows repentance never lasts more than a few years. I sense the first puffs into a new bubble.

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Paraguay rushes out first bond issue (it tops Transparency International’s corruption index)

January 18, 2013

Yesterday I wrote about Paraguay and its piano and why investors should beware this dubious country planning to make its first public international bond issue ($500 million). Today I see that the deal is almost done and dusted. I also see that Barclays are the only ones to issue a word of caution.

I wonder why this has been rushed out only three months before a new government is elected in Paraguay, all the more since the country has a long history of one government repudiating the debts of a previous one.

I was forwarded a list of questions raised by an investor I know who invests his own money (and not earning management fees from handling other people’s). Having seen the preliminary prospectus, he had these questions for the Paraguayan Minister of Finance and Citibank (lead manager of the bond issue):

1 – Why were investors not told that Paraguay has for years kept its funds safe at the Bank for International Settlements (BIS) in Basle because it is immune from legal attachment from creditors (not vulture funds in the case of Paraguay)?

2 – Why were investors not told that Paraguay will continue to keep its money protected at the BIS and therefore, in the event of the new government reneging on payments for the bond, a judgment against it will be worthless for enforcement purposes?

3 – Although the prospectus did mention a list of problem creditors, why did it not state clearly that they all refer to undertakings by one government repudiated by another?

4 – In view of allegations by the leading candidate for the Presidency in Paraguay about corruption in the current government http://www.abc.com.py/edicion-impresa/politica/federico-franco-y-la-primera-dama-con-una-fuerte-contestacion-a-cartes-528578.html, what guarantee is there for investors that a new administration will not declare the bond issue fraudulent and that Citibank should have known better?

5 – Why were investors not told what it costs Paraguay to keep its money protected at the BIS?

6 – What difference would it make to the economy of Paraguay if the bond issue was delayed until after the elections in April and proceeded with the backing of the new government which should be in power for five years? After all the current government is temporary, its mandate dubious and not widely recognized until the elections in April.

An expensive piano for a disputatious borrower

January 17, 2013

Paraguay’s parliament has just bought a brand-new Steinway piano for which it says it paid US $241,000. The local newspaper ABCColor however found out from Steinway in New York that this particular model cost only $148,000 and transport would be no more than $3,000 – http://www.abc.com.py/nacionales/us-93-mil-mas-por-el-piano-526351.html

So into whose pocket did the extra $90,000 go? That is hard to say, as it was in the case of $85 million which a Paraguayan entity borrowed from a consortium of banks in Switzerland in the mid-1980s, providing a government guarantee and written ministerial undertakings. None of that money was ever spent on the infrastructure projects for which it was raised. It disappeared.

A new Paraguayan government subsequently repudiated that debt and continues to refuse to repay it despite exhausting all legal channels of appeal following a Swiss Supreme Court judgment against it. The country has a history of one government reneging on the financial undertakings of a previous one. There are further claims of about $100 million in the pipeline in this category.

None of this would be of much concern for the rest of the financial world, if Paraguay were not just now planning to float its first public international bond issue in living memory. In the next few weeks, just before elections for a new government, it says it will raise $500 million in an operation managed by a U.S. bank to invest in infrastructure projects.

Paraguay will doubtless give a full account of all outstanding claims against it in the prospectus, and investors will no doubt give it a fair reading. They may also recall the old adage caveat emptor.


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