Posts Tagged ‘Latin America’

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 –

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.

Scorched earth in Madrid – and worse to come

June 16, 2012

The crisis has knocked the stuffing out of Madrid, not so long ago one of Europe’s most vibrant capitals. This is what I noticed on my visit this week:

– At a time of rapidly rising unemployment, metro fares have gone up substantially.

– Subsidies for the arts have dried up almost completely. At the Casa Encendida cultural centre, an annual festival held for 10 years has just taken place for the last time.

– The bottom has fallen out of Spain’s thriving cinema market: this spring only two films were being made at the main Alicante film studios, compared with a dozen a year ago.

– Artists who had flocked to Madrid from all over Latin America are returning home. Other immigrants are doing likewise.

– At the airport’s spanking new Terminal 4, passengers are few and far between in its vast empty spaces.

– Banks which the European Union is helping to write down their dud property loans are shrinking the balance sheets. So mortgages are suddenly scarce.

– Over-heated Madrid property prices remain unrealistically high. Few sales take place, and when they do, it is an average of 23% below asking prices. Further falls seem inevitable.

– Restaurants are expensive and losing guests. Young people meet at each other’s homes instead of at tapas bars. With the euro, Spain could not devalue to remain competitive, so restaurants complacently allowed their value for money to erode. Few seem to realise the threat to their survival.

Instead of an excited buzz, Madrid is characterised by worried looks, penny-pinching, abandonment of projects, lowered expectations and packed up bags. Where once it was fun, now it is serious.

Madrid has gone quiet. That’s how bad it is – and it could well get worse.

Greece: could it be tempted to go into default? Latin America sets an example

April 28, 2012

The European Union, the IMF and other creditors have decided to help Greece avoid default on its sovereign debt, but is a default really out of the question? A number of other countries have found it quite convenient to remain in default for 10 years or more. Recent history suggests Latin America may be an inspiration for that.
Take Argentina for an example. It is no stranger to defaults. Its central bank holds most of its reserves at the Bank for International Settlements (BIS) in Switzerland. This is because of its last default on its international debt 10 years ago The BIS has a special legal status as the “central banks’ bank,” backed by immunity provided by the Swiss government, preventing creditors from seizing a debtor country’s assets held there.
With its attachable assets safely at the BIS, Argentina has settled with 93% of its creditors at a fraction of the original claims, but the remaining 7% are still making vigorous efforts to seize its assets all over the world. Hence Argentina’s continuing need for the BIS. However the BIS arrangement has a price – the bank pays only around 0.4 % of interest. If the reserves were held conventionally, Argentina could be earning about 2%. The estimated loss is about $675 million per year.
The Argentinian people already suffered enormously in the financial crisis which led to the default. I was in Buenos Aires at the time. A thief attacked me as I left my hotel and tried to wrestle my watch off me. Queues of destitute people waited for free handouts of food from restaurants and supermarkets. The losses on the BIS arrangement in the end mean further losses for the people.
Another example on a smaller scale is Paraguay, which failed to pay back money it raised from Swiss banks in the 1980s. It is in default since it failed to conform with a Swiss court judgment of 2005 that it must honour a Paraguayan government guarantee given to the banks. So it too has chosen to park its reserves with the BIS. Not only does Paraguay forfeit interest – some $100 million per year – but it recently revealed that it was also paying 9 million dollars a year of professional fees to keep the arrangement going.
So the Paraguayan people have to put up with financing these losses year after year, while the BIS protection prevents the Swiss banks from recovering their loans.
Many central banks keep funds at the BIS for entirely legitimate reasons, but the worldwide average is 4% of reserves. One may wonder why the BIS wishes to protect debt defaulters whose assets a court may otherwise be justified in seizing. It is unlikely to explain. When I covered it as a Reuters correspondent in the past, it consistently refused to discuss its affairs.
Greece may not be out of the woods. Could it yet be tempted by these Latin American precedents?

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