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Argentina’s buybacksEdited by Richard Lapper, Latin America editor
Argentina’s Economy Ministry has already spent an estimated $280m in the last two weeks buying back debt in a bid to boost prices and stave off fears that a new default may be brewing. Now it will launch a new phase of the buyback operation: surprise auctions, announced 24 hours in advance. The first is expected in the second half of the week. The economy ministry will announce how much it plans to spend and which short- to medium-term bonds it is targeting, and the market will submit offers.
The new mechanism, which is expected to continue until the end of the year, should bring welcome transparency and save money, but the market remains edgy. Short term bond prices have recovered since the buybacks started but dealers say longer-term debt has not.
Upbeat industrial production data for July, showing a rise of more than 4 per cent after a slump in June has gone down well in the markets, and the government is tightening its belt, expecting a fiscal surplus of 3.5 per cent of gross domestic product, higher than expected earlier this year, which helps reassure investors that collapse is not imminent. But its mesh of subsidies on transport, energy and food – which gobbles up much of the budget – remains in place and it has sought additional budget funds to make it to the end of the year.
President Cristina Fernández has also confirmed Guillermo Moreno, controversial Interior Trade Secretary, in his job, at least for now, dashing hopes of an imminent revamp of inflation statistics with which he has been meddling since January 2007. That matters because bondholders may have been shortchanged to the tune of $8bn because of understated inflation. The IMF wants to censure Argentina’s dubious data in its World Economic Outlook in October, according to Marcelo Bonelli of the local newspaper Clarín. In that light, even though macroeconomic figures remain sound overall, Argentina will have a hard time convincing investors it can be trusted. The debt buy-back looks insufficient to turn the tide. Expect more turbulence.
Bolivarian advance
From exploding cigars and invasion armies to military trainers and the Peace Corps: there is nothing that the US hasn’t tried or done to block the rise of anti-Americanism in the Caribbean basin, a part of the world Washington used to regard as its backyard. But on the face of it that battle is being lost. On Monday, Honduras, perhaps most pro-American of Central American states, will formally join the ALBA, the trade and investment pact launched by President Hugo Chávez in an explicit bid to undermine US influence. ALBA currently embraces five countries: Bolivia, Cuba, Nicaragua and the tiny Eastern Caribbean Island of Dominica, as well as Mr Chávez’s Venezuela. True, Honduras’ Congress has still to approve the pact and with more than half its legislators opposed that is far from a foregone conclusion. But Manuel Zelaya, Honduras’s President, is clearly calculating that joining ALBA will open the door to millions of dollars of Venezuelan investment and that the prospect will help him win over congressional skeptics such as Roberto Micheletti, president of congress and a member of Mr Zelaya’s Liberal Party (see this report by the Washington-based Council on Hemispheric Affairs. He may be right.
There is no doubt that Venezuelan influence in Central America and the Caribbean is expanding. More than a dozen generally small and relatively weak countries in the Caribbean Basin are benefiting from cheap oil through their membership of Petrocaribe, under which Venezuela converts 40 per cent of bills owed for oil into long-term low interest rate credits. Understandably as a result of rising oil and food prices Guatemala and Costa Rica, as well as Honduras, have all joined the pact this year. Among English speaking Caribbean countries Venezuelan influence is also rising. Petrocaribe funds have been loaned to Jamaica’s port, sugar company and airline, for example. David Jessop, director of the London-based Caribbean Council, who has in the past lamented the decline in US and European interest in the region, wrote recently that ”Venezuela has clearly emerged as by far the Caribbean Basin’s single most important global development partner”.
Back to the future
President Hugo Chávez’s decision to nationalize the cement industry has underlined growing state involvement in the Venezuelan economy. Along with growing concentration of political power, reflected in the decree laws passed last month, it makes his 21st century socialism look more and more like the orthodox 20th century equivalent. That said it may well be worthwhile for Cemex, the biggest cement company affected, to continue negotiating over price. Talks resume on Monday. Cemex claims the offer of $650m does undervalue the business and seems proportionately lower than what the government offered to pay two other cement companies for expropriated assets. Mr Chavez will not worry too much about out the prospect of Cemex filing suit before the International Center for the Settlement of Investment Disputes at the World Bank, partly because these cases are so long drawn out. Still Cemex are hopeful it can get something from the talks. The company will have taken note of the fact that over the last two years Mr Chávez fierce hard-line rhetoric over nationalisation has been accompanied by flexibility in negotiations about compensation. For example according to press reports last week from Buenos Aires Venezuela is offering $1.65bn to Techint of Argentina for the controlling 60 per cent stake in the Sidor steel company which it is taking over. That is far less than the $3.6bn sought by Techint but when the nationalisation was first announced in May Techint was offered less than $800m.
The dangers of disintegration
Bolivia’s political impasse is becoming more dangerous by the week. President Evo Morales is set in the next few days to announce plans to hold a referendum on the country’s new constitution, a document that was approved last year after government supporters blocked opposition legislators from attending the relevant congressional session. Mr Morales may have won an increased majority in this month’s recall referendum but his opponents in the five rebel departments have also emerged with strengthened mandates. Significantly, Ruben Costas, the governor of Santa Cruz, the most powerful department, has begun to talk of federalism, rather than autonomy, a demand that would push Bolivia closer to break up. Mr Morales is committed to a peaceful solution of the dispute but growing militancy in the east will test his capacity to govern. Farmers are refusing to send meat to the pro-government west and militant youth groups have occupying public buildings as the rebel departments press demands to win back their share of revenues generated from a hydrocarbons tax. More alarming perhaps has been the excitable rhetoric of some leaders. Some are now openly talking about fighting. The mood in Beni looks to be particularly tense. Warning that ”80 per cent of the population had guns”, Alberto Melgar, the president of the department’s civic committee, said ”I want to say this very clearly. There are people who want to take up arms to make a revolution.”
Nuclear India must end its China-bashing
By Joe Leahy
India’s success last week at the Nuclear Suppliers Group meeting in Vienna unleashed a wave of nationalist chest-beating greater even than a few weeks earlier when Abhinav Bindra, a shooter, became the nation’s first individual to win an Olympic gold medal.
The nation’s cable news channels dropped their usual fare of gory crime stories and political corruption scandals to provide blanket coverage of the intricate negotiations with the NSG, which eventually agreed to lift a global ban on nuclear trade with India, ending the country’s decades of nuclear pariah status.
But the media celebrations had an ugly side – China-bashing. Perceptions that Beijing had tried to block the deal from behind the scenes sparked outrage among commentators, who suspected China was championing the interests of its ally and India’s nuclear-armed rival, Pakistan.
“It is in times of adversity that one learns who one’s friends are,” the Indian Express wrote in a piece lambasting China. The main business daily, The Economic Times, went further. “Slimy dragon wants deal for mother of proliferators,” it said, referring to perceptions that China might call for an NSG waiver for Pakistan as well.
Rather than crowing about getting one up on the Chinese “dragon” and Islamabad, this should be a time of introspection for India. When the celebrations had died down, Mr Bindra’s medal prompted soul-searching on why the world’s second most populous nation had only just won its first individual Olympic gold. So, too, the nuclear deal should set Indians thinking about why their government has taken this long to tackle energy security, probably the country’s most critical long-term strategic challenge.
From the beginning, India’s civilian nuclear deal with the US has been as much about India’s arrival on the geopolitical grand stage as it has been about atomic energy. Not only does the NSG waiver allow India to emerge from the diplomatic nuclear winter stemming from its refusal to sign the nuclear non-proliferation treaty; it also gives it a seat at the elite club of nations that governs the use of the world’s most powerful technology.
The road to nuclear acceptance has been a long one for India since the deal was first proposed by the US and India in 2005. Prime Minister Manmohan Singh had to brave a parliamentary vote of confidence to get the deal past domestic sceptics who believed it would compromise the nation’s sovereignty.
Next followed negotiations with the International Atomic Energy Agency on safeguards to ensure India’s intentions were peaceful. Then the US applied on India’s behalf to the 45-nation NSG to lift the ban on nuclear trade with New Delhi even though it has not signed the NPT and an agreement banning nuclear tests. Even now, the deal is not fully done. The Bush administration in its dying days must still win congressional approval for the pact.
The deal has been perceived in many quarters as good for India because it has got away without signing the NPT. But critics argue that it is a complex beast that brings India under the sphere of influence of the US in ways that New Delhi could find uncomfortable in the future.
Marie-Carine Lall, a south Asia specialist at the Institute of Education, University of London, argues that there is a dangerous gap between New Delhi and Washington in their views of what the deal means. The US sees it as bringing a maverick India into the non-proliferation framework. It also wants to use India as a counterweight to China and win Indian support for US objectives in the Middle East. India believes the deal will give it access not only to nuclear material and knowhow but also to sensitive technologies beyond the atomic arena. India also wants US support against the Pakistan-China axis, while maintaining independence in foreign policy. Professor Lall says tension may arise if the US tries to use its new nuclear partnership with India to put pressure on New Delhi on issues to do with Iran, for instance.
Despite the deal’s weaknesses, it is not as though India had much choice. India does not produce enough uranium to feed its existing reactors, let alone future capacity, and it imports about three-quarters of its crude oil, mostly from the Middle East. “We are 70 per cent dependent on Gulf oil and we don’t even have strategic reserves,” complained ambassador V.K. Grover, a member of the National Security Advisory Board.
India has been a laggard in securing alternative energy resources overseas. In the past four years, Oil and Natural Gas Corporation, the state oil giant, has gone on a shopping spree. But, in countries from Burma to Angola, the Chinese have mostly got there first. The civilian nuclear deal will not solve this problem overnight. Nuclear energy accounts for barely 3 per cent of India’s power capacity now and it will take a generation to increase this to anything meaningful. But it does send a signal that India is finally getting more serious about solving its looming energy security crisis. If the US Congress approves the nuclear deal, India will be able to claim it now has a powerful friend to lend a hand in this quest.
As for China, Yang Jiechi, the foreign minister, declared his surprise at the accusations in the Indian media, saying Beijing played merely a “constructive” role in negotiations at the NSG. After all, why should Beijing be overly concerned about competition over energy from India when at this point, as at the Olympics, it is winning all the gold medals?
Take this weekend off, Hank
By John Gapper
I do not know what plans Hank Paulson, the US Treasury secretary, has for the weekend. Bird-watching, perhaps. Whatever they are, may I suggest that he sticks to them?
Mr Paulson is a keen ornithologist but he is also an energetic intervener in financial markets and, when he has worked on weekends recently, the US taxpayer has paid dearly.
In March, it was a line of funding to steer Bear Stearns, the investment bank, into the hands of JPMorgan Chase. On Sunday, it was the bail-out of Fannie Mae and Freddie Mac, the quasi-public mortgage lenders, which could cost the US government $200bn (€143bn, £114bn) or more.
It is only Thursday and, already, others seem to be preparing to interrupt his days of rest again.
The first is Lehman Brothers, whose shares fell sharply after the failure of its talks with Korea Development Bank aimed at gaining a capital injection to offset its mortgage-related losses. It disclosed on Wednesday a $3.9bn loss and plans to sell a stake in its fund management arm.
Then there are the US regional banks that hold preferred shares in Fannie and Freddie, which Mr Paulson caused to plunge in value. They face their own financial crises and Tony James, president of Blackstone, the private equity group, this week predicted “massive defaults”.
Apart from banks, there are the Detroit carmakers, which have persuaded Congress to give them $25bn in soft loans. That is far more than the 1980 Chrysler bail-out but they want to double the hand-out, and both presidential candidates, Barack Obama and John McCain, have meekly fallen in line.
In an election year, neither party dares to place fiscal discipline above politics and the urge to placate US voters and foreign investors.
The US government has talked tough about moral hazard and its not wanting to bail out failed institutions but has been a soft touch. Eventually, someone must say “no” to the line of those angling to pile their own losses on to the budget deficit, which could reach $440bn next year. Mr Paulson, who headed Goldman Sachs before what Mr James called “the meltdown years”, needs to be that man.
It was not exactly comforting that credit ratings agencies had to declare to investors that the Fannie and Freddie bail-out would not affect the country’s triple-A sovereign rating. When people are assured that nothing is wrong, it makes them wonder. The rating has supported the dollar’s reserve currency status for most of the past century. Yet, on Tuesday, the cost of insuring Treasury bonds against a US government default spiked to a record level.
It is true that the Fannie and Freddie intervention does not, in itself, pose grave financial risks to the US. Standard & Poor’s estimates the worst case loss at $325bn, or 2.5 per cent of US gross domestic product, less than a third of the bill for Japan’s banking crisis in the 1990s. “It is one of the largest financial interventions not only in US history but in any country’s history. But the cost to the government is manageable,” says John Chambers, an S&P analyst.
The bigger problem is the precedent that it, once again, sets. Mr Paulson emphasised on Sunday that Fannie and Freddie were “unique” bodies that deserved special treatment. One analyst describes this as a “dog whistle” to Lehman not to expect capital from Capitol Hill.
If it was a signal, then good, and I trust Mr Paulson will stick to his warning. Lehman, like other big investment banks, can get short-term funding from the Federal Reserve if all else fails, a guarantee put in place after Bear Stearns’ takeover.
That should prevent a run on the bank and it is the only money the Fed or the Treasury should offer. Mr Paulson or Tim Geithner, president of the New York Fed, can put pressure on banks or investors with deep pockets to give Lehman capital but must not do so themselves.
The reality is that Lehman, like General Motors and Ford, got itself into this mess and ought to address it itself. Dick Fuld, Lehman’s prickly and obstinate chairman and chief executive, has turned down offers valuing it at less than book value. His pride has led to Lehman’s fall.
Similarly, no one forced US regional banks to invest in Fannie and Freddie preferred shares. It should have occurred to them that their dividends were high because of the risk of losing their money if the two entities got into trouble. I thought bankers knew that kind of thing.
In normal times, no one would entertain the notion that such supposedly sophisticated financial institutions should get a handout from the taxpayers. But these are not normal times and Mr Paulson’s fear of allowing financial chaos has pushed him on to the defensive.
It is time to push back. The Fed and the government had to stand behind Bear Stearns and prevent a run on the dollar by making good the promises that Fannie and Freddie issued to foreign investors. But there is a cost to playing with the government’s balance sheet.
It sounds outlandish that the US could lose its triple-A status, which it has held since before Standard merged with Poor’s in 1941. But stuff happens. A full-blown recession and bail-out of the banking system would put public finances under severe strain.
Japan lost triple-A status for a time, as did Denmark, Finland and Sweden during the Scandinavian banking crisis. Mr Paulson has tried to keep the dollar strong and confidence intact but endless intervention will have the opposite effect.
If he takes the weekend off and allows events to unfold, it will show that Fannie and Freddie were indeed unique and that the government has not lost its nerve. Inaction speaks louder than words.
Lula’s new lucre: Brazil may keep full control of offshore oil
By Jonathan Wheatley and Carola Hoyos
It was a day rich in symbolism. On an oil platform off the Brazilian coast, President Luiz Inácio Lula da Silva this month dipped his hands into the first crude to flow from promising reserves discovered in the country’s waters.
The gesture – an echo of that by Getúlio Vargas, a presidential predecessor who in the 1950s created Petrobras, Brazil’s state oil company – was unmistakable. But Mr Lula da Silva (pictured, above right) went further: as if to confirm the political significance of his country’s newly discovered offshore oil wealth, he planted an oily seal of approval on the overalls worn by Dilma Rousseff, his chief of staff and the woman widely regarded as his likely successor.
The reserves, though hard to reach, are expected to propel Brazil up the table of oil producing nations. Tony Hayward, chief executive of BP, Europe’s second biggest oil company, says the new finds are “as significant as the North Sea” – which in the 1970s was one of the new frontiers that helped pull the world out of its last big oil shock.
But the find is also set to pit one of the world’s most important emerging economies against both foreign equity investors and international oil companies. Many in the leftwing government seem determined to avoid sharing the coming bonanza. The future shape of the industry may be decided by short-term political imperatives ahead of presidential elections due in 2010.
Petrobras, a world leader in deep-sea exploration, is seen by many observers as ideally placed to lead the task of tapping what are some of the most inaccessible oilfields on earth. But the government has other plans. On September 19, an inter-ministerial commission is due to present its recommendations on the future structure of Brazil’s oil sector. The shortest odds are on the creation – recently backed publicly by Mr Lula da Silva – of a new national oil company, 100 per cent under government control, to take ownership of the new reserves and develop them in partnership with Petrobras and others.
While Petrobras is controlled by the Brazilian state through a majority of its voting stock, most of its capital is in non-voting shares. Some 60 per cent of total capital is held by minority – mostly foreign – shareholders. It is they who would lose the opportunity to benefit from exploiting the offshore discoveries.
Reserves that are seated below the salt
Brazil’s “pre-salt” offshore fields, as their name suggests, are trapped beneath a layer of salt way below the ocean floor, where they have resided since before Africa and South America parted company more than 100m years ago.
Working the Jubarte field, from which the first pre-salt oil is flowing, is relatively straightforward. It lies 77km off the coast, beneath 1,375 metres of water, under a layer of salt about 200 metres thick. Out in the Santos Basin further south, where the main pre-salt deposits have been found, the difficulties are greater.
These are virgin fields, more than 300km from the coast, where the oil is trapped at depths of up to 7,000 metres, including more than 2,000 metres of water and up to 2,000 metres of hot, high-pressure, volatile salt.
At the Tupi field, containing an estimated 5bn-8bn barrels of oil, a “long-duration test” is due to begin next year. It will be based on tried and tested technology, in which several wells are sunk into deposits to extract oil and gas and others to pump in sea water to maintain enough pressure to keep the oil flowing.
Apart from the huge operational problems, there is also the risk that individual deposits, once found, may not be commercially viable given the enormous investments required.
At the relatively simple Jubarte field, Petrobras is using the experience of two partners, Partex and Galp of Portugal, which have worked in comparable conditions in Oman. In the Santos Basin it will need all the expertise that its own engineers and those of partners can deliver.
It is hard to be precise about the size of the new finds, known as the “pre-salt” fields because they are trapped beneath a layer of salt. The one field that has been measured with any accuracy contains 5bn-8bn barrels – as much as the remaining reserves of Norway. Ministers are working on the assumption that there is 10 times that amount waiting to be found.
If so, international oil companies may be locked out of one of the biggest parties of the industry for some time. That is bad news when these companies are failing to replace used reserves with new discoveries. Petrobras and others are likely to be offered the chance to participate through service contracts – in which companies are paid to bring up the oil and gas but have no commercial rights over it – or production sharing agreements, in which they are given some of the oil they produce to cover costs and some as profit but have limited control over how much they may produce and when. What seems almost certain is that the current concessions system, in place since 1997, will change.
The notion has caused a political storm in Brazil, where many politicians who usually support the government have been alarmed by the proposals being floated by the president and senior ministers. “An assault on Petrobras’s minority shareholders,” is how Francisco Dornelles, a pro-government senator, describes the idea of the new company. The reserves already belong to the people and the idea that they must be reclaimed “is devoid of any meaning, confuses public opinion and serves only for electoral purposes”, declares Sérgio Guerra, a senator in the opposition centrist PSDB, which introduced the 1997 law.
The dissatisfaction is shared at Petrobras itself. Just as years of investment and accumulated expertise are set to pay off in spectacular fashion, the company’s domination of the industry it helped to create has been put in jeopardy. Sérgio Gabrielli, chief executive, (pictured above with Mr Lula da Silva) says Petrobras can take on the task and describes talks with the government as heated. The company’s strategic plan for 2008-12 includes investments of more than $112bn, of which just $8bn must be financed. The plan was drawn up on the basis of oil at $35 a barrel and before the discovery of the new fields – a revised plan is due to be announced this month. Mr Gabrielli says that with much higher oil prices and with new discoveries adding to reserves, Petrobras will be in a much stronger position. “We think we can develop the pre-salt fields on our own,” he adds, although modifying the assertion by saying: “Perhaps not 100 per cent, as we don’t know 100 per cent of what is there.”
Though they will be squeezed and may even lose pre-emption rights, international oil companies will be needed to handle technical challenges such as high levels of carbon dioxide in the offshore discoveries, an issue on which they say Petrobras is seeking their advice. Yet Brazil has already floated the idea of modifying existing contracts, albeit as one of several possibilities.
It seems strange to be keeping investors at arm’s length at a time when a worldwide shortage of rigs and other gear is forcing up costs across the industry – let alone in cases as complex as the pre-salt fields. “For every new project, costs are escalating exponentially,” says Michelle Billig of Pira Energy, a New York consultancy. “That puts a limit on the volume that can simultaneously be brought online, regardless of the reserve base.”
Under the concessions model introduced in 1997, oil companies buy rights to explore geographical blocks of Brazilian territory, on land or at sea. Petrobras – usually but not always as leader – has formed consortia with several international oil companies to buy concessions. Concession holders accept the risk of finding no oil, make the necessary investments and are rewarded with rights over whatever is discovered. They pay royalties to the government on what they produce.
The risk of not finding oil in the pre-salt fields appears slim. Of 16 probes sunk so far, all have found oil. That 100 per cent success rate compares with the 10-15 per cent typical of new areas in Brazil, according to Nilo Azambuja, a former Petrobras executive now working at High Resolution Technology, a geology and geochemistry service provider.
While the operational risks involved are still considerable, industry executives agree that the reduced risk of finding no oil at all leaves room to change the concession rules. Brazil’s oil industry regulator is among those who favour keeping the existing regime but demanding higher prices for concessions and charging companies bigger royalties. This would ensure that Brazilians gained from their new-found wealth while causing minimal disruption and attracting investment.
But Mr Lula da Silva seems determined to create a wholly state company modelled on Norway’s Petoro. Brazil has begun talks with Norway about how it managed its oil and gas discoveries in the North Sea.
People close to the talks say the stake that Brazil’s version of Petoro gained in each project would be limited by the fact that it will also have to invest and pay its share of the costs just like other partners. A senior executive of one national oil company says: “If Norway is any guide, having a new partnership of that nature in the future would not be a reason to be scared.”
Brazilian critics are less confident. “It just doesn’t make sense,” says Adriano Pires, an oil industry consultant in Rio de Janeiro. Petrobras has been able to invest and grow precisely because it has private shareholders, he says. “Where will the new company get money for investment?”
João Augusto de Castro Neves, a political scientist in Brasília, says he believes Mr Lula da Silva has spied in the new company a means of securing the election of Ms Rousseff when he stands down after two consecutive terms at the end of 2010. Success would depend on parliamentary support not only from the president’s socialist PT but also the catch-all PMDB, an agglomeration of regional interests that makes no secret of demanding government jobs in exchange for its support. A new oil company – immensely powerful and commanding a giant budget – is just the kind of entity both parties would love to gain command of, Mr Castro Neves says.
In arguing for different treatment of the new reserves, Mr Lula da Silva has revived an old nationalist slogan popular when Petrobras was created more than 50 years ago: O petróleo é nosso – “the oil is ours”.
That prompted a sharp rebuke from Antonio Palocci, formerly his finance minister. The biggest challenge, Mr Palocci said, would be to attract the necessary investment. “Either we make this investment possible,” he warned, “or we will be saying, ‘the oil is ours – ours down there under the ground’.”
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