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World Is Now “More Exposed than Ever” to Explosive Dollar

September 15, 2015

World Is Now “More Exposed than Ever” to Explosive Dollar

One of the craziest financial creations on earth, available only near the peak of enormous credit bubbles when nothing can ever go wrong, became available this spring: 100-year bonds issued by governments or companies in emerging countries, in currencies they don’t control.

Yield hungry investors in developed markets who purposefully had been driven to near-insanity and drunken benightedness by the zero-interest-rate policies of central banks around the globe jumped on them. For them, it was the way to nirvana.

At the peak of Draghi’s QE hype in April, Mexico, which has a long history of debt crises, was able to sell €1.5 billion of 100-year bonds denominated in euros because yields were even lower in the Eurozone and bond fund managers there even more desperate and insane; at a ludicrously low yield to maturity of 4.2%.

Even more inexplicable was just how Petrobras, Brazil state-controlled oil company, was able to bamboozle investors on June 2 into buying its 100-year dollar-denominated bonds.

At the time, the company had just ended a five-month delay in releasing its financial statements. It’s tangled up in a horrendous corruption scandal that has reached the highest echelons of political power. It’s backed by the Brazilian government whose credit rating, as everyone had been expecting for months, was cut to junk last week by Standard and Poor’s. To top it off, Brazil has been facing a deep recession and a plunging currency, which makes paying off dollar-denominated debt prohibitively expensive.

And it renders that debt toxic.

Petrobras, whose credit rating was cut to junk the day after Brazil’s – though Moody’s had cut it to junk seven months ago – faces other, even bigger problems: over $130 billion in debt, the most of any oil company, and the terrific collapse in oil prices.

 

…click on the above link to read the rest of the article…

Brazil Cut To Junk By S&P, ETF Falls 5% Post-Mkt

September 9, 2015

Brazil Cut To Junk By S&P, ETF Falls 5% Post-Mkt

It’s not as if the writing wasn’t on the wall, and don’t say we didn’t warn you.

Brazil, whose economy officially slid into recession in Q2 – a quarter during which Brazilians suffered through the worst inflation-growth outcome (i.e. stagflation) in over a decade – and whose efforts to plug a yawning budget gap are complicated by political infighting and a growing public outcry against embattled President Dilma Rousseff, has been cut to junk by S&P. 

  • BRAZIL CUT TO JUNK BY S&P; OUTLOOK NEGATIVE

Unsurprisingly, the iShares MSCI Brazil ETF is trading sharply lower AH on the announcement:

S&P’s move comes as the country’s finance minister fights for his political life and as deficits on both the current and fiscal accounts paint a bleak picture, especially in the face of persistently low commodity prices, China’s move to devalue the yuan, and the impossible dilemma facing the central bank which, like its “LA-5” counterparts, can’t hike to combat a plunging currency for fear of exacerbating FX pass through inflation and can’t cut to boost the economy for fear of jeopardizing the 2016 4.5% inflation target.

Expect this to get far, far worse before it gets better. Here’s the headline dump:

  • S&P SEES BRAZIL REAL GDP CONTRACTION OF ABOUT 2.5% THIS YEAR
  • S&P SEES BRAZIL REAL GDP CONTRACTION OF 0.5% IN ’16
  • S&P SEES BRAZIL REAL GDP MODEST GROWTH IN 2017
  • BRAZIL GOVT DEFICIT TO RISE TO AVG 8% GDP IN ’15, ’16, S&P SAYS
  • BRAZIL WON’T HAVE PRIMARY FISCAL SURPLUS IN ’15, ’16: S&P

 

Here’s a look at the country’s twin deficits:

…click on the above link to read the rest of the article…

 

Austerity in Greece – What Has Gone Wrong?

March 31, 2015

Austerity in Greece – What Has Gone Wrong?

A Brief Update on Recent Developments

On Friday, the Greek government has submitted its latest reform proposals to the EU. According to press reports, these are supposed to raise €3 billion and consist of the following:

“[…] moves to combat tax evasion, more privatizations and higher taxes on alcohol and cigarettes. […] The Greek government said the 18-point reform program did not include any “recessionary measures”.”

In the meantime it has also emerged that the privatization of the port of Piraeus, which Syriza had previously reportedly opposed is about to go forward after all, and is expected to bring in proceeds of around € 500 m. Pressure on the Greek government has recently increased, not only due to the fact that it is expected to run out of money soon, but also as a result of a downgrade of its credit rating by Fitch late last week to a lowly CCC rating. This makes it even less likely that the government will be able to roll over maturing treasury bills.

Below are the most recent updates of domestic deposit outflows and central bank credit to the banking sector, showing the situation as of the end of February. Note that we have adjusted the data on deposit outflows by deducting all government deposits from the domestic deposits time series, so that only the deposits of Greek households and business are shown.

…click on the above link to read the rest of the article…

 

Russia Cut to One Step Above Junk by Fitch on Oil, Sanctions

January 11, 2015

Russia Cut to One Step Above Junk by Fitch on Oil, Sanctions

Russia’s credit rating was cut to the lowest investment grade by Fitch Ratings after plummeting oil prices and the conflict over Ukraine triggered the worst currency crisis since the country’s 1998 default.

Fitch, which last downgraded Russia in 2009, cut the sovereign one step to BBB-, according to a statement issued Friday in New York. The grade, on par with India and Turkey, has a negative outlook.

“The economic outlook has deteriorated significantly since mid-2014 following sharp falls in the oil price and the ruble, coupled with a steep rise in interest rates,” Fitch said in the statement. “Plunging oil prices have exposed the close link between growth and oil.”

The world’s biggest energy exporter is on the brink of a recession after crude fell more than 50 percent since June and the U.S. and its allies imposed sanctions following President Vladimir Putin’s annexation of Crimea from Ukraine in March. The penalties have locked Russian corporate borrowers out of international debt markets and curbed investor appetite for the ruble, stocks and bonds.

…click on the above link to read the rest of the article…

 

Why Moody’s Cut Russia to Two Notches above Junk | Wolf Street

October 20, 2014

Why Moody’s Cut Russia to Two Notches above Junk | Wolf Street.

It was not the most productive summit in the history of mankind. President Vladimir Putin, after watching a military parade in Belgrade, Serbia, and questioning Kosovo’s independence, arrived in Milan on Friday so late that Chancellor Angela Merkel, with whom a private meeting had been scheduled, had to cool her heels for hours. Once done at 2 a.m., he headed over to his buddy’s place, persona non grata in EU politics, Silvio Berlusconi. But the Russian economy was not amused.

Russians know that the ruble is in trouble, and are not so naïve to think that their currency will start to strengthen again soon. Countless factors point in favor of further depreciation, not least the inability of Russian entities to borrow from international markets, recent marked falls in oil prices, and expectations of future US rate hikes…. Government estimates that capital flight is likely to reach between $90-120 billion this year look too conservative to us.

[A]s ever with Russia, there are countless risks. What if capital flight accelerates to rates well beyond expectations to generate genuine unease about the adequacy of the CBR’s [Central Bank of Russia] reserves? What if the ruble is completely irresponsive to interest rate hikes, and simply depreciates rapidly further beyond the CBR’s comfort zone, fueling a jump in inflation into double digits? And what if companies, already unable to borrow from international markets because of sanctions, struggle to meet debt repayments? And – perhaps most obviously – what if the geopolitical situation, which is well beyond the control of the CBR, further deteriorates?

…click on the above link to read the rest of the article…

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