By Michel Lowy, SC Lowy
Traditionally, investing in Asian high-yield bonds has not been for the faint-hearted. Yet in recent years a new normal emerged; just about any bond delivered strong returns. Such has been one of the results of the extremely accommodative policies of major central banks that have flooded the markets with liquidity, thereby dulling the perception of risk.
However, all this changed last year when steep falls in oil and commodities prices,
together with US high-yield fund redemptions, led to a liquidity shakeout
in the high-yield bond market. The new reality rewarded a discriminating investment strategy – with the Chinese property sector’s high yield bonds returning gains of 20 per cent, even as other market segments such as Indian issuers and Chinese industrials experienced single-digit losses. Read more
After a lull of several weeks, an upsurge of fighting near Donetsk is once again threatening Ukraine’s fragile ceasefire. A resumption of the Russian-backed offensive had been widely expected to follow last weekend’s Orthodox Easter celebrations, although Vladimir Putin’s precise intentions remain unclear. Is this the next phase of a slow-motion land grab, with Mariupol possibly the next target, or is it just a means of ratcheting up the pressure in an effort to force new concessions? Either way, Ukraine is going to need a lot more international support to weather the crisis. Read more
By John-Paul Rathbone and Andres Schipani
Socialist Venezuela would never sell out its friends to Wall Street, right? Yet it appears that is exactly what Caracas wants to do. Pressed by the oil price collapse, rattled by fears of default, facing rising social tension as imports collapse due to lack of foreign exchange, and seemingly unable to put its economic house in order, the country is trying to raise desperately-needed cash by selling debts owed to it by the Dominican Republic and Jamaica on to Goldman Sachs. Chavismo turns to the vampire squid?
The idea has been circulating for a while in the investment banking community. But now details have emerged in the press, as reported by El Nuevo Herald, and Petroleum Argos. Essentially, the trade involves Venezuela securitizing debts owed under its $3.5bn a year subsidised oil program, called Petrocaribe. Read more
Last month Ricardo Hausmann, a normally mild Harvard academic, set off the equivalent of a financial bomb. The economist suggested that Venezuela had already defaulted on many of its suppliers, its oil service contractors, and its citizens. So who or what might come next?
When Hausmann suggested Wall Street, the market reaction was huge. Indeed Venezuelan bonds, undercut by the falling oil price, have been dropping ever since. Yet it turns out that Venezuela’s latest default has been, in fact, to China. Given that Beijing is one of Caracas’ closest allies, this is surprising. It is also bullish for Wall Street. Read more
By Francisco Rodríguez of Bank of America Merrill Lynch
In a provocative article published last week by Project Syndicate (Should Venezuela Default?), Venezuelan economists Ricardo Hausmann and Miguel Angel Santos make an interesting argument. They contend that Venezuela cannot meet all of its foreign currency obligations and is already defaulting on some of them. If authorities adopted a set of common-sense policies, they argue, these would include defaulting on the country’s foreign debt and making bondholders bear part of the burden of adjustment.
Default is the economic equivalent of major invasive surgery: an aggressive intervention with high risks and side effects which is only justified when it is indispensable for restoring an economy to health. Default makes sense only when a country is insolvent. Read more
Ignore Argentina’s spiralling debt vortex,global investors’ appetite for higher-risk assets remains hot. On Tuesday, another “debt defaulter”, Ecuador, finally took the plunge into the global credit market with the launch of a $2bn bond issue.
The 10-year dollar-sale is the first by the Andean nation since it defaulted voluntarily on $3.2bn worth of debt in 2008, when Ecuador’s leftist President Rafael Correa bit the bullet, calling bondholders “real monsters.” It was was priced at a 7.95 per cent yield. Read more
By Samuel George of the Bertelsmann Foundation
On February 18 the Republic of Argentina submitted a petition to the US Supreme Court requesting a judicial review of a 2012 decision from the New York Second Circuit Court. That ruling found illegal Argentine payments on restructured sovereign debt if the country did not also service investors who had not accepted the haircut on the non-performing bonds.
If the Second Circuit Court ruling stands, it will set a precedent that holdouts could eventually be paid in full. Bondholders may become increasingly reluctant to accept haircuts on sovereign securities, thus complicating the ability of a distressed country to restructure its debt. Read more
Analysts from Bank of America Merrill Lynch think that China will experience its “Bear Stearns moment” on Friday, when the country will probably see as its first ever bond default.
That is a bold, attention-seeking call that is also patently ridiculous. Read more
By Jason Bedford, independent consultant
Many of the risks surrounding China’s trust sector have been misunderstood and consequently overstated. The Rmb3bn ($495m) China Credit Trust (CCT) product that was rescued at the 11th hour late last month was far from typical of trust products in general – and neither was its potential default new news; it first defaulted in 2012.
Some market watchers saw the CCT scare as a “Lehman Brothers moment” for China that was narrowly averted, but could strike again in a different guise. They may be disappointed. Those trying to understand the risks from China’s shadow financing need to put the trust sector into a more sober context. Read more
Calling all courageous bond-buyers out there! Ecuador says it is trying to re-enter the bond market, taking advantage of rising demand for emerging market debt.
Patricio Rivera, the minister for economic policy, told reporters on Wednesday the leftwing government might issue debt during the first half of this year. Read more
By Arturo C. Porzecanski
Carlos Mauleon, the former Barclays Capital investment banker who handled Argentina’s 2005 debt restructuring, recently wrote a guest post on beyondbrics justifying that infamous transaction: “Whatever you may think of Argentina, … the one good decision its leaders made was to aggressively restructure [the public] debt back in 2005” because “the question is, did [Argentina] have a better choice? Not really.”
But it did. Here’s why. Read more
By Samantha Pearson and Pan Kwan Yuk
It’s the end of an era for Brazil’s Eike Batista – the end of charming investors with dazzling oil forecasts, the end of being the poster boy for Brazil’s economic promise and perhaps even the end of parking his sports car in his living room.
Batista’s oil company OGX finally filed for bankruptcy protection on Wednesday, triggering Latin America’s largest ever corporate default. Read more
2012, as beyondbrics readers know, was a record year for emerging markets bonds. But it turns out it was also a record year for defaults.
According to a new report out from Standard & Poor’s, defaults among EM corporate issuers accounted for about 30 per cent of global corporate defaults by issuer count – the highest in the 16 years since the rating agency started keeping scores. Read more
Things are going from bad to worse for Suntech Power, the Chinese solar panel maker.
The company, which has been fighting to stay afloat amid falling panel prices and slowing demand, became the latest company from mainland China to default on its international bonds. Read more
By James K Glassman
As the global economy continues its sputtering recovery, policymakers have an opportunity to take a strong stand on principles that may help mitigate further long-term damage. In particular, as regards Argentina, a relatively small country with a potentially large impact on the international financial system.
For a decade, responsible nations have watched impassively as Argentina has refused to abide by court decisions and flouted global financial norms. Read more
Gramercy, the $3.2bn emerging markets hedge fund, has joined a growing chorus of critics who think the current emerging markets debt boom could soon turn to bust.
And it is putting its money where its mouth is – with the launch of a distressed debt fund that has already attracted $200m in commitments. Read more
By Federico Sturzenegger of Banco Ciudad de Buenos Aires
Last week Judge Griesa ruled that Argentina should pay to a holdout fund by the name of NML before December 15 the full amount of debt owed by the country. The ruling followed a previous one, based on the pari passu clause, which said that Argentina should pay at least something to the holdouts. Read more
There was a time, not long ago – until Wednesday night, to be exact – when investors would pay a premium on emerging market debt subject to New York law. Not any more.
Judge Thomas Griesa’s ruling that Argentina must pay $1.3bn to holdout creditors has all sorts of implications for sovereign borrowers and lenders. It has also, at a stroke, wiped out the New York law premium, as a chart from Vladimir Werning at JP Morgan illustrates. Read more
Argentina’s reaction to Thomas Griesa’s New York court ruling was probably enough to make the octogenarian judge choke on his Thanksgiving turkey.
It was expected that Argentina would promise to fight – but what is surely guaranteed to make the judge’s blood boil was the offended tone Argentina struck. Read more
A hundred years ago if a country was reluctant to pay its debts, gunboats might have steamed to its shores. Since then sovereign immunity has reigned but the latest development in a legal argument over Argentina’s 2001 defaulted debt could shift the balance toward creditors. Whitney Debevoise, former US executive director of the World Bank, explains to capital markets correspondent Robin Wigglesworth the implications of the US court case on sovereign debt markets.