FYI | Oct 23 2008
By Greg Peel
Remember when we used to speculate as to whether Lehman Bros will be the next Bear Stearns? That now all seems like kidsplay compared to the new adult world. Lehman dutifally collapsed and brought the world to its knees. Iceland has been the first sovereign victim, and after last night it appears Argentina might be the next.
In a speech in Buenos Aires last night, Argentine president Cristina Fernandez de Kirchner announced plans to take over ten of the country’s private pension funds in what she described as an effort to “protect retirees from the global financial crisis.” The move comes amidst just about every other nation on earth’s coordinated response to either nationalise banks or guarantee bank deposits, but across the globe pension fund investment in financial markets has come with a capitalist “caveat emptor” warning from governments. It is not a government’s responsibility to cover bad investment decisions, it is merely the best interests to protect its citizens’ simple cash deposits.
No one believed the president of course, and so Argentina’s stock market fell 18%. The yield on the government’s 8.28% coupon bond maturing in 2033 blew out to over 30% as traders sold down the paper to about 20c in the dollar. Yields on the country’s credit default swaps similarly exploded.
What the world is thus fearing is not that Argentina’s retirees may be looking forward to a less comfortable dotage, but that the government is intending to seize private assets to cover public borrowings. The risk is that Argentina is about to default on its government debt.
While Iceland’s bankruptcy has been a shock to the world and a great source of new jokes, Argentina’s demise is less amusing. Nevertheless, the last time the country defaulted was only in 2001. Back then the government pressured Argentina’s private pension funds into swapping there government bond holdings into longer-ated paper to thus stave off default. They refused. The government then ordered the funds to transfer US$3.2bn of deposits into the state-owned bank, but it was to no avail.
As one London-based emerging market investor told Bloomberg, this latest move is “much, much worse”.
Iceland’s problem was that it was always a poor country populated by a handful of Vikings eeking out a subsistence living. In that it has been self-sufficent to some extent, particulalry in being able to generate its own thermal power. But its only real expoxt industries were tourism and Bjork. There’s not much call for exported whale meat and Japanese researchers ensure that country is well supplied. But then Iceland discovered banking.
With a loosely regulated market Icelandic banks were able to offer low interest rates on loans and high interest rates on deposits. The krona quickly became a popular carry trade currency and the country’s banks became popular with everyone from British shire councils to Russian oligarchs. Pretty soon the assets of Iceland’s three major banks totalled ten times that of the country’s entire GDP. What’s wrong with this picture?
What’s wrong is that this was just another financial market bubble which would one day pop and the global financial meltdown was as good a pin as any. Iceland has now been forced to go cap in hand to its neighbours in Scandinavia and Russia having been turned down by its ally the US. As if the US government hasn’t got enough on its plate without having to bail out Hagar the Horrible as well. The value of the krona has halved.
Argentina, on the other hand, is a commodity-based economy. Half of its exports are agricultural (it is South America’s bread basket) while petroleum and natural gas account for around 12% and copper 3%. No prizes then for guessing why Argentina has suddenly found itself in trouble. The commodity price meltdown has been the latest wave of the global financial crisis.
As explained in this morning’s Overnight Report, the latest victims of the globl crisis are emerging markets, of which Argentina is included. As the US in particular delevers and hedge and mutual funds are called on for cash, the last bastion of global economic hope has disolved. Money is flowing rapidly out of emerging market investments to cover obligations at home, or to simply park in safer US Treasuries. The high-interest bearing peso has been another popular with carry traders and Argentine bonds have now been sold with gusto. Half of those bonds are owned by the local private pension funds. Hence the announced seizure. If the local funds pull out, then Argentina must surely default. Bloomberg reports Argentina’s borrowing requirement is US$7bn in 2008 and that is set to double in 2009. The peso did not collapse as it is believed the Argentine government sold US dollars into the market.
While Argentina’s government might feel such a siezure necessary, it will require local congressional approval to seize two large funds owned by Britain’s HSBC and Spain’s Banco Bilboa.
The British government will clearly not be in any mood to play games with its old foe either. It has already decalred Iceland a terrorist threat and siezed all Icelandic assets in Britain. (That was the only way Gordon Brown could secure a bargaining chip against British public sector investments in Iceland.) Now Argentina has become a threat. You can just see Maggie trying to order an invasion through a Scotch-fuelled haze.
It was the Argentinian shock that really spooked the global markets last night, sending commodity prices spiralling and Wall Street crumbling once more. Who’s next?
