NEWS,03.08.2012

Argentina shows Europe how it's done

Bond payoffs are supposed to be boring, but Argentina's president is celebrating Friday's final $2.3bn payment on a bond given to people whose savings were confiscated a decade ago, calling it a lesson for European countries now mired in foreign debt. The nation's economic disaster left thousands with a grim choice after the government seized their dollar-denominated deposits to stop bank runs in 2002. They could switch to devalued pesos and regain access to what was left of their savings, or accept a piece of paper promising to repay the money in dollars over the next 10 years. Few had any faith in the government's promises back then. Argentina had just defaulted on more than $100bn in foreign debt, banks were shuttered, the economy was in ruins and streets were filled with pot-banging protesters whose chants of "throw them all out" would send five presidents packing. But Argentina has mostly paid up after all, making good on 92.4% of that defaulted debt so far, including $19.6bn in US currency over the years to cancel the Boden 2012 bond. Most of the hard-luck account-holders later sold the bonds at a loss, but as the government makes its last $2.3bn payment on Friday, the few stalwarts who kept the faith have been made whole, while earning a modest 28% profit over the years. "It was good business" for anyone who got the bonds early and held them, said Jorge Oteiza, a bond trader with Banco Comafi in Argentina. "To have the same buying power you had back then isn't bad." President Cristina Fernandez praised her government for meeting its commitments and blamed multinational financial institutions for the debt crises that afflicted Argentina back then and threaten Europe today. "This is the money that the banks should have returned to the Argentine citizens," she said during a national address from the Buenos Aires stock exchange Thursday night. Showing charts and rattling off numbers, she argued that her government has shown the world how to emerge from default without imposing austerity measures, growing its economy and strengthening the social safety net. This debt relief "has given us an immense independence from the activity of the market," she said to applause from the hundreds of guests she had invited onto the exchange floor. Argentina's foreign-currency debt has dropped from a daunting 166% of GDP at the end of 2002 to a more manageable 42% of GDP at the end of 2011, said Ramiro Castineira of the Econometrica consulting firm. "If before it was a burden to shoulder, now it's just a handbag. It doesn't restrict the economy as it did in the past," he said. However, the debt has grown in nominal terms during the same period, from $137bn to $179bn. Many economists suggest the official story is misleading at best, since the government has refused to pay billions of dollars in other bad debts while borrowing freely within Argentina, taking money from pension funds, provinces, state-owned banks and the central reserve to stimulate the economy and reduce its foreign debt exposure. In her determination to make Argentina financially independent, critics say Fernandez has only shifted the debt burden onto her citizens, imposing terms that could stunt the country's future growth. For example, the government promised to pay negative 0.25% interest over ten years for the $27.9bn it took from the treasury for debt relief, the central bank said. "It's wonderful to see Argentina pay down debt, but for every dollar they're paying down, they're borrowing two or three through the other window, and increasingly from their own people," said Arturo Porzecanski, an expert on emerging markets at American University in Washington. Economy Minister Hernan Lorenzino proudly described the Argentine recipe in a column Wednesday published by Telam, the government news agency: Spurn the requirements of the International Monetary Fund and World Bank. Strong-arm the so-called "vulture funds" into accepting lower returns on their risky bets. Nationalise private pension plans, the airline and now the YPF oil company, putting their assets to use creating jobs. And tap central bank reserves to pay down international debts. Frozen out of international markets as a consequence of the 2002 default, this government made breaking their rules a point of pride, Lorenzino suggested. "At first, they called us heretics and the international community turned its back on us," he recalled. But "this government makes policies today without conceding to international pressure, thinking first of those on the inside, and later on those outside." Lorenzino has said this government will not take on more international debts. Not that it could: Friday's payoff still doesn't resolve nearly $7.5bn it owes the US and other Paris Club nations, or the $11.2bn claimed in US courts by bond holdouts. Argentina also owes millions in court judgments to US companies, and Spain's Repsol Group wants $10.5bn for its shares in YPF that Fernandez expropriated this year. Many of these investors would try to seize any newly borrowed money before it reaches Buenos Aires. Lorenzino suggested that Argentina's renegade approach makes it better prepared to confront global crises because the portion of its debt held by the private sector has dropped from 124% of GDP a decade ago to 14% last year. "This was possible only under the concept of economic independence, political sovereignty and social justice," Lorenzino wrote. But this shift from private to public debt means that the government is essentially borrowing from Argentine taxpayers and bank account holders to stimulate its economy, at rates far below inflation, which is estimated at 25% a year or more. Unless this changes soon, the money could run out and there will be few other places to turn for help. "This is no longer an 'us-versus-them' problem," Porzecanski said. "At first they went after the big multinationals, then the 'filthy-rich bondholders,' then powerful institutions like the IMF. Now it has become a fight for financial resources within Argentina. That's why I think the end is coming."

 

A Better Job Report But Challenges Remain

 

When it comes to economic data, I have been dreading the employment report issued on the first Friday of every month. And I am not the only one.For the last few years, this release from the Department of Labor has signaled insufficient job creation. It has also pointed to an increasingly segmented labor market, where the highly educated and affluent do well while vulnerable segments of society see little improvement. In the process, the unemployment crisis has gotten more embedded into the structure of the American economy.So it was a major relief this morning that the July report was a lot better than prior ones.At 163,000, job creation came in ahead of consensus expectations of 100,000. Long-term joblessness fell from 5.4 million to 5.2 million. The employment gains were broad based in terms of sectors. And average weekly earnings rose slightly.This is all good news... and especially after way too many months of disappointments. Yet, and unfortunately, it is too early to relax.The report still contains flashing yellow lights; and the future is still too uncertain with respect to both domestic and international conditions.In July, the unemployment rate edged up slightly to 8.3% despite more Americans falling out of the labor force. In fact, the participation rate declined from 64.0% to 63.7%; and the employment-population ratio, which is the most comprehensive measure out there, slipped from 58.6% to 58.4%.Then there are the compositional issues. There was little relief for those who need it most, including too many Americans who risk slipping from being unemployed to being unemployable.For example, teenage unemployment rose from 23.7% to 23.8% while joblessness among those with less than a high school diploma increased from 12.6% to 12.7% (compared to a stable 4.1% for those with bachelor degrees and higher).Put these numbers together and what you get is a picture of an economy that is healing, but doing so gradually and unevenly.So much for the past and present; how about the future?Left to its own devices, the economy would continue to heal and, concurrently, job creation would accelerate. But will they?For the improvement in the labor market to continue and broaden, America needs to minimize the risk of derailment by three clear and present dangers: the reluctance of Congress to deal with the fiscal cliff, Europe's inability to get ahead of its crisis, and a possible geo-political shock emanating from Iran.In such circumstances, it would be reasonable to expect Congress to be giving the unemployment crisis the attention it needs and deserves. Our elected representatives should be working hard on ways to accelerate the economic healing and also minimize vulnerability to these potential shocks.Unfortunately they are too polarized to do so; and it looks like they won't until the November elections are behind them, at the earliest.So despite the latest monthly improvement, America's unemployment situation will remain a challenge. And many of us will continue to nervously await the monthly data releases.

NEWS,27.5.2012

Cuba waits anxiously for oil dreams to materialize

 In this Jan. 12, 2012 file photo, Alfonso Arias rides his horse next to an oil pump operated by the state oil company Cuba Petroleos, Cupet, in Santa Cruz del Norte, Cuba. It was supposed to be Cuba's economic savior: vast untapped reserves of black gold buried deep under the rocky ocean floor. But the first attempt in nearly a decade to find Cuba's hoped-for undersea oil bonanza has come up dry.It was supposed to be Cuba's economic savior: vast untapped reserves of black gold buried deep under the rocky ocean floor.

But the first attempt in nearly a decade to find Cuba's hoped-for undersea oil bonanza has come up dry, and the island's leaders and their partners must regroup and hope they have better luck - quickly.Experts say it is not unusual that a 3-mile (4.8-kilometer) deep exploratory well drilled at a cost of more than $100 million by Spanish oil giant Repsol was a bust. Four out of five such wells find nothing in the high-stakes oil game, and petroleum companies are built to handle the losses.But Cuba has more at stake, and only a few more spins left of the roulette wheel. The enormous Scarabeo-9 platform being used in the hunt is the only one in the world that can drill in Cuban waters without incurring sanctions under the U.S. economic embargo, and it is under contract for only one to four more exploratory wells before it heads off to Brazil."If oil is not found now I think it would be another five to 10 years before somebody else comes back and drills again," said Jorge Pinon, the former president of Amoco Oil Latin America and a leading expert on Cuba's energy prospects. "Not because there is no oil, but because the pain and tribulations that people have to go through to drill in Cuba are not worth it when there are better and easier options in places like Angola, Brazil or the U.S. Gulf of Mexico."A delay would be catastrophic for Cuba, where 80-year-old President Raul Castro is desperately trying to pull the economy out of the doldrums through limited free-market reforms, and has been forced to cut many of the subsidies islanders have come to expect in return for salaries of just $20 a month.It could also leave the Communist-governed island more dependent on Venezuela, where President Hugo Chavez is ailing with cancer. Chavez provides Cuba with $3 billion worth of heavily subsidized oil every year, a deal that might evaporate if he dies or fails to win re-election in October.An oil find, on the other hand, would potentially improve Cuba's long-bitter relations with the United States, some analysts suggest. They say the U.S. oil industry could lobby Congress to loosen the embargo so it could get in on Cuba's oil game. At the very least, coordination between the Cold War enemies would be necessary to prepare for any spill that could coat beaches in the U.S. and Cuba with black goo.The Cuban government has not commented on Repsol's announcement May 18 that the first well came up dry, and declined to make any oil officials or experts available to be interviewed for this article.Next in line for using the drilling rig in Cuban waters is Malaysia's Petronas, which holds the rights to explore an area in the Florida Straits known as the Northbelt Thrust, about 110 miles (180 kilometers) southwest of Repsol's drill site. Wee Yiaw Hin, Petronas' executive vice president of exploration and production, told The Associated Press that drilling has begun and he expects results by the end of July.After that, two industry experts said, Repsol is under contract to drill a second well, though it could get out of the deal by paying a penalty to Saipem, the Italian company that owns the rig. Kristian Rix, a spokesman for Repsol in Madrid, said a decision on whether to sink another well was still being evaluated.Venezuela's PDVSA and Sonangol of Angola have options to drill next, but are under no obligation if they don't like their odds. While both countries are strong allies of Cuba, at $100 million a well, the decision to drill will likely be based solely on economics.Even if oil is found, the Scarabeo-9 is under contract to power up its eight enormous thrusters and sail to Brazil after that, with no date set for its return to Cuba. The bottleneck highlights the difficulties Cuba faces, and why it could be well into the 2020s before the island sees any oil windfall."Assuming they're successful in finding oil, to bring the oil to market will take years of development efforts," said Victor Shum, an energy analyst with consulting firm Purvin & Gertz in Singapore.Once an exploratory well finds oil, companies generally drill between 10 and 20 additional wells nearby to get a sense of the reservoir's size. The process can take several years even under normal circumstances, and circumstances are not normal in Cuba.The Scarabeo-9 was built in Asia with less than 10 percent U.S.-made parts to avoid violating Washington's embargo, making it the only rig in the world that meets the requirement. That means no other rig could be used in Cuba without risking U.S. sanction, and the additional wells would have to be drilled by the rig one at a time, with each taking about 100 days to complete. At about three wells a year, it could take up to six years for this second phase - assuming the rig is available.After gauging a reservoir's size, an oil company then must assess whether the economics of a field make it a prime spot for exploitation, or whether to concentrate resources elsewhere.If exploitation does go forward, complicated equipment is required to pull oil from such depths. Several industry experts said the only country that produces the necessary apparatus is the United States, although Brazil and other countries are working to catch up. Unless they do, the oil could not be removed unless the U.S. embargo was lifted or altered."A lot of folks are looking at the energy sector in Cuba because they are looking at a Cuba of five years from now, or 10 years from now," said Pinon. "So a lot of people are betting that either the embargo is going to be lifted, or the relationship between the U.S. and Cuba is going to improve in some way."Still, the benefits of hitting a gusher would be enormous for Cuba, and the impact could be felt long before any oil was pumped.Because of the embargo, Cuba is shut off from borrowing from international lending institutions, and the island's own poor record of repayment has left most other creditors leery. Cuba, for instance, owes the Paris Club of creditor nations nearly $30 billion.An oil find could change the game, with Cuba using future oil riches as collateral to secure new financing, economists say. They point to China and Brazil as potential sources of new funding, but say neither is likely to put money into the island without reasonable confidence they will get their investment back.Lee Hunt, the recently retired president of the Houston-based International Association of Drilling Contractors, said the stakes are enormous for Cuba that one of the wells hits oil before the Scarabeo-9 leaves. Hunt has worked to bring U.S. and Cuban industry and environmental groups together."If the only rig you can work with is gone, it's like somebody took your shovel away," Hunt said. "You are not going to dig any holes without a shovel, even if you know the treasure is down there."