The World Cup will actually make things worse for the former postercountry for emerging markets, even before the locals burn Rio to the ground after the home XI go out in the quarterfinals. Read more »
The take-away here is put in for that transfer to Brazil? From the front lines: Read more »
Naked short-selling has been blamed for many a market evil in recent years. Not so much any good.
Well, here’s one in the controversial practice’s corner: South Korea may allow institutional investors to short-sell bonds in an effort to boost liquidity in its nascent fixed-income market. Now, it isn’t the short-selling, per se, that will boost liquidity, but the move could win Seoul a coveted place in Citigroup’s World Government Bond Index. And then, just try to keep the money from rolling in.
The following post is by a hedge fund manager friend of DB who shall remain nameless. He runs the emerging markets desk at his firm.
Brazil has been one of the most confidence-inspiring credit stories in Emerging Markets. At the end of September, Moody’s awarded the country an investment grade rating. But while most of the market showers praise on the tightest-of-the-Latin-majors credit spreads, the 6 Bs of ratings, and dollar-crushing currency, a certain class of creditors is shouting about an imminent default. Their shouts are going largely unheeded, and they are learning a hard lesson about sovereign lending to Emerging Markets. In EM, there is no solidarity among creditors.
The controversy relates to a class of debts called precatorios. These are instruments representing judicial claims against government entities – the federal government, states, and municipalities. While this might sound like a small and obscure corner of government finance, litigating against the government has become something of a Brazilian national pastime. Hopeful plaintiffs don’t lack for grounds of complaint. The inflation stabilization plans of the 1980s imposed very complicated monetary correction formulae on all manner of wages, pensions, and prices, sparking disputes that continue to this day. Price controls on ethanol, also from that happy decade, have likewise spawned generation-spanning suits. At the same time, Brazilian jurisprudence has an incredibly expansive notion of direitos adquiridos – “acquired rights” – that cannot be messed with. Think of it as the insanely broad conception of fault that you find in American malpractice law, applied to the field of takings. Any meaningful reform creates losers; in Brazil they are only losers (from a new law or policy) as long as it takes to sue the government, at which point they become winners (of a lawsuit). In fact, government legal losses have consistently enough generated large liabilities for the government that most analysts’ fiscal projections still include a line for “skeletons” – the term of art for old claims that get adjudicated against the government.
Tax evasion, insider transactions, Oil, Senate committees, potential corruption. Could be a prime-time dramatization of the Tim Geithner story (true, we haven’t found the Turbo Tax angle yet, but give the story some time to germinate), or just another bit of BRIC background noise.
Petroleo Brasileiro SA, struggling to meet output targets and finance a $174 billion spending plan, faces a new challenge today as Brazil’s Senate probes claims it evaded taxes and funneled cash to government allies.
Shocking. Of course, in jurisdictions with large extraction economies, political power and scandal, natural resources and opposition parties all roll into one big slime pool. Of course, that seems to be the case in jurisdictions with large financial services economies as well.
The investigation, prompted by opponents of Brazilian President Luiz Inacio Lula da Silva, focuses on allegations Rio de Janeiro-based Petrobras evaded 4.4 billion reais ($2.4 billion) of taxes, overpaid for goods and may have favored the president’s supporters when it made charitable donations. Chief Executive Officer Jose Sergio Gabrielli denies the claims.
When the largest oil company in a commodity driven economy finds itself in the crosshairs of the Brazilian President, it doesn’t take much to wonder after the BRIC perma-bulls.
Petrobras Probe Starts as Gabrielli Faces ‘Crisis’ [Bloomberg]