January 24, 2022

China could help with Argentina’s $1.5B debt

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china-and-argentina-article-getty-images-jpgBy Chaka Phillips

“A look at China’s impact on Latin America and the Caribbean Region”

China and Latin America’s business arrangement seems to go as far back as 2000. Now China’s influence is growing not just in Latin American countries, but also in the Caribbean region as well.

According to a Time magazine article dated July 21, Argentina owes its creditors, led by U.S. hedge funds, $1.5 billion. Maybe China can help. China appears to be throwing money and its influence around in countries such as Argentina and some of the English-speaking Caribbean.

With the amount of money that Argentina owes, it is no wonder the country is going through a recession and high inflation.

A week and a half ago, Argentina and China signed a multi-billion-dollar deal that entailed infrastructure-financing and a currency-swap during the Chinese president’s visit to Argentina. Twenty agreements were included in the deal and, as part of the currency swap, 70 billion yuan currency (Chinese currency) was to e bartered between the central banks of Argentina, at an equivalent of $11 billion, Capital reported.

To some, this is a rare financial gift that Argentina needed, but from a perhaps unlikely source. In fairness, China has been making trade deals with the top five nations in Latin America since 2000, they include Argentina, Brazil, Chile, Mexico, and Venezuela.

The $11 billion exchange could be exactly the financial injection the country needs, but to some financial experts and analysts it might make little or no impact. Argentina is facing depleting foreign-currency reserves, the reserves is the only money the country has to pay its creditors. Alberto Ramos, senior Latin America economist for Goldman Sachs, says that the financial swap does little to help Argentina’s financial problems, and the yuan cannot be converted into other currencies, Capital reported.

So why would the Chinese put their money there? And why would Argentina’s President Cristina Kirchner allow them to do so? Perhaps it is to demonstrate that Argentina is still worth investing in. At the moment, China has agreed to lend Argentina $2.1 billion to buy railroad equipment and finance the construction of hydroelectric dams in the southern part of the country to the amount of $4.7 billion, Capital reported.

The whole thing sounds like a head-scratcher. China’s gesture comes on the heels of the annual BRICS Summit 2014 that ran from July 15-17; this summit involved the presidents of five countries: Brazil, China, India, Russia, and South Africa. At this conference, these leaders discussed international trade and finance. Deals were made between Chinese President Xi Jinping, and Brazil President Dilma Rousseff. Rousseff and Jinping agreed to deals that included passenger-jet sales, to power grid investments, The Wall Street Journal reported.

One of the deals that stood out was the BRICS nations formation of a bank that would rival the World Bank, and the International Monetary Fund (IMF). China has put up $41 billion, the largest contribution for this bank that they are forming, Newsweek reported.

This is a lot of money, and perhaps with it comes a lot of power and control. China has shown its financial control before in the English-speaking Caribbean. In 2012, there may have been cause for concern. In Baha Mar, the China State Construction dispatched Chinese workers to build a $2.6 billion resort, which was financed by the Export-Import Bank of China. Jamaica received Chinese aid worth $400 million. While in Guyana, Chinese companies mined for bauxite and wanted to build a hydroelectric plant and hotel to develop and modernize the country’s main airport, The Economist reported.

The English speaking Caribbean countries became indebted to the Chinese government, but it came at a price.

“Chinese construction has been a disaster for national development, for the local construction sector and for local labor, and no money has been saved,” Emile Elias, a Trinidadian contractor, said. As a result, Elias claimed at the time that many construction projects did not have proper paperwork, went over-budget, they were delayed, or were poorly built, The Economist reported.

Perceived investment from China to Argentina has not seemed to help the country. By July 30, Argentina has to get $539 million in interest payments to investors, or they could be declared in default. Maybe, just maybe, China could help. If they cannot, Argentina’s financial crisis could be as worse as in 2001, Capital reported.

For more on this story go to: http://www.latinpost.com/articles/18035/20140727/china-help-argentinas-1-5b-debt-look-chinas-impact-latin.htm

Related story:

Argentina: The clock is ticking

By Jens Erik Gould From The Financialist

rosadaArgentines could be forgiven for being a little down these days. There’s the World Cup, for starters. And then there’s the fact that the country is fighting tooth and nail with international creditors over $1.5 billion in soured bonds. Of course, things can change. Argentine officials have every incentive to work out a deal, but they better hurry: time is running out.

This isn’t their first debt payment rodeo. Argentina defaulted on $95 billion in external debt in late 2001, ushering in a period of sharp currency devaluation, inflation, increased poverty and foreign capital flight. The country’s inability to fully right the ship in the 13 years since hasn’t restored much confidence either. In 2005 and again in 2010, though, the country agreed on a bond exchange for 92 percent of the original debt it defaulted on, and it has so far remained current on those obligations.

But the remaining 8 percent is still very much a factor: Argentina says that paying all holdouts in full would cost approximately $15 billion including interest and penalties. Among the holdouts are U.S. hedge funds Elliott Management Corp., Aurelis Capital Management LP and Olifant Fund. They’ve sued for full repayment, and a U.S. district judge in 2012 ordered Argentina to pay them what now amounts to some $1.5 billion. Late last month, Argentina tried to make a $539 million payment that was due to the restructured bondholders, but the judge forbade it to do so until it had compensated the holdouts, and the payment was halted. The bonds stipulate that the country has a 30-day grace period—until July 30—to pay or fall into default yet again. But with less than two weeks to go, government officials and the holdouts seem to be putting more energy into ramping up their repayment rhetoric than into negotiations.

Still, Argentina has quite an incentive to reach a deal. Settling with the holdouts is the primary remaining obstacle for the country to regain access to international markets the country has been shut out of for more than a decade. Doing so would likely increase capital inflows and lower the cost of borrowing at a time when Argentina is grappling with declining foreign reserves and one of the world’s highest inflation rates. Tapping into new sources of financing could help Argentina fund its fiscal deficit without having to print money, which would have the dual benefit of slowing inflation and relieving pressure on the currency. A deal would also help sentiment among Argentines tired of the drawn-out default drama.

Judging by its recent conduct, the country does seem to want to put the drama to bed once and for all. In May, it agreed to pay $9.7 billion over five years to the Paris Club of creditor nations to settle claims from the 2001 default. It also reached a deal to pay Spanish oil company Repsol SA $5 billion for assets it expropriated two years ago. “Its willingness to settle these cases can be interpreted as a sign that getting back to the market is critical for them,” says Casey Reckman, a vice president in Emerging Markets Economics Research for Credit Suisse. “Ultimately, it makes more sense for Argentina to negotiate a settlement.” The best-case scenario is one in which Argentina pays off as much of its debt as possible through the issuance of new bonds, obviating the need for spending any of its dwindling foreign reserves, which recently stood at $29 billion.

Risk-seeking investors have been encouraged by these olive branches to foreign creditors, and a settlement with the holdouts would likely boost investor confidence even more. According to Daniel Chodos, an emerging markets fixed income strategist at Credit Suisse, a deal could lower yields on the Discount ’33 bond, Argentina’s benchmark, to between 6 and 7 percent — still much higher than comparable Brazilian 10-year bond yields of 4.3 percent – but well below their current level of around 10 percent.

Of course, Argentina could still dig in its heels and let the rest of the month pass in standoff mode. And in the event they miss the 30-day deadline, the peso will likely weaken, inflation could accelerate and domestic demand could take a hit. They would then be in a position known as “soft default” — one driven by a legal squabble and not an actual inability to pay. If they can come to terms on a settlement, though, Argentina would presumably be able to quickly exit default status. That’s quite different from its hard default in 2001, when the country was dead broke. It also took four years—ironically, the time between World Cups—before it was able to come to terms with the majority of creditors on the restructuring.

So why not just pay the holdouts and get it over with, especially since Argentina has the reserves to afford it? Officials say that would set a dangerous precedent that could encourage the other holdout creditors to seek full repayment – in cash – which they estimate would cost as much as $15 billion. “That’s very unlikely to happen,” Reckman says. “For everyone, the incentives are aligned to reach a settlement.” But the clock is ticking.

Photo of the Casa Rosada in Buenos Aires courtesy of meunierd / Shutterstock.com

For more on this story go to: http://www.thefinancialist.com/argentina-the-clock-is-ticking/

See iNews Cayman related story published July 20 “The Vulture Funds: Fact-Checking “Fact Check Argentina” at: https://www.ieyenews.com/wordpress/the-vulture-funds-fact-checking-fact-check-argentina/

 

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