Wednesday, July 14, 2010

¿Vos también estás luchando para la gentuza?

Only 600 over the curve.  Ain't socialism grand?
Argentina's transport secretary, said the pact calls for China to invest in 10 separate rail projects in Argentina over the next two to five years, including construction of rail lines and equipment. Among these is a $2.5 billion rail-renovation project in the capital, Buenos Aires, Mr. Schiavi said.  Mrs. Kirchner, who made the announcement during a visit to Beijing, said Argentina will get the funds in 19-year loans carrying an interest rate of Libor plus 600 basis points, or hundredths of a percentage point. Further details of the financing detail are scarce.

The real question is whether the deal is denominated in pesos, renminbi, or beans.

5 comments:

Zantox said...

Good to see Argentina's sovereign borrowing rate for transportation projects is about 18x the 1 month LIBOR (which is about 33bps), not including currency risk!

Also, I would guess if they are borrowing at a LIBOR rate, their loan is dollar denominated (ouch! http://bit.ly/dlAJcc). I could be wrong, but every article also seems to be mentioning dollars (this one is pretty good as well: http://bit.ly/du62wc).

Factor in a ~20% fall in the Peso against the dollar, and this is a monumentally expensive loan (if it was in RMB, it would be much much worse).

I hope for their sake it's denominated in pesos. And I hope for my sake, they make a gorgeous rail system (but with the exchange rate, it's about $4 via taxi to anywhere in BA).

Clark said...

Like you say, I assume that given the LIBOR reference it's in dollars (thanks for the links). The Chinese would have to be quite insane to take pesos.

The loan is definitely expensive, but maybe not any worse than borrowing from Venezuela at 15.25%
http://www.youtube.com/watch?v=1I9GqxDA4ac

They're probably not worried about the fall relative to the dollar though. They seem to be content to just print more pesos and let the thing tank. I would think the problem is that the purchasing power of a pesos gets worse in real dollar terms. I mean, when I was there last in early 08, a coke cost AR$5 and the exchange was 3:1. Anecdotal reports indicate that at today's 4:1 the same coke costs AR$7-8, so that it's maybe 5-15% higher in real terms. Just quick and dirty of course. Coke probably has more real pricing power than a lot of folks.

So it might not be so colossally expensive to go through the world's biggest shadow banking suger-daddy, though clearly paying a real interest rate of somewhere above 10% isn't cheap. But, where else are they gonna get the money?

The other thing I wondered about was what happens if LIBOR eventually goes up, and the price of soy goes down. Theoretically it's a great idea to finance a hotel with floating rate debt because the interest rate and the room rate move in unison, and you can write a new lease every night. But, well ...

Zantox said...

They're going to have to print an awful lot of pesos to keep up with the falling price.

Though perhaps that is their plan (or a positive side effect) -- effectively devaluing their currency and making their economy more export-friendly.

I'm not saying its a bad deal for Argentina, more commenting on the sad state of their credit.

As for China, they have a well documented strategy of targeting under developed/funded nations, giving them "relatively" inexpensive infrastructure development loans/capital. They are ultimately just finding the vacuum in US foreign policy (e.g. the US being too busy messing around with its war/war on terror) and snatching away valuable resources (natural and human -- such as Nanjing University have a significant African international student program that brings African students to NJU to China).

Clark said...

Yeah, I don't think it's necessarily a terrible deal for Argentina, but it does kinda take them out of the IMF frying pan only to throw them into the Chinese fire.

I completely agree with your idea that this is just (cold) war by financial means. It's just a basic fact of life that world power is shifting East.

The thing that sometimes puzzles me is why the same people who got so upset about US economic dominance somehow don't seem to mind the same basic role being filled by China. I mean it's not even as if the US is really competing for the favor of these places anymore, so it seems like a simple replacement of one by the other. Do they think China is going to be a nicer overlord or something?

Zantox said...

Perhaps the outrage differential is that the US was also looking to export (or maybe it was just incidental) its culture along with its dollars.

China is perfectly content to let whatever happens in those countries, happen (so long as it doesn't impact their resources). Despotic, totalitarian, egalitarian, capitalistic, whatever. All the same to them so long as they get their coal/soy/minerals/whatever.

Maybe that accounts for it? Or maybe people are just used to raging at the US and continue to do so. Ultimately, however, I think they let the Chinese fly under the radar, because really, nobody really cares about Africa and South America anyways. Out of sight, out of mind (though this is an entirely different can of worms that I'll refrain from diving in to).