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Argentine “inflation alert” according to the Daily Telegraph

Tuesday, June 3rd 2008 - 21:00 UTC
Full article

Under the title of “Argentine alert as inflation specter stalks half the world”, London's Daily Telegraph, --using Argentina as a lead case--, describes how international bankers managed to convince pension funds to invest in an estimated 300 billion US dollars in inflation linked sovereign bonds from emerging economies, which “hawk eyes” then considered safe.

Ambrose Evans-Pritchard writes that "Argentina is defaulting on its sovereign debt yet again" by having purged the country's statistics office and appointing a friend to manage inflation data. This is not necessarily the experience of the other emerging economies sovereign bonds but the article ends with a significant message, "never buy a (sovereign) bond until you know who runs the statistics office". Follows the full text of the article published on June second. Argentina is defaulting on its sovereign debt yet again, this time by stealth. Wealthier Porteños with a nose for trouble are pulling their savings out of Buenos Aires banks. Most are buying dollars, or slipping across the Rio de la Plata to deposit their stash in Uruguay. European and US pension funds that snapped up Argentina's peso bonds at the height of the credit bubble are discovering that it pays to probe the politics of Latin America - and indeed, Eastern Europe, and emerging Asia - before taking the plunge. It seems like only yesterday that Argentina halted payments on $95bn of external debt. The "Great Haircut" of 2001 was the biggest default in history. Investors are so forgiving. Argentina's trick this time, under the presidential double act of Nestor and Cristina Kirchner, has been to purge the National Statistics Office and appoint a friend to manage inflation data. The official Consumer Price Index (CPI) is 8.9pc. This is the benchmark used to set payments on inflation-linked bonds, now 40pc of the country's debt. The true inflation rate is more than 25pc, according to union staff of the statistics office. They allege manipulation. St Luis province is issuing its own data, three times higher. "Argentina is engineering a partial default on its domestic debt," said Professor Carmen Reinhart, from Maryland University. Some $300bn of inflation-linked bonds from Turkey, Hungary, Poland, Mexico, Brazil, South Africa, and other emerging markets (EM) have been sold, mostly to pension funds. Bankers in London and New York have hawked the debt with the same insouciance that they hawked US sub-prime mortgages. These "Linkers" were also deemed to be as safe as houses. Well, not quite. Vladimir Werning, from JP Morgan Chase, said the yield spread on inflation-linked peso debt has ballooned to 1230 basis points. They are priced for the dustbin. On paper, Argentina looks safe. The world's biggest exporter of soybeans - and number two in corn - is riding the food boom, even if at war with its own farmers. The trade surplus is $12bn. Foreign reserves are more than $50bn. Yet the default premium is soaring anyway. Argentina is a warning of what can go wrong once inflation gets out of hand, as it has in roughly half the world. Among the CPI rates - if you believe them - are: Ukraine (30pc), Venezuela (29pc), Vietnam (25pc), Kazakhstan (19pc), Latvia (18pc), Qatar (17pc), Pakistan (17pc), Egypt (16pc), Bulgaria (15pc), Russia (14pc), the Emirates (11pc), Estonia (11pc), Turkey (9.7), Indonesia (9pc), Saudi Arabia (9.6pc), Romania (8.6pc), China (8.5pc) and India (7.6pc). The International Monetary Fund says 70pc of the EM inflation shock came from soaring food costs last year (typically 40pc of the basket, versus 12pc for richer states). But the home-grown part is fast gaining a life of its own. "Easy money is the culprit," says Joachim Fels, chief economist at Morgan Stanley. "Weighted global interest rates are 4.3pc, while global inflation is above 5pc. The real policy rate in the world is negative. Central banks are both fuelling and accommodating the rise in food and energy prices," he said. Fixed exchange rates are playing havoc. Most Gulf states are pegged to the dollar, while China runs a crawling peg. These countries are importing the emergency stimulus of the US Federal Reserve when they least need it. Across the EM universe, states are now hitting the inflationary buffers. Either they hit the brakes, or risk repeating the errors of the 1970s - if they have not already done so. Some are rising to the challenge. South Africa is turning the monetary screw. Others dawdle. Russia seems paralyzed, while Ukraine's M2 money supply is growing at 52pc. A clutch of states is relying on price controls, export tariffs on food, or worse. Fitch Ratings has put Vietnam on negative watch, citing the failure to come up with a realistic policy. Inflation is 25pc, now twice the level of interest rates (12pc). Real rates are "deeply negative". Fitch's David Riley said credit growth had blasted through the speed limit across the whole arc of Eastern Europe from the Baltic states to the Black Sea, and beyond. The top ten states liable to have an accident are: Jamaica (1), Ukraine (2), Kazakhstan (3), Bulgaria (4), Suriname (5), Latvia (6), Lithuania (7), Ghana (8), Vietnam (9) and Sri Lanka (10). "Failure to contain inflation risks undermining macroeconomic stability. In the worst-case scenario, investors will lose confidence in local currency assets," he said. This decade has been a great coming of age for the catch-up countries. Bond yields have dropped to western levels. Exotic bourses have been the darling of the City. The MSCI index of EM stocks has risen fourfold since 2003. It suffered a mini-crash before the Fed rescue in March, but has bounced back. China, Russia, and others have amassed a war chest of reserves to see them through bad times. Most no longer borrow much in foreign currencies - although the property booms across Eastern Europe are funded in Swiss francs and euros. Some have independent central banks. Credibility is higher. By and large, a repeat of the 1997-1998 Asian crisis is out of the question. Nor will there be a repeat of the Latin debt defaults following the 1970s resources boom. But Professor Reinhart warns that investors may have jumped from the frying pan into the fire. The risks have been displaced from an external debt crisis to an internal crisis of the kind seen time and again over the history of free capital flows. She has examined debt data for 64 countries going back a century. Defaults - 89 of them - occur with monotonous regularity in the same cluster of states, usually triggered by a global slowdown and a commodity slide. Those with big domestic debts often resorted to "partial defaults" through the easy path of inflation. "Technology has changed, the height of humans has changed, and fashions have changed. Yet the ability of governments and investors to delude themselves seems to have remained a constant," she said. "Governments that have repeatedly inflated away or defaulted on their debts will, in all likelihood, not hesitate to default again," she said. Never buy a bond until you know who runs the statistics office.

Categories: Economy, Argentina.

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