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2010 Fall Forum - October 19, 2010

Argentine Finance Undersecretary Speaks at EMTA Fall Forum

Argentina’s Undersecretary of Finance Adrian Cosentino and Peter Dattels of the IMF Capital Markets Department were keynote speakers at EMTA’s Fall Forum.  The event, which attracted 125 market professionals, was held at EMTA’s midtown Manhattan office on Tuesday, October 19, 2010.  Bulltick Capital sponsored the event.

In his remarks, Undersecretary Cosentino delivered an overview of Argentina’s recent financial performance.  He described the country’s strong growth, with official government growth estimates of 8.9% for 2010.  The country also had achieved trade and current account surpluses over recent years, he noted.

Cosentino highlighted the moderate level of external debt, with the country’s debt to GDP ratio now at 17%, while also pointing out the low level of (36%) of official obligations owned by private creditors.  43% of government debt is in Argentine pesos, with only 22% of debt maturing within two years, he observed.  With 92% of the debt defaulted on by Argentina in 2001 now exchanged for new bonds, the country is now less exposed to litigation from holdout creditors.

Looking forward, the Undersecretary noted that 2010 financing needs are almost all now completed and given the solid fiscal situation expected for next year, any potential market transaction would depend on timing and market conditions.

Argentina’s goals going forward include continuing the process of sovereign financial normalization, deepening the local capital market and supporting the secondary market for Argentine sovereign debt, and continuing liability management.

A second presentation at the event was made by Peter Dattels, a division chief in the IMF’s Monetary and Capital Markets Department.  Dattels briefed attendees on sovereign risks and the outlook for global financial stability.

Dattels noted that sovereign debt and gross financing needs through 2011 are large.  He reviewed the vulnerabilities of developed countries, noting that each case is unique and stressing that each of the peripheral European countries has its own specific challenges.  These strains continue despite official sector support, including the coordinated EU/ECB/IMF aid package.  Stresses on the sovereign level are tied to challenges in the banking sector in a complex series of interactions. 

On the positive side, banks have recognized the majority of their expected write-downs ($1.7 trillion of an anticipated $2.2 trillion) and capital ratios in the US and Europe have improved since the onset of the crisis.  However, the process of balance sheet repair and reform remain unfinished business, and financial systems in many countries are still vulnerable to funding disruptions.  These vulnerabilities are most pronounced in the euro area.

Emerging Markets have been mostly insulated from spillovers from weaknesses in developed economies due to their strong fundamentals.  Dattels cited the differential in developed country and EM growth, fiscal, and external accounts, and highlighted the general improvement in EM credit ratings, while developed country ratings have worsened.  Relatively favorable EM fundamentals have prompted a reallocation of assets towards EM, and such inflows could continue.

The surge in inflows into EM has led to appreciating EM currencies and spread compression in local bond markets.  In response, authorities in some countries are intervening in the FX markets and adopting unorthodox policy measures.

Policy priorities for developed countries entail tackling fiscal challenges in the medium-term, as well as reducing contingent liabilities.  The financial sector should continue to restructure weaker banks, address capital challenges, while retaining access to public financial support if and when necessary.  For EM countries, managing rising and potentially volatile capital inflows will remain on top of the agenda for officials.

The event concluded with a panel discussion moderated by Bulltick Capital’s Alberto Bernal, who opened the session by asking panelists to discuss the global economy, potential risks and the mood of the marketplace.

Gramercy’s Gunter Heiland observed that the recent IMF/World Bank Annual Meetings were much more crowded than normal.  However, despite the potential for over-enthusiasm, “the general mood was not euphoric; and it is a good sign that people were cognizant that EM prices could decline, it wasn’t just a lot of froth and frenzy.”  Heiland asserted, however, that “at the end of the day, the investor should follow growth… and growth is in the EMs.”

The takeaway from the Washington meetings, according to Gray Newman of Morgan Stanley, was that both developed countries and EMs were looking at each other to be the driver of growth, causing him some concern.

Luis Oganes (JPMorgan) noted that inflows into the EM fixed income asset class will likely exceed the current forecast of $75 billion in 2010, as they have already reached $65 billion so far this year.  The majority of these funds are going into local markets.

Marco Santamaria commented that his firm AllianceBernstein continues to see a steady stream of clients looking to invest in EM because of recent performance and for diversification purposes.  He pointed out that hard currency returns year-to-date are approximately 16%, although the vast majority of that could be attributed to returns on US Treasuries.

Bernal polled participants on their predictions for a new round of quantitative easing by the US FOMC.  The panel largely concurred on expectations of $100 billion being injected into the system each month, but that its impact would be modest.

“It is a stop-gap measure, to prevent things from getting worse, from back-sliding , but it alone is not enough to get things going again,” Heiland summarized.  Santamaria expressed the most skepticism among the speakers on the potential success of quantitative easing, “and although I understand why it is supposed to work in theory, it didn’t really work the first time, so I am not sure it will work now.”  Bernal added his own view that the Fed is in fact trying to push the UK and EU Central Bank to print money as well, to avoid a sharp appreciation of their currencies.

There was also general agreement that currency wars would not translate into trade wars.  “There is a lot of rhetoric now, but after the US elections, politicians will come to their senses,” Oganes opined.  Santamaria reasoned that other steps could be taken first, such as imposing new capital controls or more active fiscal tightening, before resorting to trade wars.

 

In discussing a potential Greek default, Santamaria argued that timing would prove crucial.  If a default occurred after EU economies have rebounded from their current sluggishness, the after-effects would be easier to absorb.  In addition, if a restructuring occurred along Uruguayan lines, i.e., with an extension of maturities and no cut in principal, its potential contagion would also be more limited.

Underscoring the importance of timing, Heiland pointed out that Greece had benefited from reaching a crisis when fears of contagion to other EU countries was strong, and thus being able to get strong support.  As the world economy improves, and the potential for a Greek default to be absorbed becomes greater, the outlook for support becomes less clear.  Further, Athens had work to do to change a cultural bias against tax payment, he challenged.

Discussing decoupling, Santamaria asserted that it was not possible for EM countries to grow if the US was showing negative growth.  However, it would be possible for respectable or even handsome EM growth if the US economy had at least positive growth numbers.  Other panelists agreed, while also pointing out that financial markets decoupling was a myth.

Panelists were asked to look into their crystal ball for 2015 and make a prediction.  Heiland and Oganes differed on Latin commodity dependence- Oganes asserted that Latin countries were not taking the correct steps to reduce their dependence on commodities, and believed their over-reliance on such exports would be unchanged in 2015.  On the other hand, Heiland argued that progress would be made to produce more high tech goods. 

Newman called Mexico “under-banked” and “under-drilled” and expected improvements in the banking and oil exploration sectors.  Santamaria warned that the situation in Venezuela could be “dire.”  Finally Bernal spoke positively on the potential for Mexico to defeat its drug lords, and to pass energy, fiscal and labor reforms.

Several panelists thought the EMBI+ could tighten an additional 40 basis points to approximately 240 by year-end (with Oganes’ JPM view of 250-275 the least bullish).  “With Veny spreads representing 20% of the index, your call is really a call on Veny spreads,” Santamaria commented.

The event concluded with a cocktail reception.