Peru Eurobond Issue— A Lemon, Shows Government Financial Confusion

By Nicholas Asheshov ✐

The minister of Finance, Alonso Segura, is patting himself on the back for selling €1bn worth of bonds on the European market at 2.75% above the ECB base rate, which is as everyone knows  an eyelash above zero.

This brings the amount borrowed by Peru on the international market this year to the equivalent of $4.5bn, according to official statements.  There are two problems, more like half a dozen, with this.

The first is that this latest, huge issue,  is going to be thrown straight  into the black hole  of the government  current account deficit.  It will not create a single new job. It will not build a meter of road, a school or a first aid post in the Sierra.

Instead, the Central Bank, the BCRP, will be slurping it up in just one month to pay foreign and local bankers to keep the Sol at or near its present damaging, unrealistic, and unsupportable rate — this week a centimo or two below S/.3.30=$1. This brings the devaluation of the Sol against the dollar in these first 10 months of the year to 10%, between a third and a half of the rate of respectable neighbors like Chile and Colombia.  This means that dollars are cheap in Peru, and local and foreign bankers are buying them while stocks last.

One of many bad results from this short-sighted expensive policy is that the Peruvian economy has slowed much more than need be.  Non-traditional exporters are closing, hundreds of thousands of jobs have disappeared and will continue to disappear long after some sensible action is taken, presumably with a new government at the end of next July.   Government economists like to say that government money is different from the Central Bank’s.  This is incorrect.  It is in one pocket.  Economists, like accountants, count the dead and like to put them in neat cemeteries.

The Central Bank has been spending dollar reserves at the rate of $1bn/month for the past two and more years, call it $25 bn though the real figures are fudged by issuing swaps in soles with a guaranteed dollar repurchase.

A second problem with the new Peru Eurobonds is that they are way overpriced, at 2.75%, and much too short, only 10 years.  Minister Segura himself said he had received offers for three times the amount, over €4.2bn, a sure sign that they were too expensive, from Peru’s point of view, and too short.  If the issue had been properly prepared, he could have sold them at 30 years, maybe more, and with a much lower interest coupon.  Crummy risks like Portugal, France, Spain and Italy just pay the eyelash, without the 2.75%  These days Peru is a much better risk than these and dozens of others.  If the bonds had been 30- or 40-years, some of the cost would disappear into the distant mist of the inflation that will be needed to wipe away today’s round-the-world trillions in unbacked debt, the Greek holes snow-banking through the markets today.

Debt payments impact the budget  but are not yet an  issue for Peru  reserves, thanks to the good fortune and decent management of previous governments.  But Peru, like the rest of the world, is facing a future with the certainty that things will be slow for many years. The world economy is not growing even though virtually unlimited quantities of dollars, euros and yen continue to be issued.  Today few businesses and governments are using capital or credit to invest in infrastructure like roads, schools and ports.  Or in mines and agriculture facilities.

In the United States and Europe governments continue to insist on austerity, meaning roads are not repaired, much less built.  In Peru austerity is not a policy but the public works agencies, mostly in the provinces, are not functioning properly.  The result is the same. Instead, the economies of the world, capitalism itself, has become  distorted, destabilized  The only assets that have increased in face value with all the trillions  of quantitative easing  are shares and bonds on Wall St and the European, Japanese and Chinese bourses.

This is the dangerous financial world through which the government is wandering, babes in a darkening wood. They have been predicting, this past week, for instance, that next year will see Peru growing at 4.2%, according to the Central Bank, 5.6% according to the Ffinance ministry.  Either figure is the other side of silly, a warning sign only that they intend to borrow more abroad.  The government people did the same for 2015 as a way, as old as the Andes, of papering over the sure-thing hole in their accounts.  Peru’s budget deficit is ballooning under the sparse cover of these ‘predictions.’
Today the problem for banks, starting with central banks, is to lend.  Borrowing is easy, as the youthful Mr Segura has discovered, at the expense of Peru’s taxpayers over the coming decade.  Italy, a financial sinkhole if ever there was one, is paying its bondholders negative rates.  These accept this payment because they believe that Germany will pick up the tab.  More worrying, the financial markets sense the possibility of deflation where their bonds will increase in value.  Italy, by the bye, is the third-largest, after the U.S. and Japan, issuer of sovereign debt in the world and, if it were not for Brussels and the Bundesbank in Frankfurt, would be below Russia and way below Peru on a risk/reward balance, another of the new perversities of 21st century finance.

The new Peru bond issue is not just a mistake in financial strategy but a complete misconception of the world, and the Peruvian economy today.  The BCRP in Lima today should be pushing, forcing local banks to lend, soles and dollars, euros, whatever.

Peru is not the same as the dead-in-the-water economies of Western Europe —Eastern Europe is a different animal— Japan and the United States.  It could and should have an agricultural export business 10 times, for starters, of today’s: this is a better California.  Its metal-working shops have been honed on supplying a big, by any standards, mining province.  There is more, like textiles.  These can compete easily in today’s ho-hum world economy even with the Peru cost of, for instance, out-of-date labor legislation.  But they cannot compete where the Central Bank is gerrymandering the exchange rate —it should today be S/.4.30, not 3.30— and increasing, not decreasing, the cost of bank credit.  Both these, devaluation and cheap money, are the only Central Bank options today.  With the exception of disasters like Venezuela, Argentina and, increasingly Brazil, everywhere else, bar none, is using them.  Right or wrong, this is the world 2015-2020 and Peru’s agro- and metal-based companies are being short-changed by the Lima government, the Central Bank and the four big Lima banks themselves, willing fools in Lenin’s phrase.  These have turned themselves for the nonce into expensive exchange houses with the equally willing Central Bank’s approval: anything for P & Q until the new government comes in.

It is a new financial world out there, where it is not exactly that money no longer counts, but it is equally sure that no one any longer can count the money.

Nick Asheshov was editor of the Andean Air Mail & Peruvian Times during the 1970s and 1980s, and of The South Pacific Mail, Santiago during the 1990s.  He was Latin America Editor of Institutional Investor, New York over the same period.  He lives in Urubamba, where he writes a blog and where he has been prominent in the hotel and railway business. 

One Comment

  1. An excellent article. I feel sorry for who ever is the next president of Peru. The present government’s financial policy is not realistic in the world’s present financial crisis. The central bank is trying to act like the Federal Reserve bank. Peru can’t print excessive money, or take on debt it can’t pay back . When the next global financial crisis hits like the 2008 mess, the FX traders will take the Peruvian Sole to the woodshed. The Government’s income is mostly is in Soles, and it’s foreign debt is to be paid in dollars. Peru must export it’s products to financially survive. The central bank can devalue the Peruvian sole now, to help it’s exports, or have it devalued later by the markets in an uncontrolled disaster.

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