By Nicholas Asheshov —
The World Bank/IMF meeting in Lima this coming week is the biggest, most prestigious get-together of the year for bankers and finance people. Anyone who is anyone from anywhere will be here, has to be here, and it is a great thing, for Peru. It puts the country firmly, perhaps a little unexpectedly, on the list of world centers, up there with Rio and Mexico City.
Peru’s finances and politics will take little of the attention of the ten or twelve thousand financiers and camp followers But the reputation of Peru’s cuisine will fill the restaurants in Miraflores and San Isidro from midday to after midnight. Many of the visitors will want to take in Cusco and Machu Picchu. Good news as it reflects, as with the restaurants, the arrival of first-rate hotel and airline service, a true hospitality industry that did not exist even a decade ago.
The priority of the ministers, the central bankers and their aides will be to get a fix on what is happening to the world economy. They will be looking with increasing concern for guidance, ideas about what to do, once they get home. Not since the Lehman explosion in 2008 have government finance people in the emerging countries had to face the certainty of falling prices, falling production, falling employment and falling income.
Worldwide, only a small handful of countries — starting with India and the United States— is growing. Not much but at least moving forward. Europe and Japan are stagnant, with no immediate prospects of growth as are usually reliable heavyweights like Canada, Australia, and the Scandinavians. This group includes as respectable tail-enders Peru and Chile, Mexico and Colombia, Singapore and Indonesia with, as it may be, Iran about to join in.
The rest, led by Brazil, China, Russia, Turkey and South Africa, not to mention the Middle East and Africa, are in recession or in open disaster.
Looking for ideas
The delegations from 150-odd countries members of the IMF and/or the World Bank will be hoping to bump into someone, perhaps from the international investment and commercial banks, who can give them ideas about how best to keep afloat for, it has become clear, at least the rest of the decade.
This used to be the job of the IMF and of the World Bank. Not so long ago the World Bank was the main inspiration for public works and infrastructure for Latin America and elsewhere. It was a full-service institution, much more than a bank, providing moral backing as well as technical expertise, funds and guarantees.
The IMF, a similar building of conference halls and honeycombs of offices across M St in downtown DC, provided emergency funds and financial backbone for governments in problems. This included big names like the United Kingdom, not just third world backsliders. It may be that many of the World Bank projects did not work as advertised. Certainly the IMF’s austerity demands often produced pain with little immediate gain. Europe, including Greece today, are inheritors of this tradition. But the notion that orderly public finances and statistics are a good idea and not just an imperialist plot has become standard issue to the enormous benefit of countries round the world, starting with Peru and in this often-bolshie neighborhood, Chile, Colombia, Bolivia, Panama, Costa Rica, and Mexico. It also included during the 1990s and the early years of this century, Brazil as star pupil.
Brazil — the 800-pound gorilla
But this year Brazil has become an 800-pound gorilla. At this Lima meeting it is not China that has already joined the other elephants like Japan and Europe, but Brazil that will be a feature of concerned conversation.
A couple of years ago Brazil had become the world’s seventh biggest economy, a few pounds ahead even of the United Kingdom, a century ago the world’s greatest. Until earlier this year it seemed to the financial markets as though Brazil could treat the commodities slump like a road-repair diversion. It could have been thus. Instead, “We got hit by a turtle,” a disgusted Sao Paulo executive told the Wall St Journal this week. Brazil is turning into an international mega-problem. It is not just that Brazil’s public finances are in tatters. . . Infrastructure like roads and water supply is in deep disarray, with crime rising. National and regional politics, traditionally complex, are disintegrating with the opposition as weak as the government itself.
These days this is not just another colorful third world sad story but one that could detonate a run on the international credit markets This week here in Lima the single biggest topic of discussion will be how to prevent or at least postpone a Brazil debt default.
Not so long ago it was the IMF that could put out the fire. But today the credit markets are huge and unstable. The money that has gone, virtually uncontrolled to companies in Brazil, China, Turkey, and South Africa went often into ventures that do not work, often mines and hydrocarbons facilities which themselves have created today’s low prices. It is no accident that the copper price has moved below its 200-month moving average, setting the tone, too, for the other industrial commodities.
At the beginning of the week, the bonds and other debt issued by Glencore Mining dropped along with its share price by 30%. Glencore, with a long association with Peru through Xstrata and Marc Rich, developer of the massive Antamina and Las Bambas copper mines here, saw its market value at $16bn, down from $80bn earllier in the year, and its debt at just under $50bn — huge numbers and huge dislocation.
Other mining and hydrocarbons companies, including BHP Billiton and Anglo American, are developing the same kind of dislocation between the productive value of their assets and their ability to service the debt paper bought with enthusiasm not long ago by investment and retirement funds in Europe and the United States. Top of the list are Petrobras and Vale do Rio Doce. Petrobras debt today is, at $470bn, 10 times greater than Glencore, one of the world’s biggest.
Wall St analysts say they have always assumed that the Petrobras debt is backed by the government but famously Brazil’s sovereign debt has itself been marked down by the rating agencies to junk. By coincidence, the foreign debt of Greece is within a dollar or two of Petrobras’ obligations. In the case of Greece, of course, every widow’s mite is going to be picked up by the German taxpayer.
$60 trillion in debt issued worldwide since 2009
These are just straws in the IMF and World Bank’s headwinds this week though, there’s plenty more of the same. For instance the IMF itself has published a report saying that $18 trillion — i.e. $18,000,000 billion, give or take— in bonds and similar have been issued by companies in China, Brazil, Turkey, up from $4 trillion in 2004, and warns that a lot of this is held by US mutual funds. This in turn is part of the $60 trillion in debt that has been issued worldwide as of 2009, over and above whatever it had been before that.
This is the context of the IMF/World Bank meeting here this week. If economies around the world were growing as they did from 2009, then lenders and investors could as usual suspend their disbelief. But the IMF itself has said that it will be lowering, again, its growth forecasts for the coming few years so the lack of connection between reality and the credit markets has become even clearer, China or no China.
For sure the tip-top bankers and economists, investors and traders here are aware, convinced in fact, that it is them and not the elected politicians who are in charge What sets the annual IMF/WB meeting apart is that there is more to it than just international bureaucrats, paper-pushing government officials and the blank-eyed economists and lawyers who run central banks. The juice, and the big money, for this meeting comes from the investment and commercial bankers from Wall St., London, Frankfurt, Toronto, Tokyo, Sao Paulo who come to meet each other as well as government officials. The meetings take place at dozens of cocktail parties, buffet breakfasts and lunches and, naturally, cups of coffee and drinks at the bar. Lima’s main banks, the Credito, Interbank, the BBVA Continental and Scotiabank are putting on big shows.
Two out of every three years the WB/IMF meeting is held in Washington itself where there is a well-oiled hospitality industry. Traffic is a known quantity. The hotels are geared to big-name conferences. It is easy to get things done. Phones and taxicabs work. Then one in every three years the meeting is held away from home. It might be somewhere well-organized like Berlin. Or Bankok or Lima with dreadful traffic and security worries. Lima is more of an adventure but that adds spice.
There will be real interest for the participants in the Prospects for Peru as an up-and-coming junior BRIC. The collapse of Brazil, joining Argentina and Venezuela, means that Peru, Chile and Colombia will have a chance to shine, to provide, along with Mexico, the main positive focus in Latin America, a valuable door-opener for the coming decade.
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.