Gleanings II ~ 488 Nick Rost van Tonningen Posted by John on November 30, 2012

One of you disagrees with my view of the proposed takeover by CNOOC-Nexen deal & suggested I should make my position on the matter “clear”. So here it is :

• the Prime Minister has been courting the Chinese; so it would be a huge ‘loss of face’ for both sides if it were not approved;
• he is hoisted on his own petard on the issue of foreign takeovers of Canadian ‘marquee’ companies. For he failed his fiduciary responsibility to the Canadian public & was inept politically by not having learnt from the Macdonald Detweiler & Potash Corp. cases in 2008 & 2010, and by having ignored China’s spreading tentacles in the Alberta oilsands;
• the deeper the involvement of China, & other Asian energy-hungry nations, in the oil sands, the more likely it will be that oil sands oil will find its way into world markets at world market prices, rather be limited to a continental market at deep discount prices. This would be good for the Canadian economy as a whole, albeit less so for Canadian motorists;
• in principle it doesn’t matter a fig whether decisions regarding the Canadian operations of foreign-owned companies are made by government bureaucrats in Beijing, Kuala Lumpur or Seoul, or by corporate bureaucrats in Irving, London, or Oslo (except that the former may provide more “patient” capital & have less need for ‘instant gratification’). The only thing that really matters is that Ottawa has firm rules in place as to their behaviour in this country, and is very precise about that ex ante-, & willing to enforce its rules ex post-, facto (and if we have a problem in that latter respect, we shouldn’t blame the Chinese for it); and
• given the extent of the grass roots’ opposition to this deal, & the ham-handed way CNOOC has in this case gone about its business, Ottawa is in a stellar position to drive a hard bargain with it (at least if it has the balls to do so), ideally including a provision for a “golden share”. And if it did, it would establish a strong ‘baseline’ for future foreign takeovers. Wouldn’t it be great, for instance, if CNOOC were required to upgrade all its oilsands output in Alberta, thereby ‘adding value’, enhancing its marketability, making the pipelining of the product more efficient, & muting the environmentalists’ obsession with ‘dirty oil’.

Two other facts should be noted . First that, even if Ottawa were to give the deal the go-ahead, CNOOC still wouldn’t be home free. For it has some, albeit mostly minority- and/or potential, interests in the Gulf of Mexico; so the takeover must also run the gauntlet of a US approval process which is likely to be more demanding (while it has less at stake). And the US deadline for a decision just expired, prompting the Company to withdraw its application, only to immediately re-submit it (possibly in amended form?). And secondly, privately-owned Chinese companies have started to sniff around the Calgary oil patch, seeking to piggyback onto the already substantial presence in the oilsands of their country’s SOEs (State-Owned Entreprises)

Monday night I sent a one-pager about Mark Carney’s “inspired” appointment to the job of Governor of the Bank of England to any one of you I thought might even be remotely interested, to avoid it taking up too much space in this edition. If I missed anyone who is interested, let me know & I will email you a copy. And those interested in this matter might want to google an article in the Financial Times Magazine of May 5th 2012 by Chris Giles which is among the best ‘briefing papers’ outlining the strengths & weaknesses of an organization for a senior executive I’ve ever seen. Let’s see how long the honeymoon lasts; for good as he is, even Carney cannot walk on water! (and longer term, it might be interesting to speculate on what his next career step might be; for at his age this is unlikely to be the apex of his career, the more so since it was supposedly at his insistence that his term of engagement is only five-, rather than the usual eight or ten-, years (since then, for lack of much negative to say about Carney himself, the British press has started picking on his wife for her supposed anti-consumption views, her website that promotes environmentally-friendly ideas, & her past musings on inequality, the global market place & materialism.

One of the earliest & most innovative leading lights of America’s fund management industry recently came up with two interesting observations :

• when he was new to the financial services business, bonds were rated on the basis of borrowers’ ability to repay the amount borrowed whereas today they are seemingly more rated on their ability to pay the interest) – wonder when the last time was that a new bond issue had that quaint, old-fashioned feature, a sinking fund?; and
• “we don’t know what the future is but we know that it isn’t the past” (the Achilles heel of ‘straightlining’ forecasters).

Wall Street expects stock prices to rise 10+% this year due to the nascent housing recovery (house prices in 20 major US cities in September were up 3% YoY, & 30-year fixed rate mortgages last week, at 3.31%, were at a 50-year low), more cheap money from the Fed, optimism that the worst fiscal cliff scenarios won’t materialize, & that, as was the case this year, the stock market will make liars out of the bears.

The global outlook for grain prices remains potentially problematic. Australia’s wheat harvest, that is now being harvested, could be as low as 20.5MM tonnes (if so, down 43% from last year’s bumper crop) & the amount available for export 16.85MM tonnes, its second lowest ever, ‘bested’ only by the 13.73MM tonnes it exported in 2009/10. And its exportable surpluses may run out as early as next April. European & Russian wheat stockpiles are at all-time lows. In Argentina heavy rains have interfered with corn planting. The US corn harvest is now complete & is down 13% YoY (& 46% from the USDA’s optimistic forecast last spring) despite more land having been seeded to corn than ever before. In Kansas continued drought conditions (this is now the worst drought in the US in 56 years) have not been helpful to the winter wheat crop, and the current warmer-than-usual weather, & lack of snow cover, could create a further setback if it were to turn cold & the plants were frost-bitten. And while drought conditions earlier this year forced grain-carrying barges plying the Mississippi River system to lighten their loads, parts of it may become wholly unnavigable as early as December 10th (which would interfere with the orderly movement of US grain into export markets, since it carries 60% of all US grain exports to terminals on the Gulf Coast).

Since the ceasefire there have been a number of columns in various newspaper by people that are, or appear to be, of Jewish origin, every one of them with a not dissimilar theme, namely that the West shouldn’t take Hamas seriously & should do everything possible to ensure that Mahmoud Abbas remains the official spokesman for the Palestinians. This seems to suggest a growing concern among sympathizers of the hardline Israeli cause that it is becoming increasingly isolated in its attitude vis a vis the Palestinians. And such concerns cannot help but have been heightened when, on November 29th, 65 years to the day that it approved the creation of the state of Israel, the UN General Assembly voted 139 to 9, with 41 abstentions (an outcome even more favourable to them than the Palestinians had expected) to upgrade the Palestine Authority‘s status from that of an “observer state” to that of a “non-member state” (the same as the Vatican). This could open the door for it joining the International Court of Criminal Justice (ICC), the possibility of which worries the Israeli government out of concern the PA may seek to drag it into the Court on the grounds the settlements are a breach of the Geneva Convention’s prohibition on the creation of settlements in occupied territory – which just about everybody in the world but the Israeli government agrees it is, incl. the legal adviser of the Israeli government at the time of the 1967 War, who is still alive & not long ago attested to that fact. And it handed the long-suffering Mahmoud Abbas a political victory that will offset the benefit Hamas gained from its military ‘victory’ in the recent Gaza tit-for-tat exchange of missiles. And what should give the Israelis even more reason for concern is that after the vote in the UN, the victory celebrations on the West Bank involved both Fatah and Hamas supporters (who normally wouldn’t give each other the time of the day); for ‘divide & conquer’ has been a cornerstone of its Palestinian strategy. And, not surprisingly, the two took different views of this vote; while the Israeli government huffed & puffed that this was the death knell for the peace process, the Palestinians see it as giving them more leverage in it.

Xinhua quoted Miao Wei, China’s Minister of Industry and Information Technology as saying on November 27th that he expects automobile sales this year to top 19MM (up 31% YoY) & exports to hit the targeted 1MM mark (on the other hand, vehicle sales in September were down 2% YoY, the first such decline in eight months, due to the slowing economy & rising fuel prices).

A November 24th job fair in Wuhan, Hubei Province, with nearly 10,000 jobs ‘on tap’, attracted an ‘audience’ of over 50,000 – there is no way of knowing whether this was driven by a dearth of jobs, idle curiosity, or a serious search by people with a job for ‘greener pastures’.

Local party officials in the Chonqquing Municipal District, once Bo Dai’s bailiwick, on November 22nd relieved a mid-level local official, Lei Zhengfu, from his duties after a five year-old “indecent” video of the 54 year-old went viral on the Internet (naked in bed with an 18 year-old associated with a local developer) – this demonstrates once again the growing influence of technology in constraining the, once for all intents & purposes absolute, power of China’s apparatchiki.

There was a report earlier this month of five pre-teen boys found dead from carbon monoxide poisoning in a dumpster in Bijie, Guizhou Province, China. Li Yuanlong, who first reported this on an online bulletin board, was since apprehended & sent to an unknown “tourist destination”. The boys apparently were cousins, at least two of them brothers, left by their migrant worker parents in the care of elderly relatives unable to properly care for them. According to the economics & finance magazine Caixin there are 58MM such “left-behind children” in China – at last report there were 42MM & 50MM boys in the 5-9 & 10-14 years age cohorts (and 40MM & 45MM girls); if they survive, such boys will contribute to China’s future poverty-, & possibly criminality-, level but may also create a labour pool for doing the menial jobs the upwardly mobile Chinese will turn their noses up at (& to mute the effect of the male/female imbalance in the up & coming generations?).

The latest polls in Japan show the opposition Liberal Democratic Party in the lead with roughly 25% support, followed by the two months’ old far-right Restoration Party (that is anti-nuclear, wants to break the decades-old 1% of GDP ‘cap’ on defense spending & advocates lower taxes) with a little more-, & the currently ruling Democratic Party with a less-, than half of that, albeit with 37% of eligible voters still in the undecided camp.

Two Japanese pension funds have started to invest some of their assets in gold; Japan being Japan, one should expect other pension funds to follow suit. If so, this could create a significant new “end-investor” source of demand for the yellow metal.

Greece finally is getting their money from the IMF & the EU. Perusing comments by others more willing to waste their time on this nonsense than I, leads to only one conclusion : same shit, different pile! The one thing that stood out, however, was that central banks holding Greek debt are not allowed to retain the proceeds of any future capital gains thereon; if there will be any, and right now that looks highly unlikely except perhaps due to short term fluctuations in their deeply, deeply discounted market values, they must be surrendered to the Greek Treasury.

Today November 28th, one of msnbc’s ‘photos of the day’ was of what at first glance looked like a frozen-over, ice-choked river. But it wasn’t : it was a picture of India’s Yamuna Rover covered with a foot or more-thick layer of foamy industrial effluent.

GLEANINGS II – 488
Thursday November 29th, 2012

EUROPE SEES US DEBT CRISIS AS DIRE AS ITS OWN (NBC News, John W. Schoen)

• The OECD’s semi-annual Economic Outlook report, made public on November 27th, expects 2.0% growth in the US in 2013 (down from 2.6% in May), & negative Eurozone growth of 0.1% in 2013, after declining by 0.4% this year, before resuming growth at just 1.3% rate in 2014. But it says the Eurozone economy is in reverse & the US faces a similar fate unless lawmakers agree on a tax hike cum spending cut package that avoids the fiscal cliff. Secretary-General Angel Gurria told CNBC “We’re talking here about the medium and long-term viability of the United States economy … when to get a moment where (U.S.) debt stops rising and the debt to GDP starts coming down”, & reporters in Paris “The US fiscal cliff, if it materializes, could tip an already weak economy into recession, while failure to solve the euro-area crisis could lead to a major financial crisis and global downturn.”

For many years the US economy’s “potential growth rate” was deemed to be 2.50% (although from 1991 to 2011, it grew at 2.75% average annual rate). But on November 20th Bernanke told the Economic Club of New York that, as a consequence of the ‘Great Recession’ the potential growth rate will be lower in the future, the reality of which few people have so far realized and/or accepted.

COPPER SHORTAGE SEEN AS CHINA RE-ACCELERATES (Bloomberg, Glenys Sim)

• Copper supply shortages will extend into the First Half of next year. Even as mines produce a record amount of the metal, production has lagged demand since 2010. Barclay’s plc estimates that demand in the First Half will outpace supply by 316,000 tons, i.e. by more than all the copper in the LME warehouses. Global demand will expand next year by 3.4% to 20.85MM tons, up from this year’s 1.5%, while supply will grow by 3.5% to 20.83MM tons, with there being an excess supply of 19,000 tons for the year as a whole due to one of 297,000 tons in the Second Half. Demand from China will grow by 5.5% next year to 8.1MM tons, after rising 4.8% this year.

The driver in all this will be a re-acceleration of China’s economic growth rate after seven quarters of slowing growth, that is expected to last until at least mid-2013, as a result of last September’s announcement of a US$161BN subways-to-roads infrastructure-building program.

CONSUMER CONFIDENCE HITS MORE THAN 4-YEAR HIGH (Reuters)

• The Conference Board’s Index of Consumer Attitudes in November came in at 73.7, up from (a revised) 73.1 in October, while 73.0 had been expected (from October’s preliminary 72.2). The Board’s Lynn Franco noted that “consumers have grown … more upbeat about … the job market … (which) is helping to boost confidence.” – thus its “Jobs are Plentiful” Index had risen from 10.4 to 11.2 (although that for “Jobs are Hard to Get” was flat at 38.8).

But the entire increase was due to a rise in the Expectations Sub-Index from 84.0 to 85.1 while the Present Condition Sub-Index declined marginally, from 56.7 to 56.6.

U.S. BANS BP FROM NEW CONTRACTS (Reuters)

• On November 15th BP pleaded guilty to criminal misconduct in the 2010 Deepwater Horizon oil well disaster & agreed to pay US$4.5BN in penalties, almost one-third of it a criminal fine. Then on November 28th, hours before a government auction of offshore Gulf of Mexico tracts, the EPA announced the Company & its affiliates were banned from getting any new federal contracts, due to its lack of “business integrity”, until such time as they demonstrate they can meet federal business standards. The Company in turn announced the EPA had informed it that it is preparing an agreement that it expected to have in the Company’s hands soon, that “would effectively resolve and lift this temporary suspension.”
If the government quit doing business with anyone ‘lacking business integrity’, the universe of those it could do business could be much smaller & wouldn’t include a number of large banks.

HOW PIPELINES WILL CHOKE GROWTH (FP, Claudia Cattaneo)

• Due to the rapidly rising oilsands & shale oil output Canada’s pipelines that move oil from the wellhead to the refineries are choc a bloc. In December the space available in them will be far smaller than the demand. Enbridge has announced it will “apportion” space on several of its pipelines & Kinder Morgan expects to be able to meet only 30% of producers’ expectations in its Edmonton to Burnaby, B.C. pipeline. Peters & Co., the Calgary-based energy investment banking ‘boutique, predicts that in the New Year this will result in even bigger-than-current discounts from WTI prices (that themselves are at a significant discount from Brent) than this month’s US30/bbl. (twice October’s). This will not only hurt producers but also the Government of Alberta, whose midyear fiscal update already showed a massive widening of its expected budget deficit from the $886MM Spring Budget forecast to a $3BN or so. And those producers who tried to get around the pipeline problem by shipping out oil, expensively, by rail now see those efforts stymied by a shortage of railcars.

This will slow down spending in the oil sands, & thereby decelerate Alberta’s economic growth (& impact on government revenues). And while the politicians blame oil prices, this has a déja vu feeling; for on the production side it is not unlike the Getty government’s decision in the 80’s to let “rip’ the development of the boreal forests, rather than do so at a measured pace, on the revenue side not unlike its insistence on looking at the future through rose-coloured glasses, & on the spending side not unlike its tendency to spend as it there was no tomorrow, all of which led to king-sized deficits (that I actually helped to fund). “Once bitten twice shy” is a concept that runs counter to Albertans’ innate optimism.

HAMAS COURTED BY TWO SUITORS (AP, Brian Murphy)

• The competition between Qatar & Iran for Hamas’ allegiance is one of the Arab Spring’s intriguing sub-plots. The former is using its wealth to gain influence with it, aspiring to become a major player in the Middle East, while Iran counts on its relationship as Hamas’ military wing’s arms supplier. So, while the post-ceasefire street celebrations in Gaza featured Qatari, Turkish & Egyptian flags in recognition of their support, Khaled Mashaal, Hamas’ leader-in-exile (now based in Qatar, having left Damascus due to Syrian regime’s repression of his fellow Sunnis), publicly thanked Tehran for aiding Hamas with military support, with the Speaker of the Iran’s Majlis, on November 23rd in Damascus, promising the Gaza militants continued support in “confronting the Zionist arrogance and aggression”.
• For Sunni Hamas Qatar is a political & economic lifeline : it needs its help in bolstering its international legitimacy & its money to make ends meet (having lost Iranian funding support by not supporting Syria’s apostate Shia al-Assad regime, as Lebanon’s Shia Hezbollah has done). Last month the Sunny Emir & his for a Muslim unusually high-profile wife visited Gaza, & pledged nearly US$500MM in aid. And last week Qatar’s Prime Minister read the riot act to the Arab League meeting in Cairofor not doing enough to alleviate Gaza’s poverty & isolation, saying “We can’t give hope without delivering” & two days later said his government would be willing open a dialogue with Israel on a long-term Gaza truce if it were to lift its blockade of Gaza.

Money talks. Nashaal in an interview with Christiane Amanpour acknowledged the existence of a Palestinian state based on the 1967 borders but not of a Jewish state. And even al-Jabari supposedly had recognized the need for a more effective strategy than hurling rockets at Israel. All this suggests there may be a window of opportunity for some sort of breakthrough. But this would require a level of statesmanship that their track records suggest is unlikely to be forthcoming from either Washington or Tel Aviv. What is particularly worrying in this respect is that the first post-ceasefire poll showed that almost half the Israelis think Netanyahu shouldn’t have bowed to international pressure & have launched a ground attack. And on November 23rd, just two days after the onset of the ceasefire, Israeli forces arrested 28 Palestinians in the West Bank, incl. 4 MPs, & a couple hours later killed a 23 year-old Palestinian trying to plant the Hamas flag on the security fence separating Gaza from Israel – for the Israelis even nearing the fence from the Gaza side is a no-no.

HAMAS NO WINNER IN CEASEFIRE (CSM, Jonathan Adelman)

• Hamas leadership’s claim to victory has no sound basis. Sure, it avoided a ground assault, gained diplomatic support from Egypt, Saudi Arabia & Qatar, maintained its relationship with Iran & developed an indirect one with the US, in Arab eyes made Mahmoud Abbas look bad & can proclaim it stood up to Israel. But terrorist victories are nearly always oxymorons, its 1,500 rockets may have occasionally reached Tel Aviv & Jerusalem but killed only six Israelis & destroyed no Israeli military facilities, the Iron Dome destroyed 84% of its incoming rockets (of the limited number it supposedly targeted), the Israeli Air Force took out 1,500 targets, 10x what it did in 2008, it suffered billions of dollars in damage to its infrastructure while Israel suffered none, its relationship with Iran is less tight, Arab support may prove less than solid since Egypt can’t jeopardize the flow of American aid, Saudi Arabia & Qatar have bigger fish to fry (a nuclear Iran), Turkey will have to throttle back its “Israel is a terrorist state” rhetoric to remain a NATO member in good standing, & it won’t be able to meet its people’s expectations unless it moves away from confrontations with Israel.

Everyone is entitled to his opinions & time always tells who had been right, or wrong. But in at least one aspect his argument is factually flawed. For since WW II only three terrorist endeavours (as opposed to civil wars) have failed (those by the Basques in Spain, the Tamils in Sri Lanka & the Marxist FARC in Columbia) while at least nine others have been effective; for terrorism speeded up the creation of the State of Israel, and the independence of Malaysia & Kenya, was successful in Rhodesia, Vietnam & South Africa, helped to change the status quo in Northern Ireland, will result in the US & NATO leaving Afghanistan prematurely &, most recently, caused the Philippine government to agree to the creation of a semi-autonomous region called Bangsamoro on the island of Mindanao. Elsewhere he seems to contradict himself when he first talks about Hamas “maintaining its relationship with Iran” & later about that relationship being “less tight”. And finally, what leads him to believe Turkey has any desire to remain “a NATO member in good standing”, given that it refused the US permission in 2003 to have its 4th Infantry Division launch a “Second Front” from Turkish soil in the Second Gulf War, & when all the evidence points to the Erdogan government becoming less Westward-, & more Eastward-, looking.

HAMAS WON’T ACCEPT EU MONITOR AT GAZA CROSSING (Xinhua News Service)

• On November 28th a Hamas official told Egyptian mediators that it will not accept the return of EU monitors at its Rafah border crossing point into Egypt (as had been provided for in a US-brokered deal in 2005 after Israel had withdrawn from Gaza, but before the 2006 election that by rights should have resulted in a Hamas government & 2007 when Hamas seized power in Gaza). More specifically he said “The 2005 agreement has … been buried for a long time and we won’t accept attempts to resurrect it.”

He is bluffing. Hamas needs that border crossing fully open to break Israel’s blockade. And if the Hamas leadership has concluded lobbing rockets into Israel is futile, it shouldn’t matter if there are EU moniotors at Rafah; for their role was to prevent weapons from coming in.

THE CRISIS IN EGYPT (NYT, Editorial)

• On November 22nd, as he should have been basking in glory for his role in helping to bring about the Gaza ceasefire, Egypt’s President Morsi issued an ill-advised decree that was ‘stunning’ in its scope (one critic called it ‘dumbed-down martial law’). While some aspects were popular, like the removal of the unpopular Mubarrak-era prosecutor-general, exempting all his actions from judicial review, a move many called “a new dictatorship”, killed the idea he is the democratic leader Egyptians long for. By renewing distrust of the Muslim Brotherhood, it exacerbated the country’s political fault lines. And his claims it’s just a temporary measure until a new Constitution is in place didn’t resonate with people who remember how Mubarrak’s emergency laws were in place for 30 years.
• The Mubarrak-appointed courts earlier dissolved the democratically-elected, but Islamist-dominated, Lower House of Parliament & were said to be about to do the same with the Constitutional Assembly & the Upper House, thereby entirely stymying the popular will. But even so, not even Mr. Morsi’s allies could stomach him sidelining the courts. His Justice Minister publicly opposed the idea & three other senior advisers resigned over it, and the US State Department advocated not putting undue power in one set of hands & “As the president of an aspiring democracy, Mr. Morsi should seek to balance competing forces, from hardliners through Mubarrak holdovers to secular & liberals opposition activists.”

Whatever his motivation, he clearly overreached; on the other hand, one must wonder if countries like Egypt, Libya, Syria, Iraq & Afghanistan, cloven as they are by deep ethnic and/or religious differences & with limited, if any, popular respect for the belief systems of others, and with a strong ‘winner-take-all’ minset, are really fertile ground in the short run for Western-style democracy.

LI SAYS REFORM KEY FOR PRC GROWTH (AFP)

• On November 23rd Premier-designate Li Keqiang met with officials of the eleven cities & provinces that will the testbeds for reform, telling them “Reform … is essential to allowing people to enjoy a better life … If we don’t do it … (we’ll) bear historic responsibility.” And he singled out uneven growth & the rural-urban imbalance as key problems.

The People’s Daily, the Party mouthpiece, said his speech could be summed in two words as “Reform, reform”, or in three words as “Reform, reform, reform”, & the South China Post that this signaled a stronger bent for reform than expected from a, hitherto deemed “cautious, reformer’.

EU APPROVES €37-BILLION IN FUNDING FOR SPANISH BANKS (WSJ, C. Bjork)

• In exchange four nationalized banks agreed to major cuts in the balance sheets & payrolls. Thus Spain’s fourth largest, Bankia S.A, a two year-old entity, 45%-owned by the Spanish government & a goodly share of the rest by that of the City of Madrid, that was formed from the remains of seven savings banks, said it will cut its staff by over 6,000 (i.e. 30%) , close more than 1,000 branches (i.e. 35%), halt real estate lending & shed €50BN of assets (i.e. 15%).. EU Competition Commissioner Joaquin Almunia said this will ensure that they use “no more than what is necessary of taxpayers’ money to restructure and do not go back to unsustainable business practices” & that by 2017 their balance sheets should be reduced by more than 60% of what they had been at their peak in 2010.

Short term, of course, with unemployment at record levels, bank lending shrinking at a 5% annual rate, depositors en masse voting with their feet & Spain in the midst of a deep recession, this will only course worsen an already serious recovery-debilitating credit crunch.

ARGENTINA DEFIANT ON BOND RULING (Reuters, Juliana Castilla)

• In 2002 Argentina defaulted on US$93BN-worth of debt. In 2005 & 2010 it arranged two exchanges entailing 65%-75% ‘haircuts’ in which 76% & 18% of the bonds involved participated. About one-quarter of the remaining US$6BN still outstanding is held by New York-based Elliott Management, a hedge fund with AUM of US$15BN that specializes in ‘distressed debt’ whose performance has outstripped of the S&P 500.
• On Wednesday November 21st Thomas Griessa, the octogenarian former Chief Justice of, & now Senior Justice at, the US District Court for the Southern District of New York, ordered Argentina to pay the bondholders who had shunned the two exchanges US$1.33BN by December 15th. The next day Argentina’s Economy Minister Hernan Lorenzino, referred to the holdouts as “vultures”, with some justification they are referred to “vulture funds”, & said that Argentina will take its case to the US Supreme Court or “whatever international body that might be necessary”, & President Cristina Fernandez vowed her government wouldn’t pay one dollar to the holdouts. After this ruling Argentinian bonds, that had been a EM bond market darling because of their high yield, were ‘marked down’ 10% across the board & credit default swap rates rose to 2,400 bps, up from 1,000 bps in early October.

This could be a case of misplaced & ill-advised Argentinian ‘machismo’. For under the judge’s ruling the holdouts will get roughly the same payout, & possibly even a little less, than those who participated in the earlier exchanges, only two to seven years later. And the holdouts are getting nastier : they recently had the Ghanaian authorities impound an Argentinian Navy training ‘tall ship’ in one of its harbours (which almost led to a dangerous altercation when they were prevented from moving it to a more out-of-the way location by gun-toting Argentinian Navy personnel who so far have survived despite having their electricity & fresh water supplies cut off but who, sooner or later, must run out of food). And the default fears stem from the fact that, if Judge Griessa’s ruling is upheld & Argentina continues to defy it, US courts could stop the payment of interest on the US$24BN in bonds received in the 2005 & 2010 exchanges, or the Argentine government would simply forego the payment of interest to forego that, thereby triggering another default.