1. For the fourth time in 40 years and eighth time in its history, Argentina has defaulted on its debt.

    1. There are some very creative ideas for deals and solutions on the table, including Argentina’s banks taking on some of the non-restructured debt from the holdouts (a private arrangement that wouldn’t trigger the RUFO clauses). However, both Argentina and the holdouts refused a deal yesterday, with each side blaming the other. Whether for financial, political or public relations reasons, both sides believed default was better than a deal, at least in the short term, and they got it.

    2. Kirchner and Kicillof have done a poor job managing this issue. They’ve treated it as a public relations challenge rather than an economic one. Blaming the judge for the technical reasons behind the default may be a good domestic political message, but it negates the fact that they should have seen this potential ruling coming (it’s been on the books for over two years) and been working on other payment options for months, not waiting for the final 48 hours of negotiations.

    3. Argentina was in the middle of a major political and economic crisis when it chose to default and restructure bonds in 2001-2002. Argentina today, even if Kirchner’s poll numbers aren’t great and the economy faces stagflation, is nowhere near the crisis levels of 13 years ago. Some may argue that a default right now will create a political/economic crisis in the coming months or years. However, a default leading to a hypothetical crisis would be quite different from a crisis that led to a default. The two situations aren’t really comparable.

    4. So will there be a political or economic crisis? Probably not in the short term. The Kirchner/Kilcillof team still has room to maneuver and negotiate and there are deals that can still be worked out. Over the mid-term (next five year time frame), I think this default and the overall economic environment in Argentina are going to lead to more problems.

    5. Two of the better articles I’ve read in English on this economics behind this default are by Felix Salmon and Matt Levine. Go read them.
  2. Two recent polls show Bolivia President Evo Morales with a large lead in the 12 October election this year.

    Ipsos Apoyo has Morales winning in the first round with 59%. His main challengers are Samuel Doria Medina with 18% and Jorge Quiroga and Juan del Granado both with 4%.

    The Ipsos Apoyo poll also shows President Morales with 70% approval and only 18% disapproval.

    A poll by the firm Tal Cual published in Los Tiempos shows a closer result, but still a significant lead by the president. In that poll, it's Morales 44, Doria Medina 19, Quiroga 7, del Granado 4. That poll also includes 24% of the population that is undecided.

    To win in the first round, Morales would either need 50% or 40% and a margin of victory over 10%.
  3. CSM and Quartz both write that Japan Prime Minister Abe is traveling to Latin America as part of the country's global competition with China. Japan's goals are export markets, energy, raw materials and a UN Security Council seat bid that is opposed by Beijing. Abe has traveled to 47 countries to increase Japan's international standing since taking office in 2012, but has not yet traveled to China or South Korea.

    Abe arrived in Mexico last Friday (and his security detail closed off a street I was trying to run on, thanks a lot), followed by trips to Trinidad and Tobago, Colombia, Chile and Brazil.

    Japan appears to have lined up energy agreements in Mexico, Colombia and the Caribbean. Both Mexico and Chile are part of the TPP negotiations that Japan has joined, making those trips particularly important for Abe's trade agenda. Japan is directly competing against China in bids on Brazilian infrastructure including high speed rail systems. Abe held a meeting with Caricom's leaders in Trinidad and Tobago to ask for their support at the UN.

    In contrast, China President Xi Jinping traveled to Argentina, Brazil, Venezuela and Cuba. Chinese media is tracking Abe's trip, framing it in terms of trade, the UNSC seat and potential diplomatic statements about territorial disputes among the Asian countries.

    Viewing LatAm relations through a China vs Japan framework is an interesting counterpoint to the many articles over the past two weeks that viewed Xi's recent trip as a challenge to US foreign policy. Not every event that happens is about the US.
  4. The Dutch government ruled that Hugo Carvajal did merit diplomatic immunity, forcing the government of Aruba to release him. Flying back home to Venezuela, the corrupt narco-general was given a hero's welcome by the Maduro government.

    Maduro's approval rating is hovering around or below 40%. There is a perception the Maduro government is too focused on defending the interests of a Bolivarian elite instead of the population. There is a perception that they hide corruption and allow corrupt leaders to hold positions of power. There is a perception that drug trafficking and the violence associated with it is increasing, and that segments of the security forces are partially to blame. There is a perception that Maduro is a weak leader who allows himself to be manipulated by other forces within the party.

    It's not just the opposition, but the general public and party base that are concerned over these problems. Over the weekend, Maduro faced a PSUV party congress in which a portion of the party base showed disapproval with how the party and country are being run.

    When the Maduro government greeted Carvajal as a hero, they reinforced everything that the general public and PSUV party base view as wrong with the Maduro government.
  5. In February 2008, Semana Magazine called General Hugo Carvajal "El Montesinos de Chávez." It was a recognition that the head of Venezuela's intelligence services was helping the FARC traffic drugs and was supplying the group with weapons. Others have called Carvajal one of the top capos within the "Cartel de los Soles," the drug trafficking group that is managed by some of the top levels of the Venezuelan military. The US government placed sanctions against Carvajal for his role in trafficking drugs and aiding the FARC.

    Yesterday, Aruba detained Carvajal, setting off a potential extradition battle. Carvajal had traveled to Aruba (on a private plane with $20,000 in US cash) while awaiting his acceptance as Venezuela's top diplomat there. President Maduro loudly denounced the "kidnapping" of the general.

    In any drug trafficking organization, taking out the top leader often leads to infighting and instability. What happens when that drug trafficking organization is also part of the Venezuelan military? While most of the world watches Maduro and the US fight it out over Carvajal's extradition, the less public fight to watch may be who tries to take Carvajal's place within Cartel de los Soles.
  6. In an article for Southern Pulse earlier this year, I pointed out that Nicaragua's Canal deal includes numerous infrastructure projects on top of the Canal.
    Most importantly, the agreement says that HKND has a right to build all, some or none of the projects on its list depending on forthcoming feasibility studies and investments. This means that Wang Jing’s HKND could control territory along a potential canal route, build and control ports, pipelines and free trade zones with limited tariffs and economic sovereignty, without ever building the actual Canal.
    Nicaragua formalized the rights to projects in the autonomous canal zones in its constitutional reforms last year.

    Most people understand that the canal is a potential engineering and environmental disaster that may never be built, but there are certainly profitable infrastructure projects within the agreement that HKND and the Sandinistas are likely to pursue. The question has been what projects would HKND actually build. I thought the port concessions, airport concessions and potential free trade zones for manufacturing were the likely real goals of the agreement from both the Chinese and Nicaraguan sides.

    However, Confidencial reports a major piece of news this week:
    HKND revealed a gigantic tourist project announced as the “San Lorenzo vacation resort”, located more than 10 kilometers south of Brito, i.e., a considerable distance from the canal route. This area includes seven miles of beaches, - Ocotal, Majagual Pitahayas and Maderas- a stone’s throw from San Juan del Sur. These lands comprise hundreds of properties owned by Nicaraguans and foreigners and a dozen hotels, including the world-renown Eco touristic Morgan's Rock.
    If this is true, HKND and the Ortega government will use the canal agreement and subsequent constitutional changes to expropriate some of Nicaragua's coastline and build a vacation resort, which was completely unmentioned in the original canal debate. Foreign investors who doubted whether it was safe to invest in Nicaragua's tourism industry may be proven correct.
  7. China is lending Venezuela another $4 billion dollars. In exchange, Venezuela will ship another 100,000 barrels of oil per day to China as repayment for an unspecified amount of time. Venezuela already owes China around $40 billion in similar deals.

    Just to run the back of the envelope math for you, 100,000 barrels per day at $90 per barrel would be worth $4 billion for Venezuela in about 15 months.

    How long do you think the Chinese loan term is for? If it's 18 months, then China will get nearly an extra one billion dollars worth of oil, a 20% return on its loan. Nice deal. If the repayment is over two years, then it's an extra $2.5 billion in oil on top of the initial $4 billion payoff. That's a return of over 60% on a two year loan. That's Venezuela choosing to receive $4 billion today instead of $6.5 billion by mid-2016.

    If this was a Wall Street hedge fund taking advantage of Venezuela's weakened financial position to take 60% return rates, I'm sure the word "vulture fund" would be tossed around. However, this is more of a payday lending scheme than a vulture fund play. The funny thing is China doesn't need the oil profit as much as it needs to locked-in oil supply. The profit is a bonus and a payment on risk given that China, like every Wall Street market analyst, can't be certain when Venezuelan financial and political stability will eventually run out.

    China's other agreements with Venezuela are also fairly favored towards China, similar to the agreements I described with Argentina yesterday. For example, one of the agreements signed says China is lending PDVSA money (on top of the $4 billion mentioned above) so the Venezuelan government can purchase 1,500 buses from China. For a country like Venezuela whose vehicle manufacturing industry has crashed, being lent money (repaid in oil) to purchase foreign autos instead of rebuilding domestic industry is Galeano-style Open Veins dependency.

    Of course, by not involving the United States, Venezuela will claim China's agreements to lock in oil and export markets at huge profits are part of "socialism" and "anti-imperialism."
  8. Chinese President Xi Jinping and Argentina President Cristina Fernandez de Kirchner signed about 20 different agreements during Xi's trip to the region.

    China will agree to an $11 billion currency swap that will allow Argentina to pay for its Chinese imports in yuan. While this gives Argentina a bit of breathing room on its foreign currency reserves, it's China giving money to Argentina so that Argentina can buy Chinese (and only Chinese) goods.

    China will loan Argentina $4.7 billion to build two hydroelectric dams. The dam bids have already been won by China Gezhouba Group Corp.

    China will loan $2.1 billion to finance a railway project intended to help Argentina export more grain and soy at cheaper prices to China.

    On nuclear energy, China will provide financing to Argentina's nuclear powerplant upgrades. The goods and services related to those upgrades will be purchased from China's National Nuclear Corporation.

    On telecommunications, China's assistance means Huawei will receive preferential treatment in upcoming bidding processes.

    On mining, China will increase investments into Argentina's lithium, potassium, copper and iron mines to export those goods to China.

    Given the amount of time and energy Argentina has spent in recent decades complaining about "strings attached" to various international financing agreements including the IMF, the Kirchner government pretty much rolled over to all of China's requirements within these deals. This isn't free money for Argentina. Every time China invests, they expect business and a locked in supply chain in return. When China hands out a loan to Latin America, it often comes with the condition that the money be used to purchase Chinese products and services.

    With Argentina's current economic situation and the pressure they are facing from the debt negotiations, it isn't a surprising move for Kirchner to turn to the Chinese for assistance. China is a potential deep-pocket ally as Argentina faces roadblocks in more traditional debt markets, but the conditions attached to those loans and aid packages matter. If Argentina once worried about a loss of "sovereignty" during previous economic negotiations with the US, Europe and international financial groups, then they should perhaps look at what concessions they are signing here with China.
  9. This week, Russian President Vladimir Putin made his way through Cuba, Nicaragua, Argentina and Brazil, and you can read all the glowing coverage of it here on RT. He forgave Russia's debt to Cuba, signed cooperation agreements, and convinced Brazil to avoid any critical statements on Ukraine.

    A few hours later, Russian military equipment was used to attack a Malaysian Airlines plane in a Russian-backed rebel controlled region of Ukraine, killing 300 people. We still don't know all the details, but it appears fairly likely that the world can blame Russia's role in instigating the conflict, backing the rebels, and arming them with equipment capable of shooting international civilian aircraft flying at cruising altitude.

    In a few days, most of the world isn't going to remember that Putin was in Latin America this week. Some of Russia's allies in the region including Nicaragua and Cuba will certainly back the Russian version of events, in spite of weak evidence.

    However, even if they don't publicly speak out much, I think many Latin American leaders including Brazil will remember the Russian president coming to their region, telling them one narrative, then having it immediately contradicted by events. It has the potential to have a long term negative impact on Brazil-Russia and even Argentina-Russia relations.
  10. By now I’m sure you’ve read several analyses about how Brazil’s terrible World Cup showing will NOT affect President Rousseff’s reelection. That’s probably correct. As I predicted over a year ago, the Brazilian election is likely to go to a second round. However, like all Latin American presidential incumbents, Rousseff remains the favorite for reelection.

    Admitting that the World Cup loss won’t impact the election does raise the question of what sort of surprise event would make Rousseff’s reelection less likely.

    Like almost any fair election anywhere in the world, the economy is the number one issue for voters. To that end, two of Brazil’s neighbors and biggest trading partners are facing fairly negative economic conditions.

    Argentina is in a recession, facing 30% inflation, and mismanaging the current debt crisis, which could lead to significantly higher political or economic instability. Overall, the Kirchner administration has treated its Mercosur partners as economic competitors rather than partners, harming the whole region’s economy and dividing the group.

    Venezuela, also in a recession and facing 50% inflation, is four to six months behind in paying all its Brazilian debtors including the construction giant Odebrecht. If Maduro actually feels any ideological affinity for Rousseff, he could do her a big favor by paying back overdue debts to Brazilian companies soon. Though that would help Rousseff, given Venezuela’s inflation (among the highest rates in the world) and awful currency control mess, that decision may be out of Maduro’s hands.

    Problems in both neighboring countries are weighing down Brazil’s economy and the potential for a sudden crisis certainly exists in either case.

    I’m not predicting either Argentina or Venezuela will face an economic disaster in the coming months (both will likely plod along as usual). But if you’re looking at potential risks to Brazil’s economy and Rousseff’s reelection, a sudden economic drop in either of Brazil's neighbors is the most probable of the unexpected external shocks that Brazil could face and it would immediately place Rousseff’s reelection at risk.
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