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Generational Dynamics Web Log for 31-Aug-2018
31-Aug-18 World View -- US court seizes Venezuela's Citgo, as Argentina's peso crashes

Web Log - August, 2018

31-Aug-18 World View -- US court seizes Venezuela's Citgo, as Argentina's peso crashes

Argentina's peso collapses after central bank raises interest rate to 60%

by John J. Xenakis

This morning's key headlines from GenerationalDynamics.com

US court seizes Socialist Venezuela's Citgo as compensation for mine nationalization
Argentina's peso collapses after central bank raises interest rate to 60%
Turkey and Argentina lead the world's developing countries in falling currencies

US court seizes Socialist Venezuela's Citgo as compensation for mine nationalization

The Citgo sign has been a Boston landmark since its Cities Service predecessor sign was erected in 1940 (Boston Globe)

The Citgo sign has been a Boston landmark since its Cities Service predecessor sign was erected in 1940 (Boston Globe)

A US court has awarded Citgo, the Houston Texas based subsidiary of Venezuela's nationalized state-owned oil company Petróleos de Venezuela S.A. (PDVSA), to a Canadian mining firm Crystallex.

Allowing Crystallex to seize Citgo gives the mining company a kind of revenge against the Socialist government of Venezuela. In 2008, when Hugo Chávez was running Venezuela, Chávez ordered the seizure and nationalization of Las Cristales, the local mining operation run by Crystallex.

In 2016, a World Bank arbitration tribunal awarded Crystallex $1.2 billion plus $200 in interest, totaling $1.4 billion, which is the amount that a US court judge is ordering Venezuela to pay to Crystallex. In lieu of that payment, the judge has awarded Citgo to Crystallex.

Citgo is valued at $8 billion, a lot more than the amount owed to Crystallex. However another nationalized state-owned oil company, Russia's Rosneft, claims that it owns 49.9% of Citgo. Rosneft received the stake in Citgo in 2016 as collateral for a $1.5 billion loan to Venezuela. Rosneft is asking the judge to split up Citgo into pieces, rather award the whole thing to Crystallex. Venezuelanalysis and OilPrice.com and Mining.com and Reuters and Boston Globe

Argentina's peso collapses after central bank raises interest rate to 60%

As we reported in June, Argentina forced to beg the International Monetary Fund (IMF) for a $50 billion loan to prevent the country from going bankrupt. The IMF is extremely unpopular in Argentina, since the people blame the IMF for causing a major economic crisis in 2000, when the IMF pulled the plug on another load because Argentina was failing to live up to the austerity commitments it made as a condition for receiving the loan.

Argentina is heavily in debt, having gone on a spending spree the last decade. Since it's now impossible for Argentina to pay its debts, the value of the peso has been falling continually against the dollar all year. When the IMF agreed to loan the $50 billion in June, it was hoped that the value of the peso would stabilize, but it hasn't. People have been selling their Argentina bonds, denominated in pesos, for US dollars to prevent personal losses, which has caused the peso to fall.

On Thursday, the government increased its astronomical 45% interest rate to an even more astronomical 60% interest rate, in the hope that investors would stop selling bonds, since they could get 60% interest. Furthermore, president Mauricio Macri announced that he was going to ask the IMF to provide the $60 billion loan earlier than had been previously agreed. Macri had hoped that these two announcements would stabilize the peso.

Instead, investors seemed to have decided that the government was desperate and panicking, so the peso ended the day down an additional 12% against the dollar.

IMF managing director Christine Lagarde says that revisions to the timeline for the loan are being considered favorably, because of "the more adverse international market conditions, which had not been fully anticipated in the original program."

She added: "I am confident that the strong commitment and determination of the Argentine authorities will be critical in steering Argentina through the current difficult circumstances, and will ultimately strengthen the economy for the benefit of all Argentines." CNBC and NPR and Forbes

Turkey and Argentina lead the world's developing countries in falling currencies

Turkey's lira currency fell another 4% against the dollar on Thursday, totalling 40% since the beginning of the year. Thursday's loss was triggered by reports that a Turkish central bank deputy governor is about to resign.

Like many countries, Turkey is deeply in dollar-denominated debt that it can't repay, and investors holding Turkish lira are exchanging them for dollars to preserve value. However, as we reported earlier this month, Turkey's economic problems are exacerbated by president Recep Tayyip Erdogan, who says that interest rates are "evil," and who believes that lower interest rates cause lower inflation, which is the opposite of the case, and who is imposing his delusional economic theories on the central bank. No wonder a central bank government may resign.

When we say that Turkey's lira currency has fallen 40% against the dollar, we can say it a different way: that the value of the dollar has been rising against Turkey's currency, as well as other national currencies.

Developing country currencies have been particularly hard hit by the strengthening dollar. Many of them have borrowed heavily in dollar-denominated loans, which they can't repay with their weaker currencies.

The following table shows the amount that different emerging country currencies have fallen against the dollar this year:

Argentine peso -53.9%
Turkish lira -43.5%
Brazilian real -20.2%
South African rand -16.1%
Russian ruble -15.6%
Indian rupee -9.7%
Chilean peso -9.3%
Hungarian forint -7.7%
Indonesian rupiah -7.6%
Philippine peso -6.6%
Polish zloty -5.6%

The United States has one of the worst borrowing and spending records in the world, but so far investors haven't punished us for this. When investors decide to do that, it won't be pretty. CNBC and Bloomberg and Daily Express (London)

Related articles:

(Comments: For reader comments, questions and discussion, see the 31-Aug-18 World View -- US court seizes Venezuela's Citgo, as Argentina's peso crashes thread of the Generational Dynamics forum. Comments may be posted anonymously.) (31-Aug-2018) Permanent Link
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Generational Dynamics Web Log for 31-Aug-2018 31-Aug-18 World View -- US court seizes Venezuela's Citgo, as Argentina's peso crashes

US court seizes Socialist Venezuela's Citgo as compensation for mine nationalization

Argentina's peso collapses after central bank raises interest rate to 60%

Turkey and Argentina lead the world's developing countries in falling currencies

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Generational Dynamics Web Log for 31-Aug-2018
31-Aug-18 World View -- US court seizes Venezuela's Citgo, as Argentina's peso crashes