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Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: quoted-printable X-From: Hickerson, Gary </O=ENRON/OU=NA/CN=RECIPIENTS/CN=GHICKER< X-To: Skilling, Jeff </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Jskillin<, Shankman, Jeffrey A. </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Jshankm<, Glisan, Ben </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Notesaddr/cn=9d1ce1f4-f20b005f-8625654d-62fd40<, Buy, Rick </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Rbuy< X-cc: X-bcc: X-Folder: \JSKILLIN (Non-Privileged)\Inbox X-Origin: Dasovich-J X-FileName: JDASOVIC (Non-Privileged).pst Gentlemen, Conditions in Argentina have improved slightly overnight as government and = opposition forces have agreed, in principal, to reduce the budget deficit (= Gwyn's fourth bullet point). However, I'm concerned about Gwyn's third bul= let point that bank deposits are being converted to dollars as well as bein= g withdrawn from the banking system. I've heard market rumors supporting t= his latter point. Regards, Gary -----Original Message----- From: =09Hickerson, Gary =20 Sent:=09Monday, July 16, 2001 9:29 AM To:=09Hannon, Kevin; Lavorato, John; Fastow, Andrew Cc:=09Buy, Rick; Shankman, Jeffrey A.; Mcconnell, Mike Subject:=09FW: ENA Research: Argentina default and devaluation risk rises. = Brazil feels the effects of the contagion=20 Gentlemen, This is a good review about the financial risks in the Southern Cone. Thou= ghts in the market last week involved a special Fed meeting about Argentina= but no information was provided to the public. Brazil's currency is the s= econd worst performing currency thusfar this year, right behind Turkey. Regards, Gary -----Original Message----- From: =09Koepke, Gwyn =20 Sent:=09Friday, July 13, 2001 2:52 AM To:=09Hickerson, Gary; Shahi, Pushkar; Stuart III, William; Port, David; Go= rte, David; Zipter, Rudi; Buy, Rick; Kaminski, Vince J Cc:=09Raymond, Maureen Subject:=09ENA Research: Argentina default and devaluation risk rises. Bra= zil feels the effects of the contagion=20 Date: 12 July 2001 From: Maureen Raymond-Castaneda Gwyn Koepke We believe that the risk of an Argentine debt default has increased and pes= o devaluation risk has also risen substantially in the last several days. Due to recent economic and fiscal developments in Argentina, we believe: Argentina lacks the fiscal and monetary maneuverability to lift itself out = of a 3-year recession (exacerbated by a global slowdown) and a strong peso.= Argentina's fiscal position has weakened substantially due to economic we= akness that limits government revenue receipts needed to balance the fiscal= deficit and pay off the country's debt service. A loss of investor confid= ence has caused spreads to widen despite Argentina's need to rollover about= $8bn of short-term Letes (Argentine government debt) by the end of the yea= r. Yields paid at this week's Treasury auction are at levels that are not = sustainable over the medium-term. Three-month Treasury yields are 14.01% (= versus 9.1% paid at auction on June 26 and 7.89% on June 12). In addition = to suffering from widening yields, Argentina was forced to shorten the teno= r of debt from a mix of 6-month and 1-year bonds issued previously to only = 3-month securities at this week's auction due to increased risk aversion to= longer-term government paper by local investors (pension funds and banks).= The sharp increase in Letes yields, and the inability to issue longer mat= urities, is highly indicative of the difficulty the Argentine government wi= ll have in rolling over $8bn in short-term paper over the remainder of the = year at sustainable rates, which further weakens its fiscal position due to= higher interest payments. =20 The recession has been exacerbated by the strong peso caused by the persist= ently strong US dollar, which has hurt Argentina's export competitiveness e= specially vis-a-vis the Brazilian real that has depreciated about 25% relat= ive to the USD since the beginning of the year. As a result to these facto= rs, we believe the risks of Argentine debt default and peso devaluation are= mounting. =20 Argentina is increasingly vulnerable to a run on the banking system. Argen= tines are switching from peso to dollar deposits. Argentina's limited fore= x reserves constrain the central bank's ability to support the peso, if pri= vate sector deposits are withdrawn or converted into U.S. dollars. Private= sector deposits of $74bn are 33% peso-denominated, or $25bn, and 67% are f= oreign currency-denominated deposits, which dwarf Argentina's official fore= x reserves of $25bn. Total private sector deposits fell about $5bn (from $= 77.5bn to $72.4bn) between February and end-April this year before stabiliz= ing at $74bn as of July 6th. =20 Political uncertainty is very high and throws into serious doubt Economic M= inister Cavallo's ability to win opposition support for a new fiscal auster= ity program announced late yesterday. Cavallo needs to win approval for hi= s fiscal agenda not only at the national level, but also at the provincial = level, which will not be easy considering the 3-year contraction. Failure = to gain this support to cutback spending will worsen Argentina's fiscal woe= s, and cause a further deterioration of investor confidence. These external and internal pressures leave the exchange rate vulnerable to= speculative attack and threaten the 1-to-1 dollar peg, especially in light= of the country's limited foreign exchange reserves. Today, Argentina's 1-= month NDF traded at P1.15, implying risk of a 15% devaluation, while yester= day, the 1-month NDF traded at P1.05 (implying an increased probability of = devaluation since yesterday). Also today, the 1-year NDF traded at 1.25, i= mplying a 25% devaluation. As a result of these above internal and externa= l pressures, we believe the risk of peso devaluation has increased substant= ially. The danger of a steep devaluation is that private sector firms that hold do= llar-denominated debt and are long pesos and short dollars will suffer from= sharply higher debt payments. This could cripple an already tenuous econo= mic situation by causing a further deterioration in government revenue thro= ugh lower tax receipts. Developments in Argentina impact Brazil through 3 main channels: Currency Volatility: Contagion from Argentina has lead to a substantially w= eaker Brazilian real. Triggered by a general sell off of Argentine stocks,= bonds and currency, the real has depreciated 24% since the beginning of th= e year to close today at R2.55. To stem the real's recent decline, central= bank President Fraga hiked interest rates 150 bp and simultaneously interv= ened in the forex market June 22, which stemmed the real's depreciation for= about one week (see GMM, 29 June). Recent currency volatility could resul= t in further central bank intervention by drawing on Brazil's forex reserve= s. Fraga has indicated the central bank will intervene to support the real= 's value. A weak real will also translate into higher inflation expectatio= ns in Brazil. Emerging market credit spreads: Argentina represents about 25% of total eme= rging market debt traded. Current investor concern about Argentina has con= sequently widened emerging market debt spreads. Wider spreads put upward p= ressure on overnight rates in Brazil, reducing liquidity and increasing cos= ts of debt service in Brazil. Trade mechanism: Further downward pressure on economic output in Brazil (al= ready aggravated by the drought-induced energy crisis) brought on by weaker= export market growth to Argentina. Also, the weaker Argentine peso would = reduce Brazil's export competitiveness within the Mercosur trade bloc. This week's GMM will contain more details on the contagion effects on Brazi= l as well as Argentina's disappointing Treasury bill auction, the trend in = private sector deposits, Cavallo's new fiscal measures to cut spending, Arg= entina's heightened political risk associated with the need for fiscal aust= erity amid concerns over provincial political support and S&P's debt downgr= ade to "B-", which is one notch below Moody's rating of "B2".=20 The link to the GMM website is: http://enaresearch.corp.enron.com/research/= framework/default.asp, pull down Sovereign and FX Risk, Global Markets Moni= tor.=20 Recent issues of GMM with coverage on Argentina and Brazil: GMM, 29 June ---------- Brazil's COPOM intervenes in the forex market to st= em real's decline and bolsters reserves to defend currency in future GMM, 22 June ---------- Argentina introduces new exchange rate system for t= raded sector. Impact on the peso discussed. GMM, 15 June ---------- Brazil's energy crisis and its impact on the growth= outlook GMM, 8 June ------------ Argentina completes its successful debt swap GMM, 8 June ------------ Brazil energy rationing mandate and its impact on = output of key Brazilian commodities
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