A special report on banking in emerging markets

They might be giants
Emerging-market banks have raced ahead despite the financial crisis as their Western colleagues have languished. Patrick Foulis (interviewed here) asks how they will use their new-found strength

May 13th 2010 | From The Economist print edition

ALONG the breezy three-kilometre stretch of Mumbai's Marine Drive you pass cricket pitches, destitute people, luxury hotels, plump joggers and advertisements for Indian multinational companies, but almost no bank branches or cash machines. That absence, suggests O.P. Bhatt, chairman of State Bank of India, the country's biggest lender, gives the visitor a hint of the potential for the banking industry. Marine Drive has been underbanked since it was built in the 1930s. But now there is a palpable sense in India, as in most other emerging economies, that banking is thriving—just as it has fallen into disrepute in many Western countries.

The emerging world has a history of volatility and of bad-debt problems—indeed China is grappling with such a problem at the moment. But developing-country banks now have got things right on a number of fronts. Anti-poverty campaigners can admire their efforts to offer banking services to the illiterate. Technology gurus can see new mobile applications and low-cost IT platforms, and industrialists can count on banks that actually want to lend to their firms. Regulation buffs see an industry that is both armour-plated and wrapped in cotton wool after the crises of the late 1990s and early 2000s. In most emerging economies banks are viewed as engines of development rather than as rent-seeking parasites.

But it is by the hard stuff, money, that banks in the developing world now measure up. Not only are they well capitalised and well funded, they are really big—and are enjoying rapid growth. By profits, Tier-1 capital, dividends and market value they now account for a quarter to half of the global banking industry. China's lenders head the list of banks by market value, and Brazilian and Russian banks are among the world's top 25. At current growth rates India's banks will catch up in a decade. The crisis in Western banking, still reverberating in southern Europe, seems to have accelerated the shift in banking muscle from rich countries to the developing world.

This special report will argue that most of that muscle will be needed at home. To support the fast credit growth their populations and politicians demand, and the bad debts it may cause, emerging-market banks will need more capital than they can generate from retained profits. They are the pre-eminent gatherers of savings in the world, a mirror image of Western banks that became huge borrowers. But they will struggle to use those excess deposits abroad without taking dangerous currency risks, so the job of recycling excess savings abroad will remain with central banks and sovereign-wealth funds. The managers of emerging-market banks have plenty to do as it is. Some of them already run organisations that are far bigger than the biggest Western banks. Most also expect to lose corporate customers to local bond markets and to have to build up their consumer- and investment-banking operations to compensate. Many, too, are finding innovative ways to offer banking services to poor people without losing money.

If the crisis has transformed the status of emerging-market banks, it has also transformed the role of the state in banking. In China, which had been relaxing its grip on the industry for a decade, the government directed the banks to continue lending during 2008 and 2009—the main reason why the economy continued to grow fast. In Brazil, India and Russia the state banks have seen a sharp improvement in their fortunes, gaining market share at the expense of private banks. Some Western banks operating in developing countries have lived up to their reputation as unreliable partners. That is likely to have long-term consequences. The banking system most emerging economies now want is a mix of entrepreneurial private firms and state banks, with a few well-run foreign ones to keep the locals honest.

That has big implications for the long list of Western firms desperate to gain more exposure to emerging economies. The crisis has underscored the attractions of two business models. The network banks, such as Citigroup or HSBC, have a presence in lots of countries to make life easier for their customers. The "gone native" ones, such as Santander, have big retail operations with large market shares in just a few countries where they act like, and by and large are treated as, local firms. Both these models involve gathering deposits and operating branches on a large scale. The big investment banks are also active in emerging economies but may find the going increasingly tough as local banks get better.

Both those models are almost impossible to replicate now. The network banks are the products of a century of expansion. They are sufficiently entrenched for Citigroup's near-collapse in New York, for instance, to cause minimal damage to its emerging-market business. The "gone native" banks seized unique opportunities in the 1990s and early 2000s as Latin America sold off banks after bad-debt crises and eastern Europe privatised after communism's fall. No such sell-off looks remotely likely soon in China, India or Russia. Even the traditional last-resort technique for banks that want to become more international—setting up a few branches overseas and borrowing from headquarters or wholesale markets to fund lending there—has become much harder as regulators are clamping down on it.

The difficulty is mutual

The only consolation for Western firms that cannot get in is that emerging-market banks are facing exactly the same set of problems as they try to expand abroad. For them the crisis came too soon. With another decade under their belt they might have had the size, excess capital and skills to seize the moment and buy big bombed-out banks at the peak of the crisis. As it is, most are having to embrace gradualist strategies. All are building "strings of pearls"—branches in big partner countries to help service customers at home. Some are also offering banking services to diaspora populations in rich countries.

The Western banks have found that establishing a light presence in lots of countries is a great way to lose money. The same is likely to be true for emerging-market banks, so the smarter firms are trying to develop a competitive advantage that they can export. For the Indians that may be low-cost technology; for the Brazilians, investment-banking savvy. Some of the biggest emerging-market banks are experimenting with small acquisitions in their "near abroad". Going global requires the successful integration of lots of acquisitions, which Western banks have found hard to do.

This special report will show that the globalisation of banking, which has driven the industry for two decades, is in many ways on hold. If emerging economies are much more sceptical about unfettered finance and the role of foreign banks, Western societies are much more hostile to banks in general, let alone those run by foreigners or, worse still, foreign governments. Although emerging-market banks have far healthier business models than Western firms do, many of them will face a difficult trade-off. They will need access to foreign countries in order to build the sort of large-scale operations that make money. To get it, they may have to show that they are at arm's length, or even entirely detached, from their governments. Yet the crisis has pushed most banks in the developing world the other way.

These banks have been pitched into the big league rather suddenly, helped by the woes of Western banks and the continued strong growth in their own economies. It seems inevitable that Mumbai's Marine Drive will soon be decked with ATM machines, its joggers will be stabbing mobile-banking screens, the firms on the billboards will be going on buying sprees overseas and even the destitute will have some access to finance. Whether emerging-market banks will soon punch their weight in global banking, let alone dominate it, is another question.

Banks in emerging markets

The winners' dilemma
Forget Wall Street's woes. The emerging-market banks that now lead finance face the industry's trickiest task

May 13th 2010 | From The Economist print edition

ONE of the most patronising demonstrations of the alleged superiority of Western finance came in 2005-06, when China's big banks, once part of its communist economic apparatus, floated their shares in Hong Kong. Their prospectuses were in English and stuffed with the Western jargon of shareholder value. Their shares were underwritten by a dazzling array of Western investment banks and bolstered by anchor investments from blue-chip American and European financial firms. The emerging world might have become the factory of the world and its back office. But the globalisation of finance, it seemed, would take place on Western terms.

Things look very different today. Whereas some of those underwriters and anchor investors have been disgraced or bailed out (or both), Chinese banks are the world's largest, dwarfing their erstwhile sponsors. Emerging-market banks together account for between a quarter and half of the global industry on most measures (see special report). But it is not just the familiar shift in economic weight that has taken place. Emerging economies' financial systems, long regarded as their Achilles heels, have done far better than the Anglo-Saxon model they were once encouraged to emulate.

Doing things the old-fashioned way

Emerging-market banks are of the old school, with branches, profits, lowish pay and high capital. After decades of crises, they are tightly regulated: Indian bankers joke that their country's red tape is now the envy of regulators worldwide. Thanks to their thrifty customers, banks typically have excellent funding, gathering more in deposits than they lend out, unlike banks in rich debtor countries that rely on fickle international borrowing markets. The state has played an increasingly active role. It owns most of the banking system in China, India and Russia and a growing chunk in Brazil. As part of their efforts to counteract the downturn, governments got state banks to lend more, most notably in China, where new loans in 2009 equated to about a third of GDP. In the big emerging economies the ideal is to have a mixed banking system with a big state presence, some perky private banks, and a few foreigners to keep the locals honest. Only a handful of Western banks, including HSBC, Standard Chartered and Citigroup, have real clout.

So should the world's financial template now be Beijing or Mumbai, rather than Wall Street or the City of London? The developing world's banks had a good crisis, but their big test is yet to come. Emerging economies face a paradox: they need solid banks to help them grow fast, but fast growth will make their banks less safe. As consumers spend more, banks' excess deposits may shrink. Business customers will shift their fundraising towards capital markets, forcing lenders to build volatile investment banks. The great push to serve the hundreds of millions of unbanked people, while noble, is just as experimental as Wall Street's adventures in subprime debt. And most developing-world banks are keen to punch their weight internationally but are painfully aware of the gruesome mistakes made by Western and Japanese firms abroad.

Most importantly, the corollary of fast economic growth is that banks must expand credit at an eye-watering rate. Many executives predict their balance-sheets will double every five years or so. That inevitably creates a risk of bad debts, and having the government involved in allocating credit raises the potential for mistakes and cronyism. China is already grappling with sour loans generated by its lending binge last year. It will be very hard for these banks to satisfy their societies' sky-high expectations for economic growth without scuppering their own newly won reputations for prudence.

A special report on banking in emerging markets

Rambo in cuffs
Balance-sheets are less powerful than they look

May 13th 2010 | From The Economist print edition

WESTERN bank bosses often suspend their critical faculties when discussing their emerging-market peers. Suddenly it is not the next quarter that matters but the long-term flow of world historical forces. "They think about time in a very different way," says one, Zen-like, before adding: "History always follows a course." What lies behind this mumbo-jumbo is the recognition that emerging-market banks are not just getting bigger but also have piles of excess deposits because they are based in countries with high levels of savings. This would appear to give them a decisive advantage over Western banks that rely on fickle borrowing markets to do business. To add to rich-world banks' discomfort, developing-world banks tend to have high capital ratios too. In banking, especially after the crisis, whoever has the deposits and the capital usually wins.

The reality is a bit more complicated than that. Banks are indeed mirrors of the economy, so banks' balance-sheets reflect the fact that the typical Westerner is a borrower and the typical Asian a saver. Emerging-market banks tend to have vast branch networks that suck in deposits from thrifty families and companies. Only some of these get lent out again. Banks park the surplus with the state, by buying government bonds or keeping it in central banks. The state in turn acts as the international recycling agent for those excess savings: it lends them to Western countries through its foreign reserves or through a sovereign-wealth fund, for example by buying US Treasuries, mortgage bonds or money-market instruments.

Overextended Western banks do the exact opposite: they borrow from capital markets to plug the hole created by having more loans than deposits. This shows up in the ratio of loans to deposits, which for rich-country banks rose to alarming heights in the run-up to the crisis (though they have since come down somewhat), whereas those for emerging-market banks remained healthier.

Another way of measuring the differences is to look at the absolute funding gaps. Although by and large rich and poor countries' banks are not lending to, or borrowing from, each other directly, there is a symmetry to the figures that is not entirely coincidental. In 2008 the surplus of customer deposits over loans (ie, excess savings) at listed emerging-markets banks was about $1.6 trillion, compared with a deficit of about $1.9 trillion at rich-world banks (see chart 4). The imbalances of the world's economies are reflected by their banks.

A Western bank with masses of excess funding would be deemed to have a huge competitive advantage. Surely the same applies to entire countries' banking systems? Emerging-market banks could use their surplus funds beyond their borders, for example by lending directly to foreigners and taking market share from rich-country firms. By doing so they would be bypassing central banks and sovereign-wealth funds, recycling excess savings directly themselves. But this is not what happens. For a start, the funding position of emerging-market banks is less impressive if China is excluded. And even in markets with excess savings these are not always evenly distributed, with a lot of them stuck in sleepy state banks. Some firms are doing their best to change that: ICICI's Ms Kochhar, for example, is setting up lots of new branches to boost its deposits.

Banks that do gather excess deposits may find the government wants to get its hands on them. This could be for prudential reasons. For example, China's regulator requires banks to keep 17% of their deposits with the central bank and tinkers with this ratio to control the economy. Or it could be because the government needs the cash. In India banks are obliged to use about a quarter of their deposits to buy government debt, which helps the government fund its budget deficit. Mr Bhatt of State Bank of India says there is little chance that this will change soon: "It is the model in this country," and allows the government to spend on development.

So complementary and yet so far

But suppose that when everything is said and done banks still have piles of excess deposits? This is broadly true of China's lenders. Can they find a way to marry their savings-rich firms with the indebted equivalents of the West? There is already a real-life case study: HSBC. It has always gathered more deposits in Hong Kong than it lends out. In 2002 it bought a mirror image of itself, Household, an American consumer-finance firm with $106 billion of loans and no deposits. It announced at the time that it was "bringing together one of the world's top asset-generators with one of the world's top deposit-gatherers". Those labels could be applied respectively to America's and greater China's entire banking systems.

The acquisition failed because of bad debts at Household, but the original premise was wrong too. HSBC's regulators, like most around the world, did not want deposits in one country to be used to finance a subsidiary overseas, exposing the bank to foreign-exchange and counterparty risk. Michael Geoghegan, HSBC's chief executive, says it might have found fiddly ways of getting Asian customers to fund Household, perhaps by securitising Household's loans and selling them to HSBC's Hong Kong subsidiary; but the bank chose not to do so because it felt that would disadvantage its Hong Kong depositors. He says the regulatory climate has got more difficult since the crisis, and "it's getting harder to move liquidity around" among subsidiaries.

For the moment China's banks show little appetite for taking positions in risky Western assets. Bank of China did boost its foreign-currency lending in 2009 by a stonking 47% to about $200 billion, or about a quarter of its loan book, but this was matched by $190-odd billion of foreign-currency deposits. The bank actually reduced its holdings of foreign-currency securities by an eighth, "in accordance with the global financial-market situation"—a polite way of saying in order to avoid dud Western assets. Its latest annual report notes "growing concerns" over the finances of southern European banks and governments.

Deposits don't travel

There are other ways of utilising excess deposits abroad, says Anthony Stevens, a consultant at Oliver Wyman. The most obvious ones are hedging, organising swap lines with foreign banks and encouraging domestic customers to switch their deposits into foreign currency, thereby making them take the exchange-rate risk. But none of these are large-scale options in countries with partially closed capital accounts. And in China in particular, given the undervaluation of the renminbi, the last thing policymakers want is banks whose asset bases would fall as the currency appreciated. Far better for the currency risk to be borne by the central bank and sovereign-wealth funds. In the medium term, as customers spend more and save less, the pool of excess cash in emerging-market banks may shrink. Until then it will be hard to use that strength abroad.

What about the emerging-market banks' capital positions? At the end of 2009 these banks had a weighted-average Tier-1 capital ratio of 10%, in line with rich-world banks, but this probably understates their advantage. Excluding China's banks (which have been busy raising equity since), the ratio was 12%. And the new capital rules known as "Basel 3" are likely to be much less painful for emerging-market banks, which typically have higher-quality capital and smaller investment-banking units (which will be heavily penalised by the new rules) than their rich-world peers. At the same time they are likely to be more profitable than banks in Europe and America, which will allow them to create new capital faster.

Even so, emerging-market banks will still be short of capital. That is partly because of bad debts. In most places the cycle has already turned for the better. In Brazil Bradesco has said that the worst is over. Sizwe Nxasana, chief executive of FirstRand, one of South Africa's big four banks, notes that impairments are falling off and the performance of loans to lower-income customers has been "very good" during the downturn. But in both India and China the position is less clear-cut. Indian banks have lowish levels of non-performing loans but have built up relatively small reserves against them. These reserves act as a buffer against losses before capital is eaten into. Adjusting for that could knock a percentage point or so off Indian banks' capital ratios.

China's banks seem to have lots of reserves relative to the current level of non-performing loans, but that level seems implausibly low given how much they have been lending. Bad-debt reserves relative to the size of total loans are smaller, especially compared with Western firms that have taken massive hits in anticipation of losses. For example, Bank of China has roughly the same size of loan book as JPMorgan Chase or Citigroup, but only around half the level of bad-debt reserves.

Still, assume the best: that after a lending boom of several years, bad debts at emerging-market banks are under control. Surely, then, with their high profitability, they should be throwing off plenty of excess capital? Not necessarily, for the faster they grow, the more capital they will need to set aside to support new loans. And although emerging-market banks generate decent returns on equity, in aggregate they pay out about a third of that in dividends, limiting the amount that is retained and added to their capital bases.

Less than meets the eye

The maths of this can be pretty eye-watering. Assume that emerging-market banks really increased their risk-adjusted assets at, say, 20% a year yet maintained the same return on those assets, capital ratios and dividend payout ratios as they had last year. To back new assets, such as loans, they would need $4 trillion of new capital over the next ten years, only $2.6 trillion of which would come from retained profits. They would need to raise $1.4 trillion from external sources—about one-and-a-half times the total capital America's 19 biggest banks had at the end of 2008. Even assuming growth of 15%, the shortfall would be some $400 billion. One option would be to cut dividends, but neither private nor public shareholders would like that.

At the same time Western banks are actually likely to release capital as they wind down bad assets. Royal Bank of Scotland has about $30 billion tied up in its "bad bank" but will probably have to use that to repay emergency aid from the state, its current majority owner. Still, banks that have either largely paid back the government, such as Citi, or never accepted aid, such as HSBC, could eventually have capital coming out of their ears. Vikram Pandit, Citi's boss, recently told investors that "nobody wants to talk about excess capital," but "at some point down the road we're going to have to figure out what to do with" it.

The balance-sheets of emerging-market and rich-world banks are like the coasts of America and Africa: they look like a good fit. One group of lenders is overloaded with excess deposits but in need of capital, the other is short of deposits but likely to generate capital. It would seem like a template for much closer integration, but bringing the two groups of banks together might be as difficult as melding continents. That partly reflects the problems emerging-market banks face in shifting excess funds into foreign-currency assets, or among subsidiaries in different countries. But most emerging economies now also have less appetite than they did for letting foreigners in, and much more for state involvement in banking. And far from being ready to take on the globe, most emerging-market bankers are consumed by their colossal and growing businesses at home.

A special report on banking in emerging markets

Cross your fingers
Emerging-market banks have done remarkably well, but they need all the luck they can get

May 13th 2010 | From The Economist print edition

BANKERS in many rich countries failed two tests over the past decade. The first was the test of the marketplace, which exposed many banks that proved unable to command the confidence of their investors and counterparties or even to make a profit during a downturn. In the end they required government help to fund themselves and get hold of capital.

The bigger test was that of being "socially useful", in which the whole system got poor grades. Too much energy was put into speculation and complexity. Rather than being a source of stability, banks intensified the economic cycle, with firms showing little discipline during the boom and no humility afterwards.

Compared with their Western peers, emerging-market banks are mostly A-grade pupils. As businesses they are in good fettle, partly because of their youth and their natural advantages. They have plenty of funds because the societies they operate in have high saving rates. Their profits are stable, not least because their capital markets are small and volatile investment banking is not a big business yet. Yet much of their success reflects good management and good regulation. Supervisors learnt from the many crises in emerging markets over the years and made sure that banks had decent capital ratios and plenty of liquid assets. These firms tend to keep a good balance between old-fashioned banking values and innovation in customer products and technology.

On the wider test of performing a useful economic role, emerging-market banks have come out of the crisis well. Most of them genuinely believe in the importance of providing more people with access to financial services. The banking system as a whole continued to extend credit throughout the crisis. State-controlled banks did the heavy lifting, lending freely through 2008 and 2009, but private firms too performed reasonably well, whereas some Western firms in emerging markets proved unreliable, cutting credit or even shutting down or selling out.

This special report has argued that the experience of emerging-market banks will have a lasting impact. A fairly traditional banking business model has worked. That means Western firms without big local deposit bases and serious intentions to grow deep local roots will be less welcome. The few American and European firms that already have solid emerging-market businesses have been very fortunate, and there is little chance that others will be able to replicate their model.

It also means that a mixed banking sector—with state-owned and private firms, as well as some foreign ones—will stay in place. This balance is now seen as a good thing in its own right rather than just a stage on the road to full market ownership. Big privatisation programmes are not on the cards. That will make it hard for Western firms without emerging-markets exposure to get established.

Big and getting even bigger, well run and well regulated: the emerging-market banks seem to have a lot going for them. At the same time their Western peers are dazed, under attack and shrinking. Yet for all their success, emerging-market banks face two big challenges.

The ifs and buts

The first is coping with exceptionally rapid growth without blowing up. The absolute volume of loans many banks are adding in a year now is often bigger than the entire bank was a decade ago. Growing at a rate of 20% a year will impose colossal pressures on everything from staffing levels to risk control. And to sustain it, these firms will have to plunge headlong into products they know little about, such as mortgages. Yet if their economies keep roaring ahead, the stodgy business of lending to companies will suffer as alternative means of finance for businesses open up. Emerging-market banks say this activity is not very profitable anyway, but they are bound to miss it if it goes.

The second challenge is the greater involvement of the state in the past few years. Although this has served emerging economies well, it brings its own problems. There is ample historical evidence that government control over banks' lending can breed cronyism and misallocation of funds. China will be a test case after its big lending spree of the past 18 months. At least in other developing countries the government's role in bank lending has been much less overt. Still, state-controlled banks, which hold the majority of assets in the financial system in China, Russia and India and over 40% in Brazil, will have to juggle their dual personalities as independent agents (often with minority stockmarket listings) and public servants.

Most emerging-market banks are pursuing a cautious string-of-pearls strategy abroad, but the lesson from Western banks is that this is a quick way to lose money. To succeed in expanding abroad, banks need scale and a local deposit and customer base. New regulations will make this even more important.

As emerging-market banks begin to consider bigger acquisitions, they will find that being state-controlled will be a serious disadvantage. This is partly because banking in the rich world has become more politicised. But it is also because the conservative culture of many state banks is ill-suited to foreign takeovers, and because many customers would prefer to deal with a privately owned bank. That means India's and Brazil's private banks, although smaller than China's, may have an easier time expanding abroad.

Emerging-market banks are not about to take over the world. They have far too much to do at home: double the size of their business every five years or so, avoid bad debts, find more capital, cope with rapidly shifting patterns of corporate lending, bring banking to millions of poor people and deal with the politicians. Can they really do all this? Most have already performed miracles over the past few decades, from surviving political earthquakes to coping with hyperinflation, and prospered throughout a crisis that felled Western banks. But if the strength of emerging-market banks today is impressive, the task they face is also huge.

A special report on banking in emerging markets

All the world's a stage
But emerging-market banks are still treading cautiously abroad

May 13th 2010 | From The Economist print edition

FROM the rubble of Western banking it is easy to conclude that emerging-market banks are already big, getting bigger, and are coming to get us. Most emerging-market banks do have a sense that they are destined for great things. Mr Kamath at ICICI speaks for many when he says that in the medium term "we will see a clutch of Indian banks among the top 15 banks in the world." Chinese and Brazilian firms are already there and Russia's biggest bank is not far off. For all their scale and ambition, however, emerging-market banks mostly still derive only a tiny share of their profits from their foreign operations (see chart 11). How quickly might that change?

Seen from the hot seat of an emerging-market bank, the world is a dangerous place. Western finance faces an onslaught of regulation and is likely to stagnate. The few investments that emerging countries have made in Western financial firms have tended to turn out badly—think of China Investment Corporation's decision to put money into Blackstone's bubble-era flotation, or Ping An Insurance's stake in Fortis, which it was forced to write down after the Belgian bank failed. Those who declined invitations to bail out Western firms were proved right. "I did think I might do a big acquisition," says Mr Bhatt of the time when he took over as chairman of State Bank of India in 2006. "Then the sky fell in." He says he has had "a lot of offers but I have not taken them".

An emerging-market bank boss also has huge demands placed on him at home: to supply credit, to find capital and to survive the political jungle. And there are the lessons learnt since banking started to go global in the 1970s: the mediocre performance of American commercial banks overseas, the Japanese fiasco, multiple horror stories of commercial banks buying investment banks, and, as the boom peaked, a ruinous hostile acquisition in the form of the RBS-led takeover of ABN AMRO. Most emerging-market banks have plenty of humility. Mr Guo of China Construction Bank says that in rich countries "we cannot compete with local banks" for local corporate and retail business.

Instead most banks in the developing world are establishing a "string of pearls" abroad to service domestic customers as they expand internationally. At its most basic level this involves setting up branches. Often this expansion is aimed at other emerging economies, not just Western financial centres. Sberbank is opening a branch in Delhi and Itaú has a presence in Shanghai and Dubai as well as the usual offices in London and New York. In India the local banks find it hard to compete on cross-border deals these days. In Bharti Airtel's recent $9 billion acquisition the African assets of Zain, a Gulf-based mobile-telecoms firm, Standard Chartered and Barclays led a syndicate of financing banks that included only one local firm, State Bank of India. This is something the locals hope to change. ICICI's Ms Kochhar says her bank wants to set up an infrastructure abroad to service Indian firms. Mr Bhatt notes that India's banks need to expand with their corporate customers, or "sooner or later you will be irrelevant."

Forming alliances with local firms is one way of strengthening a string of pearls. In South Africa FirstRand has a pact with China Construction Bank. Sizwe Nxasana, FirstRand's chief executive, says his bank was working with them on a number of ad hoc transactions, so a formal agreement "became a very natural step". In one case this has blossomed into an even closer relationship, with China's ICBC taking a stake in Standard Bank (see article). Emerging-market banks hope that such co-operation will hone their skills. One consultant who has led workshops for Chinese bankers in international corporate banking says they soak up knowledge "like a sponge".

A complementary strategy is to provide "diaspora banking". Emerging-market banks have a competitive advantage among compatriots who live in Western countries. ICICI, for example, has small retail operations in Britain and Canada, and Banco do Brasil plans to open 15 new branches in America to target Brazilians living there. The deposits these operations gather are also handy as a foreign funding base. Still, even diaspora banking is not risk-free. In 2007 China Minsheng Bank bought a 10% stake in UCBH Holdings, a San Francisco-based bank that served Chinese-Americans. The bank failed and Minsheng wrote off its investment. Its chairman recently said: "We'd like to focus on matters at home now."

Yet the rules of banking overseas do not change just because a firm comes from a developing country. String-of-pearls strategies do not have a great track record. The experience of the Western network banks, most notably ABN, is that relying on expatriate customers to cover your costs does not work. In 1959 First National City Bank (Citigroup's predecessor firm) was aiming, in the words of one executive, to put a branch into "every commercially important country in the world". Yet by the late 1960s the strategy had run into trouble. John Reed, who eventually became head of Citi, once said of its overseas branches that they "didn't really know how much they earned". The network banks eventually succeeded because they widened their customer base to include locals as well as expatriates.

There are sceptics even among banks in developing markets. Aditya Puri of HDFC Bank doubts that the number of Indian firms going abroad is big enough yet to make it worth following them: "We will move when we see a migration of ducks rather than just a single swallow." He is of the Santander school of overseas expansion: "Unless you are a big player in a market, it is not of much use." At Santander itself Mr Sáenz says he is not planning to expand his network abroad to service Brazilian corporate clients there. That is a small part of the profit pool in Brazil, he says. "It is not our core business at all."

Two ways in

The spreading of emerging-market banks' branches across the world is simply a catching-up process that in itself has little significance. After all, even third-rate European banks have offices in New York and Hong Kong. In the longer term there are two possible approaches that could prove more important.

One is to try to find a competitive advantage. For India's banks this could be their low-cost technology—"the edge", as Mr Kamath puts it. A big test of this will be State Bank of India's expansion in retail banking in Singapore. Mr Bhatt says the bank is catering to the whole population, not just Indians, and will keep the back office in low-cost India. Many bankers in Mumbai speculate that this might produce a new twist on Western firms outsourcing to India: Indian banks will buy rich-country banks to get a shop front, then move the back office to India. Brazil's banks, meanwhile, are betting on investment banking. Bradesco's Mr Abreu says: "Brazil is still where we have the best opportunities. But what we are really focusing on abroad is to expand our investment bank."

The other possibility is to make acquisitions. There are very few, if any, examples of Western banks building a big presence abroad branch by branch. The way all commercial banks, even the network banks, went global is through deals. But acquisitions in banking are harder than in most industries. The politics are controversial. The financial risks are high because of leverage. And because banks have no physical plant beyond their branches, their value rests in their staff, who might wander off. To do this well, you need practice.

China's banks have been practising in their "near abroad". ICBC has bought small banks in Indonesia, Thailand and Macau. China Construction Bank has acquired bits of Bank of America and American International Group in Hong Kong. These are small deals by value but, says CCB's Mr Guo, "very significant" because they will help improve the bank's capabilities. Sberbank has bought small operations in Belarus, Ukraine and Kazakhstan. Banco do Brasil has just bought a controlling stake in a mid-size Argentine bank, and Itaú already has a presence in neighbouring countries. Even Bradesco, less expansive by instinct, recently bought a small bank in Mexico. Mr Abreu says it is a very cautious first step.

Will such first steps lead to greater leaps abroad? Certainly stories of giant deals make the rounds: your correspondent heard a yarn about a Chinese bank board discussing whether to bid for Merrill Lynch. And if the crisis had turned out differently, some emerging-market banks might have taken the plunge. During its darkest hours Citigroup considered selling Banamex, Mexico's second-biggest bank. Had it done so, the new owner might have been one of Brazil's banks.

Yet the expansion of emerging-market banks into the rest of the world depends on two things. One is that they grow even bigger and accumulate more capital and more skills. This seems all but inevitable. The second condition is that the globalisation of banking, a trend that has governed the industry for two decades, continues. And that is far from certain.

A special report on banking in emerging markets

A door to Africa
Standard Bank reaps the benefit of bold thinking

May 13th 2010 | From The Economist print edition

TO UNDERSTAND where Standard Bank is today, says its boss, Jacko Maree, you have to go back to South Africa in early 1987, when Standard Chartered, its original parent, sold out completely. Most South African firms were not welcome in the rest of Africa, he says, and "it wasn't entirely obvious" that Standard Bank's priority should be there or indeed in emerging markets at all. When South Africa moved to majority rule in the 1990s, plenty of South African firms shifted their domicile to London and tried to diversify into developed markets, but Standard Bank stuck to its guns. Something of this determination is reflected in its choice to keep its headquarters in downtown Johannesburg even though most financial firms moved to Sandton, a safe but dull suburb where adventure is a bar named the Bull Run.

Mr Maree, at the cuddly end of the spectrum of South African bankers, has been pretty astute. He became chief executive in 1999 after a failed takeover bid for his bank, which he says "was a big kick up the backside". That meant making more of its main activities abroad: an African presence built from branches bought from Australia's ANZ in 1992; an investment-banking unit in London (originally put there because of foreign-exchange controls in South Africa); and small operations elsewhere, including Russia, where natural-resources banking, an obvious specialism for African firms, is important.

The result has been solid, with compound annual growth in profits per share of 8% since 2003 and only a small dent in earnings from the financial crisis. In 2009 almost a quarter of profits came from abroad, either the rest of Africa or indirectly linked to the continent—for example, currency trades executed in London.

South Africa has had two lending booms since the end of apartheid. The first was driven by the opening of the economy to foreign capital, the second by lending to the rising black elite over the past decade. As a market it is fairly mature. But Africa as a whole is set for a "tectonic shift", says Goolam Ballim, Standard Bank's chief economist. The proportion of Africa's trade with China, Brazil, India and Russia rose from 5% in 1993 to 19% in 2008. Much of this, inevitably, is in resources, but governments are getting better at saving the proceeds of the good times for the less good ones, reckons Mr Ballim.

Old Africa hands who used to roll their eyes at this kind of analysis got a surprise in 2007 when ICBC, now the world's largest bank, spent $5.5 billion on a 20% stake in Standard Bank in what was then China's largest ever corporate foreign investment. Mr Maree and Mr Jiang, ICBC's chairman, stitched the deal together after spending a day in Cape Town together. There is still a wow factor about it, says Mr Maree. Although the revenues generated from working with ICBC are modest—some $78m in 2009—co-operation is being stepped up. Standard Bank has 30 bankers in Beijing now, as well as a main board director in an office close to ICBC's, who help clients of the Chinese bank interested in expanding in Africa.

For China's banks the deal is a test case of whether "treading softly" overseas will work. The combination ticks every box, bringing a presence in key markets for Chinese clients and exposure to a sophisticated foreign firm with skills in areas like investment banking and foreign-currency funding. Yet ICBC has limited influence with Standard Bank, with only a couple of directors on its board. A full takeover looks unlikely. ICBC would need permission from Standard Bank's board to buy more shares, and South Africa's government would probably not approve.

For Standard Bank the merits of the deal are clear: more capital, and kudos, to build a bigger presence in Africa and elsewhere. It is mulling buying a bank in Nigeria (where the government is opening up more to foreigners). And it is eyeing India, which Mr Maree says is "the missing link", given that Standard Bank already has an operation in Brazil and a stake in a Russian investment bank, Troika Dialog. With Standard Bank's complex history and relatively isolated position, explains Mr Maree, "we've had to think in a much more out-of-the-box way."

A special report on banking in emerging markets

Mutually assured existence
Public and private banks have reached a modus vivendi

May 13th 2010 | From The Economist print edition

"INDIA is where China was ten years back," says Mr Kamath, chairman of ICICI. That is certainly true by size. India's GDP amounts to about a quarter of China's today and its banking industry just a tenth. But in at least one respect India is well ahead: it has several dynamic privately owned banks that over the past decade have taken a fifth or so of the market from the state-controlled banks. Until the financial crisis in the West the private banks seemed to offer a template for the entire industry: within a decade or two, it seemed, the state would retreat significantly. Now India's mixed model of banking is likely to persist for longer.

Part of that reflects the fact that India had its own wobble during 2008. This was not a full-blown crisis; indeed, Aditya Puri, chief executive of HDFC Bank, the second-biggest (and perkiest) private firm, says to describe it that way would be an "appalling misconception". But there was a sharp spike in money-market interest rates after the collapse of Lehman Brothers, a liquidity squeeze and a notable shift in deposits. At ICICI overall deposits, as well as the stickier category of savings and current-account deposits, dropped by about a tenth between June and December 2008. Savers shifted their cash to the government-controlled banks, which were perceived to be safer. "Money was pouring out of our ears," says Mr Bhatt of State Bank of India.

That experience has helped prompt a change of strategy at ICICI, which for a long time was one of the most admired private banks in the developing world. After a decade of spectacular growth, fuelled in part by wholesale funding (including bulk deposits), the bank recently slammed on the brakes. In 2009 its loan book shrank by 17%.

Chanda Kochhar (one of several female bank bosses in India), who took over as chief executive from Mr Kamath last year, says that the bank decided to focus on changing its funding mix towards retail deposits because as interest rates rise these should be cheaper as well as stickier than wholesale funds. Current and savings deposits now make up 42% of total deposits, up from 27% before the crisis. Private banks so far lack the state banks' huge branch networks, but they are working on it. ICICI now has 2,000 branches, against only 755 in early 2007. That should help it suck in more deposits.

The state banks may hold on for a while yet to the market share they have taken. Between June 2007 and December 2009, after a long period of genteel decline, they saw their share of total deposits and loans rise from 73% to 77%. After years of fierce competition from the private banks, they have begun to get their act together. At State Bank of India's headquarters in Mumbai visitors may still receive a smart salute from a man in uniform, but, Mr Bhatt says, its technology and products are now "comparable to the private sector". Mr Kamath agrees that the state banks have caught up on technology.

Learning to love state banks

Yet even if the private banks do go back on the attack, attitudes towards the state-controlled banks have changed for good. After all, they were the ones that continued to supply credit to the economy during the downturn. Before the crisis all banks were expanding their loan books at an annual rate of about 25% (see chart 6). After mid-2008 there was a big divergence, with the state banks (which come in three main flavours: the nationalised banks, State Bank of India and the regional rural banks) keeping credit growing fairly steadily. The private banks more or less ground to a halt. The foreign banks went from expansion to sharp decline, with their share of loans dropping from a peak of 7% to a paltry 5.3% last December.

Most bank executives now also concede that old-fashioned regulation was shown to have its merits. Indian banks are required to hold a big slug of their assets (typically just under a third) in government bonds and at the central bank. Now Western regulators too are considering pushing up liquidity levels. Indian bankers joke that all the fiddly rules they face have become the envy of regulators throughout the world.

All this has led to a reappraisal of whether state banks should be fully privatised in the long term. HDFC Bank's Mr Puri says that "the world has changed and the view around here has changed." Mr Kamath takes a similar view, predicting that in the new circumstances "India's evolution will be more or less in line with China's." Mr Bhatt reckons there will be "no big-bang reform" and that over time the state-controlled banks' share will drop only gently, to 55-65% of the market.

But just as important has been the expansion of the state banks, Banco do Brasil (a listed commercial lender with a bias towards agriculture), Caixa Econômica Federal (a mortgage specialist) and BNDES (which acts more as an investment company). Together their share of the financial system's assets has reversed its earlier decline and now stands at 42% (see chart 7). Part of their increase in market share reflects acquisitions, with Banco do Brasil buying Nossa Caixa, a mid-sized state-owned firm, in 2008 and a 50% stake in Votorantim, a car-finance specialist, in 2009. But about two-thirds of the rise has come from lending more than the private firms during the downturn.

That in turn has changed people's views of a mixed financial system. Domingos Abreu, chief financial officer of Bradesco, says the state banks "had a very important role…in the government's anticyclical policies", adding that in a downturn "it makes a difference" to have a mixture of state, private and foreign banks. He concedes that two years ago he might have answered the question differently, but now he had to acknowledge that the state banks have their merits.

Alfredo Sáenz, chief executive of Santander, which owns the country's third-biggest private lender, quips that Brazil keeps an "artistic equilibrium" between the private and the public sectors. Persio Arida, a former governor of the central bank and president of BNDES, and now a partner at BTG Pactual, Brazil's leading independent investment bank, says that the "consensus" in the country is that the state banks played a vital role. However, he cautions that until the extent of bad debts created by their lending is known, no definitive judgment can be reached.

Russia holds the line

In Russia up to 54% of the system's assets are state-controlled, according to Andrei Vernikov, an economist, compared with 45% in 2007. Foreign banks' share stands at 18%. The balance-sheets of the three European banks that are most active in Russia, UniCredit, Raiffeisen International and Société Générale, together shrank by about a quarter in euro terms in 2009. Royal Bank of Scotland's loans to Russian corporate customers dropped by 45% in sterling terms. Net loans at state-controlled Sberbank and VTB declined by only 4% and 10% respectively in local-currency terms. Last summer the government took a larger stake in VTB to bring its holding up to 86%. Andrew Keeley, an analyst at Troika Dialog, an investment bank, says that although the government is likely to sell the additional stake in VTB again, it intends to keep majority control of both big banks.

But none of this means that a Soviet-style banking system is about to emerge in any of these countries. In China the government did take control of credit during the crisis, but for other state banks it was more of a nudge and a wink. Mr Bhatt says he was left to his own devices. Most governments also want private-sector banks to raise the level of competition. Even in China the state accepts some innovative upstarts, such as China Merchants Bank, a mid-sized bank with diffuse ownership and no direct state control. And all emerging markets want some foreign banks in order to keep local firms on their toes.

So although the ratio of ingredients varies, the objective mostly seems to be a mix with a strong state presence. This is seen as more responsive to businesses, less vulnerable to flaky foreigners and more open to "soft" control by the state as it tries to manage the economic cycle. Western bankers see its merits too: HSBC's Mr Geoghegan, a veteran of banking in Latin America, the Middle East and Asia, reckons that a healthy combination of foreign and local firms leaves foreign banks politically less exposed.

Control freaks

The problem for state banks is that they need to find a way of raising capital without diluting the government's holding. Most state-controlled banks are listed because a quotation brings market discipline to managers and provides useful information about the performance of the bank. But governments seem determined to hold on to a stake of at least 51%. For example, Banco do Brasil, now the country's largest lender by assets, announced plans to raise $5 billion earlier this year, but its objective remains the "maintenance of the government's shareholding control". Turkey is thinking about floating its largest lender, Ziraat Bank, but the state seems likely to retain control. It is the same story in China, says Bill Stacey, an analyst at Aviate Global, a brokerage firm. The government is happy to sell shares in banks but wants to keep a majority stake. Likewise, in Russia the state wants to retain control of the two biggest banks.

What happens when the state's holding gets close to that crucial 50%? State Bank of India expects to receive a capital injection from the government this year. Its chairman, Mr Bhatt, says it is still an open question whether the state might breach the 50% threshold in the medium term, but even then it would seek to have a big enough stake to remain the dominant shareholder. Many governments are in better fiscal condition than India's and have more scope to top up banks' capital.

Emerging-market banks' hunger for capital used to ensure that they would ultimately be sold off to the market—or to foreigners. Not any more. So the prospect now is of a fast-growing, innovative banking industry that remains subject to conservative regulation and only gradual shifts in control. After the West's experience with no-holds-barred banking, that may be a good idea. But for growth-starved Western banks desperate to do business in emerging markets it means they will find it even harder to get in.

A special report on banking in emerging markets

The bigger and bigger picture
The developing world's banks are flourishing

May 13th 2010 | From The Economist print edition

THERE is only one thing that is still small about banks in emerging economies: their bosses' pay packets. The head of China's ICBC, the world's biggest bank by market value, received just under $134,000 in 2009, a couple of decimal places shy of his Western counterparts. On all other measures these firms are big enough to make a Wall Street banker reconsider his status in the universe. In terms of market value they now account for almost half the industry's total worldwide, nearly twice as much as in 2005. That might reflect an excess of optimism, but emerging-market banks are big by other measures too. According to Tab Bowers, a consultant at McKinsey, they account for about a third of the industry's global revenues, matching the emerging countries' share of world GDP. By the most solid measures of all, profits, dividends and Tier-1 capital, listed banks domiciled in emerging markets now account for between 27% and 53% of the global industry (see chart 1). China is responsible for about half of this share. Big Western banks' profits from developing countries add up to perhaps a quarter of the local firms'.

Despite their large size, most emerging-market banks are not household names in the West. Most rich-world investors are aware of China's "big three" banks, at or near the top of the global rankings (see table 2), but know little about them. Aside from the Chinese banks, the global top 25 include a handful of big Russian and Brazilian firms, and lower down there is a long list of smaller banks that together add up to quite a lot. The average listed rich-country bank in the top 150 has a market value of about $36 billion, against $24 billion for emerging-market firms and just $15 billion if China is excluded. Many are state-controlled and most were handsomely profitable through the crisis and have good capital and funding profiles. Few have much business overseas.

The numbers game

League tables in banking are dangerous things. In 1990 all ten of the world's largest banks by assets were either Japanese or French. Such things can change quickly. The big emerging-market banks should therefore view their rise with a mixture of pride and nervousness. China's biggest banks are all still state-controlled. ICBC, spun out of the People's Bank of China in 1984, is run by Jiang Jianqing, a career banker. It has been making a flurry of investments in Asia and Africa. China Construction Bank (CCB) has its roots in development banking. Its boss is Guo Shuqing, who ran China's foreign-exchange fund before taking CCB public in 2005 in the first big bank flotation. Bank of China has a grand pedigree dating back to 1912. Traditionally China's foreign-exchange and trade bank, it still has the largest presence abroad. Bank of Communications is the only Shanghai-based big firm, in which HSBC holds a 19% share.

Brazil's two big private banks are widely admired. Itaú Unibanco was formed through a merger in 2008 which saw it overtake Bradesco by size. Both firms are battle-hardened survivors and have big insurance, credit-card and investment-banking operations. Listed but state-controlled, Banco do Brazil is the country's biggest financial firm, with a fifth of total assets. It has increased its market share since 2007 and is looking abroad.

Russia's banking system is fragmented, with only two giant firms, both state-controlled. Sberbank controls almost a third of the country's deposits and has a mixed loan book. Its newish management is trying to cut costs and spruce up its business at home. VTB Bank started as a merchant bank but has gradually built up its branch presence. About a quarter of its profits now come from retail banking.

India's banking system is small but growing fast. About three-quarters of the industry is in government hands, with the listed but state-controlled State Bank of India commanding about a quarter of the market. It has been revived under the watch of O.P. Bhatt, who became chairman in 2006. ICICI Bank, for a long time the pin-up of the private banks, paused for breath in 2009, rejigging its strategy to target industry as well as India's burgeoning middle classes. Its veteran boss, K.V. Kamath, became chairman in 2009, with Chanda Kochhar taking over as chief executive. HDFC Bank is still a tiddler by assets but its market value has shot up, reflecting confidence in its domestic strategy and its combative chief executive, Aditya Puri.

Singapore, Turkey and South Korea also have banks with market values in the $20 billion range. But perhaps the most notable firm outside the BRIC group of countries is Standard Bank of South Africa, run by Jacko Maree since 1999. Almost a quarter of its profits come from outside its domestic market, mainly the rest of Africa. It got a big boost in 2007 when ICBC bought a 20% stake. A takeover, both parties say, is not on the cards, but Mr Maree's business cards are now in both English and Chinese.

Just how big could such emerging-market banks get? Any self-respecting bank bull likes to whip out a chart comparing the ratio of bank loans with GDP in poor and rich countries. The poor countries generally have much lower ratios. The hope is that emerging-market banks will enjoy a double benefit. Not only will their economies grow fast but financial activity will become more intense, allowing banks to grow faster than GDP. Today quite a few banks in Asia, Africa and Latin America forecast that their loan books will rise by 20-30% annually over the next few years. Assuming that Western banks stagnate, that would mean China's biggest bank would take about two years to reach the size of, say, JPMorgan Chase, measured by risk-adjusted assets. The biggest banks in Brazil, Russia and India will take seven to ten years.

The idea that banks are "GDP-plus" businesses has obvious pitfalls. In 2008 and 2009 the loan books of emerging-market banks outside China grew relatively slowly, at about 10%, although in China they expanded by about 30%, and the pace elsewhere will pick up this year. And if credit grows too quickly for too long the system tends to explode, as America and some other Western countries have found.

In central and eastern Europe too, where loans rose at twice the rate of nominal GDP between 2000 and 2007, they hit a brick wall in 2008 as overextended banks ran out of funding and bad debts mounted. In much poorer Nigeria, talked up in 2006 by Mayfair hedge-fund managers as the next great "frontier" banking market, credit as a share of GDP doubled in about three years to around 30%. With small branch networks and relatively few people in the formal economy, this was too much. About a third of the system by assets is now distressed. The lesson from the Asian crisis of the late 1990s is that systems generally shrink after a blow-up.

Credit relative to GDP, then, does not grow in a straight line, thanks to the economic cycle. But even in the longer term a rising trend is not inevitable. According to Credit Suisse, domestic credit to the private sector credit relative to the economy has been flat or falling between 2002 and 2008 in China, Mexico, Malaysia, Thailand and the Philippines. And even if borrowing levels are rising in the longer term, banks' role in supplying that credit is not assured. In America much of the work of financing companies is done through capital markets. Emerging-market banks may face a similar trend. Except in Brazil, most of their business consists of loans to industry. Fast-growing local capital markets could take some of this away. If so, the biggest part of the banks' balance-sheets would actually shrink relative to GDP.

Penetrating arguments

Yet for all the caveats, emerging-market banks can count on vast untapped demand. McKinsey estimates that most people in Latin America, Asia and Africa lack access to formal banking services. Slowly the supply is catching up. Bradesco in Brazil has recently opened the world's first floating bank branch (which sails down the Solimões River in Amazonas) and the first branch in Heliópolis, a big favela (slum) in São Paulo. State Bank of India has more than doubled its number of ATMs since March 2008 without seeing a decline in transactions per machine per day, currently about 300. Most banks are trying to reach the "unbanked". This is partly a question of technology—for example, providing biometric identity cards for illiterate people without papers. It is also a question of organisation. Mr Kamath, the chairman of ICICI, India's biggest private bank, is thinking about appointing an agent in each village who would be given the kit to link up with the bank's system. Indian government schemes to guarantee work for rural workers for 100 days a year and to introduce identification cards for all could be a catalyst for the spread of such schemes. Like most bank executives, Mr Kamath accepts that these will not make the industry money "for quite some time" but reckons that "no bank can afford not to be there." Mr Puri, the boss of rival HDFC Bank, says that on a "five-year horizon it can absolutely move the needle".

But the real boon for many emerging-market banks has been the rise of a credit culture among the middle classes. Well-off people behave in a way their parents would find unimaginable, buying homes and cars not by saving up but by borrowing. The ratio of household borrowing to GDP points to this in all big developing countries (see chart 3). If the world economy rebalances so that surplus countries save less and consume more, mortgages and consumer loans will become the banks' biggest source of profits.

Although competition may put pressure on emerging-market banks' high margins, there are offsetting factors. People will shift their savings from deposits to investment products with better yields that banks can charge fees for. Low-cost technology too could boost profits. India's banks say they have leapfrogged the expensive mainframe computers of their Western peers and expect a rapid move towards mobile-phone banking among the young. In China people do not use cheques but can get text-message confirmations when they have used their credit cards, reducing the risk of fraud. Noel Gordon, a consultant at Accenture, jokes that when Western banks were fiddling with rocket-science finance, emerging-market banks were innovating more productively by opening up entire new markets that will make sustainable profits.

Emerging-market companies also promise to give the banks lots of new business. This year there will be a boom in loans as they shrug off the downturn. In the longer term banks will have to adapt as local capital markets develop and businesses expand abroad. Most lenders are building up investment-banking skills and a presence overseas that will generate income as more local businesses turn to issuing bonds and shares for finance.

And even though all these opportunities still lie ahead, emerging-market banks have already taken a giant leap in size and profits in the past decade. They have also maintained adequate capital ratios and ample deposit funding. The combination of growth and strength would appear to give them enormous advantages, heralding a rebalancing of power in global finance. Yet are those rock-solid balance-sheets quite what they seem?

A special report on banking in emerging markets

Breaking and entering
Why it is hard to copy Santander

May 13th 2010 | From The Economist print edition

SANTANDER, the rich world's fourth-biggest bank by market value, is a beacon of hope and a source of despair for other firms. Having started as a small regional bank, it pulled itself up by its bootstraps to become a big player in Latin America (as well as in Britain). Yet copying its strategy has become far harder now that most big emerging markets are in effect closed to large takeovers by foreign firms. Although the Spanish bank is dipping a toe into Asia, for example through a co-operation agreement with China Construction Bank, Santander's boss, Mr Sáenz, is mildly concerned about the industry's present frenzy to expand there. The region, he says, is "closed and expensive".

Santander's strategy is to build a deep retail presence with a large market share. A good example of how this works is Brazil. By assets Santander has a market share of 9% there, big enough to compete head-on with the big boys (see chart 9). The network banks are one level below this: HSBC has a 3% share and Citigroup 1%. The investment banks are another step down. Credit Suisse, which has a relatively big Brazilian operation, having bought a local firm, Garantia, in 1988, accounts for only 0.6% of the financial system's assets. Santander's business is heavily skewed towards lending to individuals and small businesses rather than to big firms.

The same is true of the other "gone native" banks. BBVA has a market share of about a quarter in Mexico. In eastern Europe Italian and Austrian banks have pursued a similar strategy. UniCredit, for example, is a mass-market bank in Poland, Bulgaria and Croatia, where it has shares of over 10% by assets. These banks argue that being big in particular countries is more profitable than being widely spread in the manner of the network banks. Ronit Ghose, an analyst at Citigroup, has benchmarked HSBC against local peers in its key regions and concluded that, outside Hong Kong, it typically has a worse cost-income ratio and return on assets, whereas Santander with its higher market shares in Latin America and Britain does better than the locals.

Establishing such positions of strength in depth takes time. Santander made its first round of acquisitions in Brazil in 1997 and its first game-changing one, of Banco Banespa from the Brazilian government, in 2000. Its build-up culminated in its purchase of ABN's Brazilian unit in 2007. Nor is it for the faint-hearted. BBVA bought into Brazil in 1998, but by 2003 it had concluded that it was unable to achieve critical mass and sold out to Bradesco. These days even the willing and able simply cannot find much to buy, because most developing countries will sell big banks to foreigners only from positions of weakness.

In the late 1990s and early 2000s Brazil went through a period when it needed foreign capital, investors were still skittish and there was a political commitment to privatisation. In Mexico the government nationalised the banking system in the 1980s and refused to allow foreign firms to buy control when it privatised the system in the early 1990s. The opportunity for foreign banks came after the devastating peso crisis of 1994-95 which eventually caused the rules to be relaxed. That led to BBVA's acquisition of Bancomer (2000-02), Santander's of Serfin (2000), Citigroup's of Banamex (2001) and HSBC's of Bital (2002).

Slim pickings

Are there equivalent opportunities for Western banks today? Mike Smith, chief executive of Australia's ANZ and an Asia veteran, says that in some countries in the region smaller family-controlled banks may be up for sale as capital requirements become more onerous. ANZ is also rumoured to be eyeing a bank in South Korea owned by a private-equity fund. But the biggest emerging markets, China, India and Russia, are state-dominated and no big banks are likely to come on the block.

Santander, finding much of the emerging world outside Latin America closed to it, has shifted its strategy. It has expanded through the crisis in Britain, buying bits and pieces (and bidding for some of the branches Royal Bank of Scotland is selling) to add to the base it acquired with Abbey in 2004, gradually building up market share—much as it did in Brazil. Mr Sáenz says the bank has "faith in a business model more than a geography", adding that "it's more likely that in the near future we will invest in more mature economies."

That could include eastern Europe, which has changed from emerging-market darling to villain. Instead of the bullish stories three years ago, when the penetration of banking services was expected to rise to western European levels, there is now deep pessimism about the region's adverse demographic profile and its lack of a saving culture. Poland is Santander's kind of market, though: biggish and with distressed sellers. Allied Irish Bank, having been bailed out by its government, is auctioning off its operation there, which has a 5% market share.

Other western European firms active in eastern Europe suffered during the crisis and are scaling back, for example KBC and Dexia. The healthy banks are staying put and remain optimistic. Société Générale is reorganising its interests in Russia and will get a majority stake in what will become the fifth-biggest firm by loans. It says it is convinced of the long-term potential. UniCredit's Mr Ghizzoni says the "process of convergence will continue".

Mr Sáenz believes that when countries invite in big banks from overseas it "puts lots of pressure on the competition", forcing it to raise its game and allowing economic development to move at a faster pace. Partly because of that, he thinks that in the longer term countries such as India and China might open up somewhat. "Do I think this will be the situation for the next 20 years? I believe something will happen to these economies that will make them change their mind." He points to Mexico's sudden opening up in the 1990s. "My experience is never say that it is closed for ever. Things can change a lot."

Time is what we don't have

But taking the long view is a luxury that less successful banks cannot afford. Waiting for India and China to fall to their knees is hardly a strategy. That leaves those banks with few choices. One is to build branches rather than buy a bank, which might work in some places. Standard Bank, its South African rival FirstRand and some of Nigeria's healthy banks are expanding their networks across the rest of Africa, where there is little competition.

It might also work for banks with privileged access, for example in China (see article). ANZ is building a bigger presence in Asia, having been ambivalent towards the region for years. Its boss, Mr Smith, explains that Australian businesses are now far more integrated with Asia and that this customer base gives ANZ an edge to expand its business abroad. Still, in most markets local bank bosses are pretty sceptical about Western firms building Rome branch by branch. "I don't think they will be major players" is about the politest comment your correspondent heard.

There is a traditional last resort, used, among others, by Japanese banks in California in the 1980s and more recently by desperadoes in eastern Europe. The formula is to set up a few branches, or pay astronomical prices to buy them, then use funding from your parent or from wholesale credit markets to lend through them. By some estimates half of foreign banks' loans in central and eastern Europe came from such sources. But regulators are cracking down. The new Basel 3 rules will penalise banks with too much wholesale or cross-border borrowing, and with good reason. A recent IMF briefing contrasted the sharp slowdown in foreign-bank lending in emerging Europe with the much more stable picture in Latin America (see chart 10), where foreign banks typically have bigger branch networks. It concluded that "foreign-bank lending funded by domestic deposits and denominated in local currency is likely to be more resistant to external financial shocks." The days of building up a big loan book without bothering about deposits or branches may be over. As Mr Ghizzoni puts it: "Some banks had an opportunistic approach. It's a game that is at the end."

So what are traditional banks in Europe and America to do if they want to expand abroad? They face stagnant home markets. They cannot replicate the presence of firms such as Citigroup or HSBC. They have no opportunity to buy dominant positions in attractive geographic markets, as Santander did, and no tradition of competing in sophisticated niches such as investment banking. Even the cheapskate strategy of buying a paper-thin presence is being closed off. Their only consolation is that emerging-market banks face the same dilemmas as they venture abroad.

The IMF and the euro-zone rescue

High stakes
What has the fund got itself into by participating in Europe's bail-out?

May 13th 2010 | From The Economist print edition

THE IMF's star has risen steadily through the global economic crisis. Contributions from its members have tripled its firepower. It has rescued economies from Hungary to Pakistan. Yet despite these achievements, its activities did not extend into the heart of the rich world.

That is now changing. Although initially sidelined by the European Union (EU), the IMF eventually cofunded and devised the terms of Greece's massive bail-out. And on May 10th the EU announced that the IMF is to provide up to €250 billion ($317 billion) to supplement its own €500 billion stabilisation fund to prop up the euro area's weaker members.

But the details of the IMF's promised contribution are far from clear. The fund is keen to emphasise that no money has actually been set aside for the rescue. Its deputy chief, John Lipsky, stresses that the €250 billion figure is "a hypothetical or theoretical number" based on the fund's role in recent joint EU-IMF rescues, where the IMF has provided about a third of the cash on offer.

The amount is hypothetical for a very good reason. Having to set that amount aside immediately would leave the IMF unable to lend to any other country that got into trouble. As of May 6th, its total remaining lending capacity for the year ahead was $272 billion, or €215 billion. It has never lent as much in one go as it would if the euro-area package were to be activated in its entirety (see chart).

The fund could, of course, find more money. Its board recently approved an extension of its standing arrangements to borrow from governments and central banks by more than $500 billion. But about half that amount is already included in its current lending capacity. Activating the rest would require many governments to seek legislative approval.

There are other options. The IMF will get some extra cash at the end of the year from a general increase in quotas, the maximum amounts countries are obliged to supply to the fund. Last year it also issued $250 billion of Special Drawing Rights (SDRs), its own quasi-currency. These sit in countries' reserves in proportion to their quotas. Dominique Strauss-Kahn, the fund's chief, thinks countries could lend some of this money to others. But there is no precedent for SDRs being transferred on such a massive scale.

The fund could also approach some reserve-rich emerging countries to top up its kitty. Some have already lent to the fund. China bought $50 billion of notes the fund issued last year; Brazil, Russia and India each bought $10 billion. But some of these countries are miffed that the fund did not consult them before rushing to the rescue of the euro area. Emerging Asian economies have bitter memories of the harsh conditions the IMF imposed on them during the Asian crisis; they are concerned about the fund making a huge commitment of resources without clearly setting out what potential borrowers would have to do to get the money.

Eswar Prasad, a former chief of the fund's China desk, says that all this is once again leading to questions about "whether the IMF's ultimate fealty is to its main shareholders, the US and the EU". Such concerns repeatedly arise because European countries as a group have the biggest chunk of votes in the IMF, and are over-represented relative to their economic heft.

Some also wonder whether the political ambitions of Mr Strauss-Kahn, who is widely rumoured to be considering a run for the French presidency, were behind the IMF's eagerness to step in. Simon Johnson, once the fund's chief economist, says that "a former French finance minister is the worst possible person to be leading the IMF into negotiations designed to save the euro. The conflicts of interest are overwhelming." The fund's European adventures may help Mr Strauss-Kahn. Their consequences for the institution he heads are less clear.

Argentina's ruling couple

Lame ducks no longer
Written off just months ago, the Kirchners are bouncing back. But if a divided opposition is outwitted at the next election it will have only itself to blame

May 13th 2010 | BUENOS AIRES | From The Economist print edition

PUNDITS began writing Cristina Fernández's political obituary just eight months after she became Argentina's president in 2007. She squandered the popularity she had inherited from her husband and predecessor, Néstor Kirchner, by picking and losing an ill-advised fight with farmers over export taxes. Then the world financial crisis abruptly halted the country's economic boom, even as inflation eroded workers' purchasing power. After years of unquestioned authority, the Kirchners suffered an embarrassing defeat in a midterm election last June. Not only did their Peronist party lose its congressional majority, but its list of candidates in Buenos Aires province—home to almost two-fifths of the electorate—led by Mr Kirchner himself, finished second. He promptly submitted his "irrevocable" resignation as party leader.

The first couple have done little to merit a comeback since then. Nonetheless, thanks to a recovering world economy, the advantages of incumbency and a hapless opposition, they are showing surprising resilience. Ms Fernández's approval rating has increased from 20% to 29% over the past seven months. Francisco de Narváez, who beat Mr Kirchner in Buenos Aires province in last year's election, reckons they have a 50-50 chance of winning the 2011 presidential election. Mr Kirchner, who has taken back control of the Peronists, says he and his followers are "determined to continue governing until 2020." Unlike Hugo Chávez, their Venezuelan ally, the Kirchners would not have to overturn term limits to do so, since they could continue to take turns in power.

The fortunes of Argentina's leaders have often been tied to global demand for the country's farm exports. The Kirchners are no exception. Although the price of soyabeans, the most important crop, has fallen by 40% from its peak in July 2008, it is still 60% above its historical average. Moreover, after the pampas suffered a severe drought last year, they are now enjoying a bumper harvest. The government collects 35% of these revenues.

Ms Fernández has further lined the public purse by nationalising the country's pensions and raiding its foreign-currency reserves. When the Central Bank's president, Martín Redrado, opposed her plan to use $6.6 billion of reserves to repay debt (which would free other revenues for new spending), she forced him to resign. Congress subsequently approved the policy.

Armed with these funds, the president is trying to buy back estranged voters' affection. In October she extended the child-support system for poor families, at a cost of $2.6 billion a year. The government is also wooing younger voters with plans to distribute 250,000 laptops to secondary-school students and provide 15,000-20,000 cheap mortgages, many of which will go to first-time buyers. In addition to their direct benefits, these initiatives have helped kick-start the economy, which should grow by more than 5% this year.

Ms Fernández is also benefiting from the way in which her husband boosted the power of the presidency. He reduced the share of taxes that is automatically transferred to the provinces, making their governors more dependent on the central government for financing. Many legislators are beholden to the governors. By artfully increasing public spending to its allies among them and withholding it from foes, the government has retained much of its sway over Congress despite lacking a majority. It has also got bills approved by cleverly exploiting the opposition's divisions and picking off factions within it.

Finally, although the economic costs of Argentina's 2001 debt default have mostly been left behind, its political consequences continue to favour the Peronists. The Radicals, their traditional rivals, had the misfortune to be in office during the crash, and voters have never forgiven them. Their implosion is a big reason for the opposition's fragmentation. Many presidential hopefuls from the opposition have less in common with each other than with the Kirchners. Perhaps the strongest contender is Mr de Narváez, a businessman and dissident Peronist. But since he was born in Colombia, his candidacy depends on the Supreme Court reinterpreting a constitutional bar on foreigners.

As neighbours such as Brazil and Chile forge ahead, the average Argentine has plenty to grumble about. One in three is still poor and inflation is heading for 30%, although the government rigs the figures at a third of that. But the Kirchners will not bury themselves. To dethrone them the opposition will have to move beyond knowing whom they are against and decide whom and what they are for.

The EU-Latin America summit

Plus ça change
But the balance of diplomatic power shifts to Brazil

May 13th 2010 | From The Economist print edition

AT THE first summit between the European Union and Latin America in 1999, the assembled leaders announced a "strategic partnership" with no fewer than 55 "priorities" from human rights to tourism. Over objections from France, which was worried about its farmers, they agreed to launch talks on freer trade between the EU and Mercosur, a sub-regional group based on Brazil and Argentina, provided these moved in parallel with what became the Doha round of world-trade talks.

Not much of this has happened. The following four summits were notable chiefly for demonstrating Latin America's recent disunity: Argentina and Uruguay were not on speaking terms at one, while Cuba's Fidel Castro and Venezuela's Hugo Chávez sounded off against free trade and European preaching on human rights.

Spain, which holds the rotating presidency of the EU, wants to use this year's get-together, in Madrid on May 18th, to "relaunch" the relationship. Its hopes are pinned on trade deals (technically, an "association agreement") with Colombia and Peru and with Central America, and on restarting the talks with Mercosur, which have been suspended since 2004.

The only certainty is the signing of the pact with Colombia and Peru, which then must be approved by the European Parliament. Despite concerns about human-rights abuses in those countries, the parliamentarians will probably decide that in boosting trade and investment the agreement would bolster democracy.

The negotiations with Central America were dogged at first by a dispute over Europe's barriers to their exports of bananas. This was eventually resolved last year, but a coup in Honduras caused the talks to be frozen until February. Several issues remain: for example, Central America wants to limit imports of Europe's (subsidised) powdered milk and cheese. European diplomats hope to address these concerns in a last round of dialogue before the summit.

With the Doha round dead, Mercosur will agree to Europe's request for exploratory talks about renewing their negotiations. But since France is opposed, and Argentina often breaks Mercosur's rules, these are unlikely to get anywhere.

Back in 1999, Europe was confidently expanding and Latin America was in recession. Now the reverse is true. Although Europe is still Latin America's biggest aid donor and foreign investor, its trade with the region has grown much more slowly than China's over the past decade. Moreover, the global balance of power is starting to shift to countries like Brazil.

Ahead of a presidential election in October, Brazil has lurched to the left in foreign policy. It threw its weight around before the summit. Brazil and its South American allies refuse to recognise Porfirio Lobo, Honduras's president, because he was elected under a government that took power through a coup. They threatened to boycott the event if Mr Lobo attended. Mr Lobo obligingly agreed to turn up only for a separate meeting between the EU and Central America. This ostracism is bizarre given that Mr Lobo won a reasonably free election in November. The same cannot be said for the governments in Iran, which Brazil's president, Luiz Inácio Lula da Silva, will visit before arriving in Madrid, or in Cuba, with which he is friendly.

Marginally useful as the trade deals may be, they hardly add up to a "strategic association" between the two continents. This will remain a distant prospect as long as Latin America is divided and Europe is preoccupied with its own woes.

Economic and financial indicators

May 13th 2010
From The Economist print edition

In America, employment outside the agricultural sector increased by 290,000 in April. America's workforce grew by 805,000, partly because many unemployed people who had stopped looking for work re-entered the workforce. As a result the unemployment rate rose to 9.9% in April from 9.7% in the previous month.

The combined GDP of the countries in the euro area was 0.5% higher in the first quarter of this year than in the three months to the end of March 2009. In Germany, the euro area's largest economy, the economy grew by 1.7% over the same period, while the Greek economy contracted by 2.3%.

China's inflation rate was 2.8% in April, up from 2.4% in March. April's inflation rate exceeds that in any of the past 18 months, but is still below the Chinese government's target rate of 3%.

Industrial production in Britain expanded by 2% in the 12 months to the end of March. This rate of growth was the highest since March 2004.

Germany's industrial production was 4% higher in March than in February. During the same month, France's industrial output increased by 1%.

Industrial output in Turkey rose by 21% in the 12 months to the end of March.

Indonesia's GDP in the first quarter of 2010 increased by 5.7% compared with the same period in 2009.

Taxing wages

May 13th 2010 | From The Economist print edition

The OECD, a think-tank, defines the "tax wedge" as the difference between what it costs someone to employ a worker and what that worker takes home as a percentage of total labour costs. A single person with no children who earns the national average wage can expect to take home less than half of what it costs his employer to employ him in Belgium, Hungary (not shown) and Germany. The tax wedge fell in most OECD countries between 2008 and 2009. Many of the declines were primarily because of reductions in income tax. In America, taxpayers stopped receiving cash stimulus payments from the government. This more than offset the result of a decrease in income tax, causing the tax wedge to rise.

Global OTC derivatives

May 13th 2010 | From The Economist print edition

The notional amount of outstanding over-the-counter (OTC) derivatives stood at $615 trillion in December 2009, up from $605 trillion six months earlier, according to the Bank for International Settlements (BIS). That is still well below June 2008's figure of $684 trillion, which was the highest figure since the BIS began to collect such data in 1998. The amount of credit-default swaps outstanding fell by almost 10% in the second half of 2009. Notional amounts are useful as a measure of market size. But the BIS reckons that gross market values provide a more accurate measure of the amounts that are actually at risk. The gross market values fell by 15% in the six months to December 2009, to $21.6 trillion.

UPDATE: Brazil Government To Cut BRL10 Billion From Spending

MAY 13, 2010, 1:38 P.M. ET

BRASILIA (Dow Jones)--In a move to slow Brazil's rapidly expanding economy and curb accelerating inflation, the government Thursday announced it will cut 10 billion reals ($5.65 billion) from planned public-sector spending this year.

Government officials said the reduction in outlays would help ease excess demand seen in the economy during a period of recovery.

"The demand in the economy is made up of private and public sector components," said Brazilian Finance Minister Guido Mantega. "The best way to quickly cool heating demand is to cut government spending."

The latest spending cut comes in addition to a budget freeze of BRL21.8 billion announced earlier in the year. The new cut will specifically target current administrative spending and will avoid impact on social programs and investment, Mantega said.

The minister said the cut was part of countercyclical strategy to avoid "excessive growth," and added that the government would make an effort to ensure that the country's economy wouldn't expand by more than 7% in 2010.

"We can cut interest rates, cut spending, and cut investments," he said. "We have instruments in hand to maintain the economy growing in a sustainable and balanced way."

Brazil's economy contracted by 0.2% in 2009 under the effects of the global financial crisis, but recent central bank market surveys point to growth of more than 6.2% this year.

According to the government's own projections, Mantega said, Brazil's economy is seen growing by 8% to 10% in the first quarter alone on a year-on-year basis.

Meanwhile, local inflation expectations have risen consistently over recent months despite central bank efforts to tighten monetary policy and ease liquidity.

According to a central bank market survey released this week, IPCA inflation is seen accelerating to 5.5% by the end of this year from 4.31% at the end of 2009.

Brazil's 12-month IPCA consumer price inflation through April reached 5.26%, well above the country's official year-end inflation target of 4.5%.

The measure announced Thursday marked the first time that Brazil's current government has announced budget cuts specifically with the intention of controlling excess demand and inflation.

The government in the past has frequently announced budget spending freezes, but normally in an effort to assure compliance with its year-end operating budget surplus targets.

Brazilian Planning Minister Paulo Bernardo, who together with Mantega helped craft the policy move, said the government became convinced of the need for a reduction in fiscal stimulus in the wake of recent robust economic figures.

"We came to the understanding that we needed to help out via fiscal policy," he said.

Brazil's March retail sales rose a seasonally-adjusted 1.6% from February and 15.7% from March 2009, the Brazilian Census Bureau, or IBGE, reported this week. Further, Brazil's industrial output rose a seasonally adjusted 2.8% in March from February and by 19.7% from March 2009.

Meanwhile, market analysts Thursday lauded the government's move to head off overheating amid pressure for more spending ahead of this year's national elections in Brazil.

"Fiscal tightening is rarely seen in Brazil during an election year, but it goes to show just how strong the economy is right now," said Win Thin, Senior Currency Strategist at Brown Brothers Harriman & Co. in New York.

Speaking earlier in the day at an inflation targeting seminar in Rio de Janeiro, Brazilian central bank president Henrique Meirelles said the bank also strongly favored any measures outside the scope of monetary policy that could help curb inflation pressure.

"Any help in the process of stabilizing the economy is welcome," Meirelles said.

Since the beginning of the year, the central bank has raised reserve requirements in the country's banking system and begun tightening monetary policy with a three-quarters of a percentage point hike of the country's reference Selic interest rate.

According to recent market surveys, the central bank is seen raising the Selic rate by as much as 225 basis points by the end of this year from its current 9.5% annually in an effort to curb inflation.

WORLD FOREX: UK Pound, Euro Under Pressure On Debt Worries

MAY 13, 2010, 12:34 P.M. ET

NEW YORK (Dow Jones)--The euro and the U.K. pound are under pressure Thursday amid worries about the negative economic effects of measures to correct large national deficits.

The euro slipped close to a 14-month low versus the dollar as worries surfaced once more about the drag that plans to slash government spending will place on economies of euro-zone countries such as Greece, Spain and Portugal. Although outside the euro zone, the U.K. also faces painful measures to reduce deficits.

"The whole situation is injecting nervousness in to the market," said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank in New York. "In Greece, for example, the government is accepting the measures, but the people have not accepted these measures."

The efficacy of proposed solutions are cast into doubt, he said, "by this huge disconnect between the government and the people."

The doubts about longer-term fundamentals for the euro zone and U.K. sent investors to the safety of the U.S. dollar, the yen and the Swiss franc, which touched a new record high against the euro. Although the Swiss National Bank recently affirmed its intention to prevent excessive appreciation of the franc, there was no clear signal of central bank market action to change the franc's course.

Around midday Thursday, the euro was at $1.2564, down from $1.2629 late Wednesday, according to EBS via CQG. The dollar was at Y92.77, down from Y93.17, while the euro was at Y116.57, off from Y117.69. The U.K. pound was at $1.4650, down from $1.4826. The dollar was at CHF1.1149, from CHF1.1110.

The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 85.167, up from 84.848.

The common currency dropped briefly to CHF1.3997 in London's morning trading hours Thursday, below its previous low of CHF1.4005 set May 6. The move represents a drop below the SNB's perceived tolerance limit of CHF1.4000. It recently traded at CHF1.4007. Swiss markets were closed Thursday in observance of a national holiday.

Recent fears of a euro-zone debt default had receded in the absence of any new negative developments either in Greece or the region's other major debtors.

Worries about a political stalemate in the U.K. are easing now that the Conservatives and Liberal Democrats have agreed to form a coalition government, with the deficit and spending cuts topping the agenda.

But while fears of a systemic breakdown due to sovereign debt have receded, the euro and sterling haven't gotten much support.

"Investors are being somewhat more discerning about the investment decisions that they make," Bennenbroek said. "The euro and the pound are not getting what one would call unjustified support. The pattern that we saw before was that everything turns stronger against the dollar."

In contrast to Europe, spending cuts in Brazil have been hailed as a sign of economic strength, not weakness. Brazil's government will cut about 10 billion reals ($5.65 bilion) from spending as part of its effort to curb accelerating inflation, Finance Minister Guido Mantega said Thursday. Mantega said the reduction of public-sector spending would help ease excess demand seen in the economy during a period of recovery.

The cuts signal "just how strong the economy is right now," said Win Thin, senior currency strategist at Brown Brothers Harriman in New York. "Fiscal tightening is rarely seen in Brazil during an election year."

The dollar is trading at BRL1.7750 from BRL1.7731 late Wednesday.

Optimism for a global recovery also got help from positive economic data in Australia and Japan.

The mood had investors moving toward equities, commodities, and thinking twice about rushing to the euro and the pound, as they would have last year or the year before, said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.

Bennenbroek said he expects currencies to "tread water slightly," with the next major move in the markets likely to be technically induced, perhaps by a euro fall below $1.25.

Brazil Real Closes Slightly Weaker On Europe Jitters

MAY 13, 2010, 3:43 P.M. ET

SAO PAULO (Dow Jones)--The Brazilian real closed slightly weaker against the U.S. dollar Thursday on continued investor worries about the European fiscal crisis.

The real closed at BRL1.7765 to the dollar, slightly weaker against Wednesday's close of BRL1.7731.

Traders noted that volume was weak, with little intraday volatility. Domestic funds bought dollars while importers, exporters and global funds were mainly sidelined.

Traders said investors are still worried about the European fiscal crisis, despite moves this week by Portugal and Spain to cut budget deficits.

In Brazil, Finance Minister Guido Mantega announced the equivalent of more than $5 billion in budget cuts as a way to fight down inflation and moderate expected interest rate hikes. Investors largely shrugged off the announcement, however, with worries still focused on Europe.

Traders added that a number of Brazilian companies planning overseas bond issues have now stepped back from the market. "Nobody is making a move until the European situation becomes clearer," said a trader. "No dollars will be coming into the market from bond issues for a while."

On the domestic credit market Thursday, interest rate futures contracts on the BMFBovespa financial exchange closed mixed in low-volume, range-bound trading. The contracts reflect investor expectations for average annual interest rates at future dates.

As in the foreign exchange market, most investors shrugged off budget cuts announced Thursday by the Brazilian government, saying the cuts will have little impact on long-term monetary policy.

Among the most actively traded interest rate futures contracts Thursday, that of January 2011 closed unchanged at 11.12%.

-By Tom Murphy, Dow Jones Newswires; 55-11-3544-7090; brazil@dowjones.com

A Glimmer of Sanctions on Iran

U.S. officials are quietly confident they are within striking distance of a long-sought agreement to impose new international economic sanctions on Iran.

And for that they can thank, at least in part, North Korea and Iran itself.

After months of fits and starts, officials believe they are near a meeting of the minds with the other permanent members of the United Nations Security Council—Russia, China, Britain and France—on a new set of sanctions to penalize Iran for its nuclear program. Getting big-power agreement is the key to a U.N. deal, and President Barack Obama and Russian leader Dmitry Medvedev agreed by phone Thursday to "intensify" the quest for a sanctions deal. The fact that there's progress at all is also a sign that relations with China are thawing after months of tension; as recently as a month ago, the Chinese weren't playing ball.

Of course, being close to a deal isn't the same as having one, and things could still go haywire. Most important, Iran is likely to make a last-minute play this weekend, via Brazilian President Luiz Inácio Lula da Silva, to head off a U.N. sanctions resolution.

Brazil is one of the members of the Security Council right now, and President da Silva has made it a kind of personal mission to befriend Iran and head off new sanctions. He is to visit Tehran Sunday, and it appears that he and his Iranian counterpart, Mahmoud Ahmadinejad, are trying to cook up a plan to put Iran back in the good graces of the international community on the nuclear question.

That effort likely will take the form of a proposal to revive, in some fashion, a tentative agreement Iran reached in talks with world powers last fall. Under that arrangement,Iran was to ship about half of the low-enriched uranium it has produced abroad, to Russia and France, for reprocessing into benign fuel for a nuclear research reactor.

By turning such a big chunk of the raw material Iran has been accumulating into something other than the highly enriched uranium needed for nuclear weapons, the deal would have stretched out the time Iran would need to produce warheads.

Iran began backing away from the deal almost immediately, though, and it sputtered out on the runway. Now, don't be surprised to see Mr. Ahmadinejad, in a bid to head off sanctions, link arms with Mr. da Silva in coming days and proclaim Iran's renewed interest in some variation of the plan—most likely one that would call for the uranium never to leave Iran's soil for reprocessing.

Beyond Brazil, there are two other notable obstacles: Lebanon and Turkey. Lebanon happens to hold the presidency of the Security Council this month, and is hardly eager to shepherd into place sanctions on a country that backs Hezbollah fighters on Lebanese soil. Likewise Turkey, also occupying a rotating Council seat, is reluctant to sanction a fellow Islamic country.

But a sanctions resolution needs just nine of the 15 votes on the Security Council, and U.S. officials seem confident they can get those. Their trump card in this effort may be Iran itself.

Iran has, over the past month or so, embarked on a kind of diplomatic blitz to head off sanctions, wooing Security Council members in New York, in Tehran, and in their home capitals. Mr. Ahmadinejad personally visited Security Council member Uganda and appeared at a U.N. conference on nonproliferation.

But the Iranian offensive, diplomats say, has been ham-handed and unconvincing, marked less by reassuring proposals than by proclamations of Iran's right to continue its nuclear program and dodgy statements about that plan to ship some of its uranium abroad.

The second trump card may be, of all things, North Korea. North Korea and Iran are the two poster children for nuclear proliferation dangers, and no amount of diplomatic or economic pressure has succeeded in pushing Pyongyang off its nuclear path. Those who doubt the usefulness of sanctions have pointed to North Korea as an example showing they don't have much impact.

But then, last week, North Korean leader Kim Jong Il visited China and, essentially out of the blue, said he was interested in returning to long-slumbering six-party international negotiations over his nuclear program. It was a sign that maybe, just maybe, the pressure of international sanctions is pinching enough to alter North Korean thinking.

Most encouraging for U.S. officials may be signs of a healthier relationship with China, after tensions over Washington's arms sale to Taiwan, a White House visit by the Dalai Lama and the yuan's value. All isn't sweetness and light, but the dialogue is returning to normal, and Obama administration aides sound optimistic about the trends.

To really matter, any new U.N. sanctions against Iran would have to be followed by more pointed steps taken separately by the U.S. and its developed-world allies to further isolate Iran and its Revolutionary Guard establishment from the international financial system.

So there is a ways to go—maybe a long ways—before financial pressure might move Iran. But the starting line may at least be in sight.

New Leaders Have Pledged a More Pragmatic Approach to the U.S.

A Government With Liberal Democrats Likely Means Recalibrating Conservatives' Ties With U.S. and Wariness of Europe

By ALISTAIR MACDONALD And JAY SOLOMON

David Cameron's Conservative Party is historically known for its close relationship with the U.S. and an arm's-length distance from Europe. As prime minister, he could end up taking a more pragmatic view on Europe—and finding that Britain's "special relationship" with the U.S. isn't what it once was, particularly if he seals a coalition deal with Britain's third party, the Liberal Democrats.

While financial markets may be relieved that the U.K.'s post-election minuet is finally over, the coalition government is in many ways an awkward one, perhaps most starkly in terms of foreign policy and defense.

Experts say they anticipate the Liberal Democrats will act as a check on the Tories' wariness of the euro zone, but have limited impact on defense-spending issues, such as renewing the Trident submarine, the costly independent nuclear-deterrent program the Tories back.

But the two parties will find some common ground, most notably in a more pragmatic approach to Britain's "special relationship" with the U.S.

Under leaders such as Margaret Thatcher and Winston Churchill, the Conservatives emphasized close ties with the U.S. More recently, both Washington and London have subtly inched further apart.

The U.K. remains important to the U.S., as a key ally recently on matters including wars in Iraq and Afghanistan as well as the Group of 20 nations' talks on global financial reform. London plays a key role in pressuring Iran over its nuclear program.

But going forward, the U.K.'s usefulness to Washington is likely to decline as its economy recedes on the global stage, with India, China, Brazil and others nudging older Western powers to the sidelines.

Mr. Cameron's Conservatives, in a move that the Liberal Democrats will almost certainly endorse, look to hedge their bets by anticipating the relative decline of U.S. power amid the rise of developing nations.Before a trip to India in 2006, Mr. Cameron wrote in a blog: "for too long, politics in this country has been obsessed with Europe and America."

For Mr. Cameron, the future means strengthening ties to the emerging giants and moving closer to old friends such as the Gulf nations, and forming what he called a "new special relationship" with India.

Mr. Cameron extols the virtues of close contact with Washington, but he and other Tory officials emphasize a "solid but not slavish" friendship that needs to be rebalanced from one tilted in America's favor. For his part, Liberal Democrat leader Nick Clegg has criticized "the default Atlanticism" of both Labour and Conservative governments, adding in March "we still too readily put ourselves in a position of unthinking subservience to American interests."

Since Barack Obama's inauguration last year, U.S.-U.K. relations have notched a number of awkward moments that had nothing to do with geopolitics. British diplomats felt snubbed when the White House returned a bust of Churchill that had been displayed in President George W. Bush's Oval Office. Mr. Obama also sparked a media outcry in the U.K. after presenting Mr. Brown with a box of DVDs that didn't work in British entertainment systems.

With regard to Europe, the Conservatives have a thornier challenge. In election debates, Liberal Democrat leader Nick Clegg described some of the Tories' partners in the European Commission as "nutters."

Mr. Cameron, who pulled the Tories out of the mainstreamconservative European People's Party bloc in 2006 to partner with a fringe right-wing group, responded by saying Mr. Clegg would want a much stronger Europe that would cede more of London's powers to Brussels.

That tension may make it tougher for the Tories to follow through on their plan to change the law so that any British government agreeing to atreaty that hands over power from Britain to the European Union— such as joining the euro— would need to pass a referendum.That means that issues such as giving up sterling and adopting the euro would need to be voted on. The Conservatives also have drawn a line on other issues, such as never signing up to a European public prosecutor.

In reality, many powers have already left London for Brussels—often under previous Tory administrations—a fact that Mr. Cameron has acknowledged when promising to be an "active" member of Europe.

"He is entirely pragmatic, he understands clearly the importance of Europe, and he understands we are part of it," said Douglas Hurd, a foreign-policy adviser to the Tory leader. A foreign minister to two former Tory prime ministers, Lord Hurd says Mr. Cameron will encourage joint foreign-policy responses on issues such as handling an increasingly abrasive Russia, while trying to stop any further centralization of power to Europe, particularly on issues such as social policy.

That said, his "pragmatism" isn't shared by other members of the party, though he is likely to find strong European backing from his coalition partners. Mr. Cameron will still be under pressure to balance his relationship with Brussels and his relationship with the euro-skeptics in his party. This was in part the undoing of John Major, the last Conservative prime minister who was hamstrung by party rebellions over Europe.

"There is a good deal of apprehension in Europe, but on the whole European leaders have been reassured that Europe didn't feature much in the campaign and the Tories weren't too strident on the subject," said Nick Witney, of the European Council on Foreign Relations think tank.

In Amazon, Rain Forests Make Room for Mall Rats

MAY 13, 2010

RIO BRANCO, Brazil—Until now, civilization's march into the Amazon forest has followed a predictable pattern. Loggers make way for cattle ranches that make way for farms. The next step: Shopping malls.

Only a few decades ago, many scientists believed that the Amazon was barely habitable. Today, at least five Brazilian Amazon cities have populations over 300,000, a key threshold for attracting national retail chains. By the end of next year, four of the five biggest cities will have large American-style malls. Developers are considering projects in three others.

The latest mall project broke ground in March in Rio Branco, a once-isolated outpost near the spot where rain forest activist Chico Mendes was killed in 1988. Builders were encouraged by a successful new mall about 340 miles away in Porto Velho. Folks from Rio Branco were making the six-hour drive there to shop.

The proliferation of Amazon shopping malls marks an economic turning point for one of the world's last frontiers. A modern consumer economy is taking root in a region that most people still imagine as dense jungle and piranha-infested rivers, checkered with deforested patches.

On Tuesday, Brazil's government reported that retail sales in the Amazon's Rondônia state, home of the Porto Velho mall, rose by 31.7% in the year ending in March, the second fastest rate in the country and twice the national average. In Acre state, where the Rio Branco mall is under way, sales rose 31.5%—the country's third fastest rate.

The rise of the Amazon consumer underscores the scope of Brazil's domestic economic boom. President Luiz Inácio Lula da Silva has showered the region with money in an effort to lift the standards of the poor and working classes. Poor families get cash subsidies. Businesses get subsidized loans from the federal Banco da Amazônia. Hydro-electric dam projects provide jobs and investments. City populations have grown as people move there to access jobs and government services.

The Amazon's development also alters the game for environmentalists. Amazon city dwellers now have more clout to demand that roads, power plants and other projects be built in the region. That helps explain why Brazil's ultra-green environmental minister was replaced in 2008 by one more open to development. Because the malls are being built on land that was deforested decades ago, environmentalists haven't opposed the projects. Local environmentalists say their goal is to channel inevitable economic growth into activities that don't require mowing down more trees.

"The arrival of shopping centers is part of a global trend," said Jorge Viana, a former governor and leading environmentalist from Rio Branco. "Our biggest challenge is creating a model of sustainable economic development that includes the people who live in the forest."

To be sure, the vast Amazon is still mostly forest and won't become a strip mall any time soon. Since 1991, the population in Brazil's Amazon forest biome rose 48% to 19.7 million, mostly in cities and towns, according to Conservation International, a Washington, D.C.-based environmental nonprofit. But that's still extremely sparse considering that Amazonians occupy territory around the size of Western Europe.

Still, there's enough spending power in the Amazon now to attract global investors. Canada's Ivanhoe Cambridge, among the world's biggest shopping mall builders, is a partner in the Porto Velho mall. U.S. pension funds invested in the Rio Branco project. In 2007, BRmalls, a Brazilian developer partly-owned by U.S. real-estate tycoon Sam Zell, bought a stake in the region's oldest mall, Amazonas Shopping, in the urban hub of Manaus.

In Porto Velho, the new shopping center has changed everything from the landscape to the economics and social habits of the frontier town. The capital of a heavily deforested state, the population of the hardscrabble cattle and soy hub swelled after new roads brought hundreds of thousands of settlers to the region in the 1980s. Now, it's booming. Construction workers and white collar engineers are pouring in to build two hydro-electric projects worth several billion dollars nearby.

A beige, boxy structure rising out of a neat black-top parking-lot, Porto Velho Shopping is a jarring contrast to the rest of town, still a chaotic jumble of shabby, cramped buildings and cracked pavement.

The mall is by far the largest well air-conditioned structure for hundreds of miles around, making it an oasis in the muggy heat. That's enough to make it the state's top entertainment destination.

"The mall is basically the only thing there is to do in the entire state," said Aira Queiroz, an 18-year-old student who'd made the 125-mile trip from Ariquemes, the ranch town where she lives, to enjoy an ice cream and shop at the mall on a Saturday in April. "There's definitely nothing to do in my town."

Around her, mall scenes typical of the U.S. suburbs unfolded. The food court buzzed with chatter. A glass elevator climbed the atrium to deposit movie-goers at a five-theater Cineplex boasting a 3D screen. There were even Amazon mall rats. Teens, some with dyed-black hair swept precociously over one eye, roamed the aisles looking for something to do. Uniformed security guards kept a watchful eye.

For all its scenes of Americana, there are reminders that the mall is on the Amazon frontier. McDonald's had no fries that day. The delivery truck was delayed somewhere on the 2,500-mile drive from São Paulo. The mall's employee-of-the-month won for handling more responsibility after half her team contracted Dengue fever.

A pair of Indian girls on a mall excursion guided by missionaries stood still, pondering the escalator from a safe distance. The mall has the first escalator banks in the state, and many people were lining up to ride one for the first time. After a cautious approach, the girls clasped hands and went for it. One made it easily. The other was caught in a steadily widening split-stance before wobbling aboard.

The changes are not just social. The mall has put enormous competitive pressure on local retailers to improve service and lower prices, altering the way they do business.

Some 50 national chains, such as department store Lojas Americanas (meaning "American Stores,") opened their first store in the state at the mall. The competition put some downtown shops out of business, and forced others to upgrade to survive.

Consider the case of Divas, a clothing boutique run by Vilmarque João, a one-time appliance executive, and his wife. The business sprang from Mrs. João's frustration at the lack of fashionable clothing shops in Porto Velho. She and her friends started pooling money a few years ago to fly designated shoppers to São Paulo to retrieve the latest styles.

Word got out. Soon, orders poured in from other women with the same complaints. The Joãos dropped appliances and opened a clothing store downtown where it thrived for six years. They moved to the mall when it opened, figuring business downtown would be sucked dry.

Suddenly, however, national clothing franchises with high-end jeans opened just steps away from Divas in the mall. To survive, the Joãos cut the price of Carmim brand jeans by 43% to 389 reals ($218). Competition for new styles meant paying to ship apparel overnight by air from São Paulo.

To keep up with national stores, Divas hired more sales people and spent more time training them. The Joãos' lower prices and higher costs shrank their profit margin to 12% from 50% at their downtown store. But overall profits are still higher: Thousands of people, rather than hundreds, now pass their store daily. Mr. João suspects the mall environment has given a jolt to local consumerism.

"The mall is the only place in Porto Velho where all social classes are mingling in an open space, on equal footing," said Mr. João. "The middle class gets a chance to see what the rich are wearing, and then wants to go out and buy it."

The idea of building shopping malls in the Amazon isn't new. Brazil's 1964-1985 military government envisioned a network of bustling Amazon cities. They built roads to the forest and subsidized pioneers who would settle it.

It didn't work out as planned. Expanses of forest were torched, but the rain forest land wasn't as fertile as expected. Far flung towns like Porto Velho swelled with luckless settlers and became violent no-man's lands.

But Amazonian economics are changing. By experimenting with fertilizers, grass types and other technologies, Amazon farmers and ranchers have learned how to wring more profits from the land. New roads have tethered together Amazon cities once isolated from each other, creating local markets. Roads now extend into neighboring countries like Peru, increasing commerce.

The first shopping mall in the Brazilian Amazon opened in 1991 in Manaus, a city of 1.7 million that has thrived as a manufacturing center because of a special status as duty-free zone. In April 2009, the 227-store Shopping Manauara opened nearby with jungle trees in the food court. The project was funded in part by Developers Diversified Realty Corp., a publicly traded U.S. real estate investment trust. At least two developer groups are considering additional mall projects for the city.

Most significantly, shopping malls are spreading to secondary Amazon cities like Porto Velho and Rio Branco where such investments were unthinkable a decade ago. One mall project is under way in Macapá, a state capital on the Amazon's northern bank unreachable by road from the rest of the country. And a second group is considering a competing project. Mall developers have already acquired land in the river port city of Santarém, population 277,000, and in Marabá, a mining hub.

The Amazon's consumer market reached critical mass so fast that it surprised even the experts. Five years ago when Dorival Regini, chief executive of a Rio de Janeiro-based mall developer LGR, began looking into Rio Branco, he had doubts.

In his mind, Rio Branco was synonymous with Dodge City—a lawless outpost on the Amazon frontier. The state was notorious as the place where the son of a cattle rancher murdered the rubber tapper and environmentalist Chico Mendes. Until the late-1990s, Hildebrando Pascoal, a strongman police chief-turned congressman, ran the state. He earned the nickname "chainsaw" for the way one of his enemies perished.

But data showing rising population and incomes warranted a closer look. So Mr. Regini dispatched an analyst, who was initially skeptical. "After he got there, he called and said, 'I should stay a few more days; I think we can do this'," Mr. Regini said.

Rio Branco had been tamed. "Chainsaw" was in jail. A group of green technocrats, mostly disciples of Chico Mendes, had won elected office in 1998. They pushed laws barring clear-cutting in the state's remaining rain forest. In a bid to attract businesses to town as an economic alternative to ranching, they built parks, well-lit streets and a fancy pedestrian bridge over the river. Zoning laws went in, and much of the endemic corruption went out.

Another encouraging sign: a planned road from Rio Branco across the border into Peru and over the Andes to Pacific Coast ports. The road, now opened, may soon be an important transit point for import and export to China, locals hope.

LGR acquired a piece of land at the intersection of the new road to Peru and the highway that connects Rio Branco to the rest of Brazil. The 161-store Via Verde Shopping is slated to open in mid-2011.

The company is confident the project will work in a city where traffic jams now clog streets where there were few streetlights just a decade ago. LGR executives flying up to oversee the project had trouble finding enough rooms in local hotels. The company is now planning a hotel, too.

The mall is the state's biggest private investment. But other firms are also eyeing Rio Branco. The Dutch warehouse club Makro opened near the mall site recently, and its French rival, Carrefour, is planning a store.

Building a mall in an Amazon city like Rio Branco presents unique challenges. Heavy rains fall almost half the year. During the dry season, workers must race to build the frame and roof so that work on the inside can continue during the rains. Missing the deadline could mean losing an entire year.

Everything from cement to iron bars, glass and fixtures costs more because it must be trucked in from hundreds, and in some cases thousands, of miles away. The clay Amazon soil has no stones. That means that gravel to make cement must be trucked in—along with other construction materials.

There are also unexpected snafus. When LGR engineers scouted locations for a bicycle park the company is building to meet city requirements for building improvements, they were surprised to find a family of Indians who'd come out of the forest camping on the spot. The Indians told them to leave. Later, federal Indian authorities arrived and provided housing for the group.

One aspect has been easy: Finding tenants. Space in the Rio Branco mall was almost totally rented out before it broke ground.

Brazil to cut public-sector spending; Chile rate decision due

May 13, 2010, 5:31 p.m. EDT | By Carla Mozee, MarketWatch

LOS ANGELES (MarketWatch) -- Brazil's currency finished modestly lower Thursday, easing from an earlier gain when traders took their cues from a government plan outlining spending cuts in a bid to hold down inflationary pressures.

The currency ended at 1.777 reals per U.S. dollar, down from Wednesday's close at 1.773 reals. Trading was influenced in part by lingering concerns about debt problems in the euro zone.

The currency rose to 1.767 reals during the session as the Brazilian government said it will reduce public-sector spending by roughly 10 billion reals ($5.64 billion) in a move to rein in inflationary pressures, according to media reports Thursday.

Among exchange-traded funds, the iShares MSCI Brazil Index Fund /quotes/comstock/13*!ewz/quotes/nls/ewz (EWZ
67.01, -0.60, -0.89%) reversed course to close with a 0.9% loss.

The Bovespa equity index fell 0.7% to 64,788.22, with declines accelerating as stocks on Wall Street tumbled late in the session. The S&P 500 Index /quotes/comstock/21z!i1:in\x (SPX
1,157, -14.24, -1.22%) fell 1.2% to 1,157.44. Read Market Snapshot.

After a contraction of 0.2% in 2009, Brazil's economy has been quickly expanding. Market professionals have largely pegged growth coming in at more than 6% this year.

Alongside growth, inflation and inflation expectations have been on the rise. The annual inflation rate in April was 5.26%, surpassing Brazil's inflation target of 4.5%.

Finance Minister Guido Mantega said the government will work to limit economic growth to no more than 7% this year.

"Fiscal tightening is rarely seen in Brazil during an election year, but it goes to show just how strong the economy is right now," wrote Win Thin, senior currency strategist at Brown Brothers Harriman, in a note Thursday.

Brazil, which will hold its presidential election in October, said in March that it would freeze nearly 22 billion reals in spending.

Late last month, the nation's central bank embarked on a new rate-tightening cycle by raising the key Selic rate to 9.5%. The Selic had stood at a historic low of 8.75% since July 2009.

In a weekly survey conducted by the central bank, analysts lifted their economic growth estimate to 6.26% for 2010, up from 6.06% in the previous week. They also, on average, expected the benchmark IPCA inflation index to end at 5.5% this year.

Elsewhere in Latin America, Chile's IPSA index fell 0.5% to 3,872.48, with losses also deepening as Wall Street dropped. The moves in Santiago came ahead of the central bank's interest-rate decision due late Thursday. The iShares MSCI Chile Investable Market Index Fund /quotes/comstock/13*!ech/quotes/nls/ech (ECH
55.78, -0.06, -0.11%) turned lower and ended at 0.1%.

Analysts polled by Dow Jones Newswires, on average, expect policy makers to hold the benchmark TPM rate at the record-low rate of 0.5%.

Chile continues to deal with the aftermath of a massive earthquake that hit Feb. 27. The government has estimated that the temblor created about $30 billion in damages.

The central bank said last week that a key index of economic activity dropped 2.8% in March from the year-ago period. Analysts polled by Dow Jones Newswires had expected a decrease of 2.5%.

In Mexico, the IPC index fell 0.1% to 32,342.43. Argentina's Merval lost 1% to 2,316.74.

Brazil to Cut Spending by $5.7 Billion to Cool Demand (Update2)

May 13, 2010, 1:51 PM EDT

May 13 (Bloomberg) -- Brazilian Finance Minister Guido Mantega said the government will cut spending by 10 billion reais ($5.7 billion) to cool the economy before the effect of interest rate increases can take hold.

Mantega, speaking to reporters today in Brasilia, also said that the spending cuts would not affect social programs or investment in infrastructure.

Policy makers last month lifted Brazil's benchmark interest rate for the first time since September 2008 amid forecasts that Latin America's biggest economy will expand at the fastest pace in a quarter of a century in 2010. Propelled by domestic demand, faster economic growth is stoking inflation that has exceeded the government's 4.5 percent every month this year.

Cutting public spending "is a strong and quick tool to reduce the government's demand," Mantega said. "The advantage compared to other tools, is that it takes effect immediately -- when you raise the interest rate it takes four, five, six months to have an impact."

The yield on the interest rate futures contract due January 2012, the most traded today on the Sao Paulo BM&F exchange, fell three basis points to 12.26 percent at 1:25 p.m. New York time.

"It is positive to use fiscal policy to help contain domestic demand," Alexandre Schwartsman, chief economist at Banco Santander SA in Sao Paulo, told reporters today in Rio de Janeiro. "Quicker inflation is closely linked to the acceleration of demand beyond its limit."

Schwartsman said the cut may be small given the speed at which the economy is expanding. "There are countries carrying out more vigorous fiscal adjustments," he said.

The cut announced today, which will be detailed May 20, comes in addition to a 21.5 billion-real cut disclosed earlier this year, Budget Minister Paulo Bernardo told reporters today. The combined total of cuts announced this year amounts to about 1 percent of Brazil's gross domestic product and still requires President Luiz Inacio da Lula Silva's approval, Mantega said.

Central bank President Henrique Meirelles, speaking to reporters today in Rio de Janeiro, said any help from the fiscal side to contain inflation is "welcome."

'Chinese-like rate'

Brazil's economy will grow at a faster, "Chinese-like rate" this year as the result of a stronger global economy and measures taken to stimulate domestic demand, Itau Unibanco Holding SA said in a report yesterday.

Mantega said the government will not allow the economy to continue to expand at a 7 percent pace over time. He said policy makers have the tools to keep the economy growing in a sustainable and balanced fashion.

"We can raise rates, cut spending and investment," Mantega said. "We will reduce a bit government demand to prevent excessive growth," he said at a later event today in Brasilia.

The central bank's eight-member board, after keeping the benchmark rate at a record low 8.75 percent for nine months to boost economic growth, raised the Selic to 9.5 percent on April 28. The bank will further increase the rate to 10.25 percent in June, according to the median estimate in a May 7 central bank survey of about 100 economists.

Latin America's biggest economy should expand 7.5 percent this year, above a previous estimate for 6.5 percent, Itau's chief economist, Ilan Goldfajn, wrote in a May 12 report. Brazil's biggest bank by market value also raised its estimate for economic growth next year to 4.8 percent from 4.6 percent.

The real rose 0.2 percent to 1.7713 at 1:32 p.m. New York time from 1.7741 yesterday.

Lula Buoys Bonds as $5.6 Billion Spending Cut to Tame Inflation

May 14, 2010, 12:46 AM EDT

May 14 (Bloomberg) -- Brazilian President Luiz Inacio Lula da Silva's 10 billion real ($5.6 billion) spending cuts are prompting bond traders to pare inflation expectations the most in two months.

The gap between two-year fixed-rate bonds and inflation- linked notes has narrowed 14 basis points, or 0.14 percentage point, this week to 560 basis points, according to data compiled by Bloomberg. The last time the so-called breakeven rate, which reflects investors' inflation expectations, fell more was in the first week of March.

Central bank President Henrique Meirelles said yesterday's budget cut was "welcome" assistance as he fights inflation and reins in growth. Meirelles raised the benchmark interest rate 75 basis points last month to 9.5 percent to curb the nation's 5.3 percent annual increase in consumer prices as traders pushed yields on rate futures up by the most since October 2008.

"The government is helping the central bank," said Marco Freire, who manages about $2.5 billion as chief investment officer of Brazilian fixed income at Franklin Templeton Investimentos Brasil in Sao Paulo. "It's a step in the right direction. We could see inflation expectations subsiding."

Freire said he shifted out of inflation-linked bonds and into fixed-rate debt "recently" and predicts that yields on the government's 10 percent notes due in 2017 will fall to 12 percent before year-end from 12.62 percent yesterday.

Yields on the fixed-rate notes due 2012 have fallen 19 basis points to 12.37 percent since May 4 while yields on similar-maturity inflation-linked debt rose one basis point to 6.77 percent.

Budget Deficit

The gap between the two has narrowed from a 17-month high of 580 basis points on May 4. Yields on interest-rate future contracts due in January 2012 declined 26 basis points over that time to 12.28 percent from a 16-month high of 12.54 percent.

Traders had pushed the yields up 64 basis points in April on concern Meirelles would fail to stem inflation as government spending climbed ahead of October elections. The budget deficit widened in March to 17.1 billion reais, the most on record for that month, according to the central bank.

Peter Eerdmans, head of emerging-market debt in London at Investec Asset Management Ltd., which oversees $65 billion, said yesterday's budget cuts show "this is a prudent government."

"This is what the market is looking for," Eerdmans said. "We see value in bonds."

Default Swaps

Brazilian local debt has gained 3.1 percent this year, beating the average return of 1.2 percent on emerging-market local bonds, according to JPMorgan Chase & Co. The real fell 0.1 percent to 1.7756 per dollar yesterday. It has declined 1.8 percent this year after soaring 33 percent in 2009.

The extra yield investors demand to hold Brazilian dollar bonds instead of U.S. Treasuries widened one basis point to 197 basis points yesterday. The gap reached a three-month high of 248 basis points on May 6 on concern Greece's debt crisis would spread across Europe, which buys more than 20 percent of Brazilian exports.

The cost of credit-default swaps to protect against a default on Brazilian debt for five years rose three basis points to 121 basis points yesterday, according to data compiled by CMA DataVision. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

'China-Like' Growth

Brazilian policy makers are trying to cool demand after a government report this week showed retail sales surged a record 15.7 percent in March. Economists expect annual inflation to quicken to 5.5 percent by year-end, above the government's 4.5 percent target, according to a central bank survey published this week.

Economists predict growth will surge to 6.3 percent this year, which would be the fastest pace since the 1980s, according to the survey. Itau Unibanco Holdings SA, Brazil's biggest bank, said May 12 that the economy will expand at a "China-like rate" of 7.5 percent.

Lula's spending cuts are too small to curb domestic demand, said Solange Srour, chief economist in Rio de Janeiro at BNY Mellon ARX, which manages about 11.4 billion reais. Nomura Holdings Inc. estimates the reductions equal 0.3 percent of gross domestic product in Latin America's biggest economy.

"It's not a huge package," Srour said. "They should do more to help the central bank, but it's better than nothing."

Finance Minister Guido Mantega said yesterday that the spending cuts are "a strong and quick tool" to slow inflation.

'Under Control'

"The advantage compared to other tools is that it takes effect immediately," Mantega told reporters in Brasilia. "When you raise the interest rate it takes four, five, six months to have an impact."

Last month's rate increase from a record low of 8.75 percent was the first since 2008. The 11.12 percent yield on the rate futures contract for January 2011 delivery shows traders expect Meirelles to raise the benchmark rate to over 12 percent by year-end. That yield has climbed nine basis points since May 7, reversing last week's slide.

Yields will fall as investors conclude policy makers are taking steps to contain inflation, said Paul Mcnamara, who oversees $3.5 billion of emerging-market bonds and currencies at Augustus Asset Managers in London. He said he's buying fixed- rate bonds due in 2021.

"The central bank is getting inflation under control," Mcnamara said.

Brazil Rate Futures Yields Fall to 2-Week Low on Spending Cuts

May 13, 2010, 12:17 PM EDT

May 13 (Bloomberg) -- Yields on Brazil's interest-rate futures contracts fell to the lowest level in two weeks as the government said it will cut spending, helping the central bank slow the pace of rising borrowing costs.

Brazilian Finance Minister Guido Mantega told reporters in Brasilia that the government will cut spending by 10 billion reais ($5.6 billion) to cool the economy before the impact of interest rate increases can take hold. The reduction represents 0.3 percent of gross domestic product growth this year, according to Tony Volpon, a Latin American strategist at Nomura Holdings Inc. in New York.

"They are cutting spending in an election year," said Pablo Cisilino, who manages $12.5 billion in emerging-market debt at Stone Harbor Investment Partners in New York. "The spending cut is not huge, but a good sign that they will not put all the burden of the adjustment on monetary policy."

The yield on interest-rate futures contracts due in January 2012 fell four basis points, or 0.04 percentage point, to 12.25 percent at 11:39 a.m. New York time. Earlier it reached 12.22 percent, the lowest level since April 30.

"While good news, we don't think it will make enough of a dent on demand to meaningfully change whatever the Brazilian central bank has set its mind to do in this cycle," Nomura's Volpon wrote in a note to his clients.

Brazilian policy makers led by central bank President Henrique Meirelles raised the benchmark interest rate for the first time in 19 months in April to keep inflation in check as the economy expands. They lifted the rate to 9.5 percent from a record low of 8.75 percent.

The real rose 0.1 percent to 1.7728 per dollar, from 1.7741 yesterday.

Kremlin: Medvedev, Obama Speak About Mideast

By THE ASSOCIATED PRESS | Published: May 13, 2010

MOSCOW (AP) -- Russian President Dmitry Medvedev and President Barack Obama on Thursday discussed Iran's suspect nuclear program and the need to look for ''non-standard'' approaches to resolving problems in the Middle East, the Kremlin said.

Their telephone conversation, which the Kremlin said lasted for an hour and a half, came as the United States tries to build support for new sanctions against Iran.

The Kremlin said Medvedev briefed Obama about his trip this week to Syria and Turkey, where he had made clear Moscow's willingness to play an active part in efforts to bring peace to the Middle East.

The United States opposes a joint Turkish-Brazilian effort that could help Iran avoid new United Nations sanctions. Medvedev, who met with Turkey's president on Wednesday in Ankara, plays host to Brazil's president in Moscow on Friday.

Obama and Medvedev ''according to tradition exchanged opinions at great length on the Iranian nuclear problem,'' the Kremlin statement said. They agreed to intensify efforts to work out a common position within the framework of the six key powers, the five permanent U.N. Security Council members plus Germany, it said.

The two presidents, who plan to meet in the U.S. in June, also agreed to work together more actively on the situation in the Middle East, ''including studying non-standard approaches,'' the statement said.

The United States and its allies accuse Iran of seeking to develop nuclear weapons, and the U.N. has demanded Tehran halt uranium enrichment, a process that can be used to produce either nuclear fuel or a warhead.

Iran says its program is peaceful and that it has a right to pursue enrichment to power reactors to generate electricity. The U.N. has already imposed three rounds of financial sanctions over its refusal.

Ambitious Brazil Housing Plan Would Replace Slums

AGUAS LINDAS, Brazil (AP) -- Cristina Silva dos Santos is close to realizing a dream she has had for 28 years, since giving birth to the first of six children: a home big enough for her entire family.

For now, she and her five youngest are squeezed into a four-room, rough-brick house the size of most garages, where they all sleep in the same room.

But a new government housing program, the largest in Latin America aimed at cutting overcrowding in slums, will give Silva a substantial down payment on a $30,680 (54,000 real) home with two bedrooms, a living room, kitchen and bathroom.

The program, ''My Home, My Life,'' is a model for developing countries trying to alleviate the squalor surrounding roughly 1 billion squatters and slum dwellers worldwide, according to one expert.

Officials from Angola, Cape Verde, Mozambique and other countries facing housing shortages have requested information about the program, said Maria Fernanda Ramos Coelho, president of the state-run bank Caixa Economica Federal, which is administering the project.

Caixa officials also presented the program recently to their Venezuelan counterparts.

''This is undoubtedly a model that could be used in other countries,'' said Demostenes Moraes, director of Habitat-Brazil, the Brazilian branch of an international nonprofit devoted to building houses for the poor.

The program, started last year, is part of the social policies that have made President Luiz Inacio Lula da Silva one of Brazil's most popular ever -- and could help attract votes for his chosen successor, candidate Dilma Rousseff, who trails in the polls going into the October presidential election.

Aguas Lindas, a city of 200,000 about 30 miles (50 kilometers) west of Brasilia, is a picture of unmanaged sprawl and hotspot for violence and drug trafficking that grew up with migrants moving to the capital to escape rural poverty.

Silva's new home is one of 1,600 to be built on the outskirts in a community that will have its own police force, school and water supply -- services that more often than not are absent from shantytowns in cities such as Aguas Lindas.

''As a single mother, this program is what allowed me to have my own house,'' said the 45-year-old food services worker, accompanied by her five youngest children during an interview in the old home. ''Every day they ask me, 'When we are going to move?'''

Using federal, state and municipal funds, ''My Home, My Life'' pays 100 percent of the cost of a home for families who earn a maximum of $870 a month (1,530 reals) -- three times the minimum monthly wage of $290 (510 reals.) The amount diminishes as participants' salaries rise.

Houses are built by private construction companies, which act as intermediaries with the bank on behalf of customers.

As of February, the government had 670,000 new-home applications in the works and aims to have signed contracts for 1 million homes by the end of this year, Ramos Coelho said,

A second phase of 2 million homes is planned to begin in 2011, she added.

If the program continues at the intended rate, Brazil could erase its shortage of 7 million homes -- and hundreds of illegal settlements that have popped up over the years in the South American nation of 190 million people -- in the next decade.

''Brazil has not had any housing policy since the 1970s,'' Ramos Coelho said. ''This program begins a new era in the country of eliminating our housing deficit.''

Many of the city dwellers live in poor, overcrowded, crime- and drug-infested shantytowns known as ''favelas.'' Brazil experienced an explosion of favelas from the 1950s to the 1970s amid a boom in industrialization that attracted rural dwellers to metropolitan life.

''My Home, My Life'' aspires to transform the favelas into more formal and hospitable living areas, complete with security, recreational areas and public utilities.

Another goal is to remove homes from areas at high risk of landslides and flooding, such as the slum in Niteroi, a city of about 500,000 across the bay from Rio de Janeiro, where 60 houses were destroyed last month during heavy rains.

At least 232 people were killed in the Niteroi landslide and others in Rio de Janeiro state.

There is much evidence to indicate the program will succeed: Brazil's strong economic performance over the past few years -- despite a global economic crisis -- has provided officials with the means to bankroll the project; land for new housing is widely available in the enormous country, and both of the two main presidential contenders have pledged to continue the program if elected.

But the program hasn't been seamless: Some beneficiaries are complaining the houses are being handed over too slowly, while large cities such as Belo Horizonte and Sao Paulo don't have enough land on which to build.

In Sao Paulo last month, about 2,000 protesters invaded unoccupied buildings to demand housing for the poor in Brazil, saying the government program will not be made available to everybody who needs it.

But for Mailson Barbosa de Santana, 22, and his wife, Luana de Oliveira, 18, ''My Home, My Life'' is a godsend, allowing them to buy a three-bedroom house in the same residential complex where Silva is going to live.

''We had been looking for a house for a year, but can only buy one because of this program,'' Santana said. ''Now with our own home, we're going to think about having kids, too.''

UPDATE 2-Brazil finmin seeks 2010 budget cuts to cool economy

* Budget cuts aimed at cooling down Brazil's economy

* May, March spending cuts total 31.5 bln reais

* Mantega says "won't allow" GDP to expand 7 pct in 2010 (Adds total budget cuts, comments, byline)

By Ana Nicolaci da Costa and Maria Carolina Marcello

BRASILIA, May 13 (Reuters) - Brazil's government plans to cut 31.5 billion reais ($17.77 billion) from its 2010 budget, seeking to put the brakes on a red-hot expansion that has stoked inflation in Latin America's largest economy.

Finance Minister Guido Mantega unveiled spending cuts of 10 billion reais on Thursday, on top of 21.5 billion reais in expenditures already taken out of the budget in March.

In total, the budget cuts will be equivalent to 1 percent of gross domestic product, he added.

"We consider this sum to be enough to work as a counter-cyclical measure," Mantega said at a news conference.

Investors have pushed yields on interest rate futures higher in recent weeks on expectations Brazil's economy may be growing too fast. Concerns about rising consumer prices prompted the central bank last month to raise borrowing costs for the first time in almost two years.

On Wednesday, Mantega said in an interview with Reuters Insider that the government would soon announce "meaningful" spending cuts. The reduction in this year's budget would have more impact to cool the economy than an increase in interest rates, he added. For details, see [ID:nN12222276]

Budget and Planning Minister Paulo Bernardo said it was unusual for the government to unveil two spending freezes so close together as it did this year, but it was part of a broader move to bring growth to more sustainable levels.

"We became convinced that it was important to also help with fiscal policy," Bernardo said

Brazil's gross domestic product grew at an annualized pace of 8 percent in the first quarter, but the government expects slower growth in the second quarter, Mantega told reporters in Brasilia.

The government "won't allow" the economy to expand 7 percent and has several tools to keep growth at a sustained pace below that, he said.

"The best way to throw a bucket of cold water in this heat -- if it is indeed boiling, warming up -- to cool down demand, a strong and fast way would be for us to reduce demand coming from the government, current spending," Mantega said.

The budget cuts would be presented to President Luiz Inacio Lula da Silva for final approval in the coming days, Mantega said. ($1=1.772 Brazilian reais)

Lula Must Not Undermine Brazil's Chance to Be the Next "Indispensable Nation"

Brazilian President Luiz Inácio Lula da Silva's remarkable tenure closes at the end of this year -- and already some are speaking of him as a possible candidate to succeed Robert Zoellick as President of the World Bank or even Ban Ki Moon as Secretary General of the United Nations.

Normally, the head of the World Bank is an American while the head of the IMF is European, but in this age where the lines of global power and responsibility are rapidly being redrawn, some in the Obama administration are eager to show both magnanimity towards Lula as well as indicate "institutional flexibility" when it comes to building in the world's new rising powers.

In a deft Obama-esque move, the next head of the World Bank could very easily be a non-American.

When virtually overnight President Obama and other global leaders threw the G8 into the trash heap of history and selected the G20 as the primary workshop to deal with the rapidly worsening global financial crisis, the institutional order of the 20th century signaled that it was ready for a new era recognizing the consequential weight of stakeholders like Brazil, India, and China.

Brazil, however, in the twilight of the Lula administration needs to consolidate confidence in it rather than plant seeds of doubt as it faces fundamental choices about the type of nation it wants to be as it sits at a clear breakout point in its global ascendance.

On one hand, Brazil can move from being a significant regional power whose significance used to be defined in part by how it could slow US-led institution-building to a different sort of globally responsible stakeholder that wants to be in the first tier of nations rewriting a globally inclusive social contract.

President Lula's trip to Iran and his enthusiasm about injecting himself as a broker between Iran and the P5+1 countries (the UN Security Council Permanent Members of the US, Russia, China, the UK, and France in addition to Germany) is fraught with serious dangers for his legacy and for Brazil's aspirations to be accommodated in the world's most powerful institutions.

Iran and the West are in a serious standoff over the course of Iran's nuclear intentions, and the US and its UN Security Council counterparts are working to assemble a sanctions package to punish Iran for failing to abide by IAEA protocols, for developing a covert nuclear reprocessing site, and for not doing more to convince a skeptical world that its nuclear power program is not meant for military purposes.

Nations rarely indicate what their top tier national security priorities really are as politically correct platitudes about various causes get in the way, but there is little doubt that for the United States, encouraging Iran to pivot from a nuclear weapons capacity, latent or real, is very near the top, if not the single most important national security objective of the administration.

There are two possible outcomes from Lula's upcoming trip to Tehran. First, Lula's well-meaning efforts to defuse one of the world's tensest, building crises may result in convincing Iran that it has a political back door out of the increasingly tough wall that the US is trying to assemble around Iran with the support of China, Russia, Europe, Japan, and many of the other nations that participated in the recent Nuclear Security Summit and who are key players in the current Nuclear Non Proliferation Treaty review underway now in New York.

Giving Iran a back door would seriously aggravate American policymakers who have enough problems at the moment communicating resolve to Iran's leadership.

Alternatively, Lula could succeed in taking the message that everyone from Obama to Europe's Javier Solana to the former IAEA chief Mohamed ElBaradei and others have issued to Iran -- which is to engage in a serious discussion that ranges from the Islamic Republic's own concerns about regime security to inclusion in global institutions to accommodation of its growing regional interests in exchange for helping to alleviate the West's lack of trust in its nuclear activities and ongoing concerns with Iran's funding of transnational terror groups.

Lula could perhaps be the person who helps Iran to move forward in ways that it has not -- but in doing so, Lula cannot afford to be seen as acquiescing to or promoting Iran's strident misbehavior.

In the wake of the Cold War, Brazil's statecraft has been brilliant as it has positioned itself as the new "indispensable nation" in nearly every nouveau cluster of states trying to fill the power vacuum in a world cluttered with anachronistic global institutions whose power grids don't match the real world. The recent Brazil-hosted BRICs summit (Brazil, Russia, India & China) and the IBSA (India, Brazil, South Africa) summit are examples of the positioning brilliance of Lula and his government; so too Lula's role in global climate change politics and his helping to make the G20 the new power center in global economic affairs.

But the reality is that the United States remains a vital global player that can enhance or restrict the aspirations of new powers.

President Lula's decision to jump into the US/Europe vs. Iran match has turned enormous Obama administration enthusiasm for Brazil and Lula into confusion; for some, real doubt about Brazil's judgment.

While the Obama administration was giving previous "special relationships" like the UK, Israel, and Japan some less privileged treatment than they had grown used to, Obama and his team were trying hard to 'upgrade' some of the relationships that are vital to the future. Brazil is clearly one of these, but its Iran moves threaten a lot.

Some senior folks in the administration as well as sophisticated observers in the US Senate and House of Representatives think that at just the moment when Lula got the US wanting to seriously advocate for Brazil's inclusion in any reformulation of the UN Security Council permanent membership, Brazil then stepped into the Iran mess. Lula's posture thus far has not necessarily been one of a fair-minded broker but oddly more as an advocate of Iran's declarations.

Perhaps Lula is just cozying up to Ahmadinejad and Iran's Supreme Leader Ayatollah Ali Khamenei to be able to give them some tough love and deliver more serious words privately. However, if that is the case, Lula's government has not used back channels to either Europe or the US that that is his intention.

Recently, Brazil's Ministry of Foreign Affairs organized a significant day-long workshop to think about emerging institutions of global governance. Thirteen nations were represented in the meeting, and I was fortunate to be invited. Others there filling American slots included my New America Foundation colleague and 21st century Alvin Toffler-style futurist Parag Khanna, the Council on Foreign Relations' Julia Sweig, and the Carnegie Endowment for International Peace's David Rothkopf.

The meeting, co-chaired by Rothkopf and Deputy Foreign Minister Antonio Patriota, was really superb and easily surpassed most US-based meetings I have attended on the subject of what comes next in the global order.

At Patriota's direction, we tried to seriously work through alternative paradigms for global governance. For instance, I gave my own thoughts on how we needed to modify the UN with a system of networked nodes of responsible global stewardship that was less hierarchal than today's system.

I haven't figured out how to explain my concept well -- but what I have in mind is something metaphorically like a cloud computing approach to global management in which there is an open source, Microsoft like portal for nations around the world -- be they Iran, India, Brazil, Indonesia, China, and others -- to help generate security and economic balance in their region without a globally dominant hegemonic overlord. In fact, the DNA of the previous hegemony is more embedded in the "software" of a mostly liberal global order that will continue on even if the US is not the global heavyweight it once was.

G. John Ikenberry at Princeton has been influential in my thinking about this -- which clearly needs more work. Nonetheless, Deputy Foreign Minister Patriota's Brasilia salon was mind-stretching and sophisticated, quite up to par for the kind of Brazil we should all want to see emerge.

There were many other proposals offered, some incremental fixes of the current system and others big conceptual leaps -- but during a sixteen hour long day of discussion, many senior Brazilian government strategists and diplomats from the President's office as well as from the Foreign Ministry remained with us, intensely involved and listening.

Brazil on many levels is becoming a vital global player -- and should be one. Lula's unique ability to be both a progressive global visionary while also a pragmatic realist about what is doable and what is not has earned him trust and confidence of most serious world leaders who want him to remain actively connected to the global order after his presidency ends.

That said, the trust needed among the world's biggest stakeholders to make space for Brazil's global leap forward is threatened by possible missteps on Iran.

Some observers think that beyond the issue of whether Lula fails or not with Iran is his judgment -- in which Brazil embraced an issue that probably was not its highest national security priority in order to add to Lula's legacy but potentially made itself an obstacle in what may be one of the highest priorities of the United States and Europe. Bad statecraft -- perhaps. Or at least a high stakes gamble that will have big costs associated with failure.

From my perspective, I think that this situation can still be managed depending on Lula's posture when in Iran, his willingness to communicate behind the scenes with the US and other key stakeholders in the Iran standoff, and whether or not he actually produces any shift in Iran's recalcitrant position.

This summitry represents a big gamble by Brazil's impressive President -- and one hopes that he understands that his nation's rightful place as a key pillar of emerging international stakeholders depends on getting nations like Iran to move beyond their past, to get beyond paranoia, and to constructively negotiate about strategic factors that divide Iran from the rest of the world.

LLEVAN HASTA 4 DÍAS ESPERANDO AUTORIZACIÓN DEL INAL
Brasil denunció que la Aduana demora camiones con alimentos
Sin norma vigente, la Aduana igual cumple el deseo de Moreno y traba el ingreso de camiones. En Brasil dicen que argentinos suspendieron órdenes de compra

NATALIA DONATO Buenos Aires ()

Viernes 14 de mayo de 2010

La advertencia de Guillermo Moreno ayer se convirtió en realidad: según denunciaron industriales brasileños y confirmaron parcialmente en la Aduana argentina, hay entre 3 y 4 camiones con alimentos provenientes de Brasil demorados en las aduanas a la espera de que el Instituto Nacional de Alimentos (INAL) reciba el visto bueno de la Secretaría de Comercio para liberar el paso.

El canciller brasileño, Celso Amorim, recibió "con preocupación y por eso instruyó a la embajada de Brasil en Buenos Aires a expresar ese sentimiento a las autoridades argentinas", dijo un vocero del Ministerio de Relaciones Exteriores. Por ese motivo, el embajador de Brasil en Argentina, Enio Cordeiro, se entrevistó ayer en Buenos Aires con el secretario de Comercio y Relaciones Económicas Internacionales, Alfredo Chiaradía, a quien le transmitió el mensaje de Amorim.

El Gobierno no comunicó ni publicó la existencia de ninguna resolución que establezca parámetros para la importación de alimentos. Sólo trascendió el contenido de una nota firmada por Moreno a Oscar Zubieta, director del INAL, en el que le pide que informe a la Secretaría de Comercio Interior sobre los pedidos de importación para tener "conocimiento integral de cada una de las operaciones" y articular políticas con otras áreas de gobierno "impidiéndose que el mercado interno se vea afectado negativamente".

El alineamiento del resto del Gobierno con Moreno fue inmediato y en las aduanas comenzaron a retener camiones a la espera de cumplir los nuevos trámites administrativos. Por ahora se trata de demoras, pero en ámbitos empresarios brasileños temen que las demoras se estiren y produzcan pérdidas en el caso de productos perecederos.

El director de Comercio Exterior de la Federación de Industriales de San Pablo (FIESP), Ricardo Martins, tiene registrado las demoras de 7 camiones por hasta cuatro días. En la Aduana de Paso de los Libres hay dos unidades que transportan chocolates y productos de snak y otro en Buenos Aires transportando productos congelados. A otras cuatro unidades todavía no se les autorizó el ingreso a territorio argentino. "Creemos que están demorados por las nuevas medidas que anunció Moreno, pero no hay información oficial", dijo Martins.

La mayor preocupación es que se suspendieron las órdenes de compra desde la Argentina por temor a que los productos no puedan después ingresar. "Muchos importadores frenaron pedidos por miedo de no saber lo que va a pasar", explicó Martins. Según la Dirección General de Aduanas, que encabeza Silvina Tirabassi, no hay camiones de alimentos provenientes de Brasil detenidos en las fronteras más allá de los tiempos que son normales para trámites burocráticos.

"Los camiones brasileños de empresas alimenticias que están en las fronteras están esperando la intervención del INAL que habitualmente tienen alguna demora, antes de pasar a realizar los habituales trámites aduaneros", explicó la fuente de Aduana. "Hasta ahora la demora es la normal y la Aduana no está deteniendo camiones de productos alimenticios provenientes de Brasil ni de ningún otro país", aseguró la fuente oficial.

Brasil ya habla de represalias por el freno a las importaciones

14/05/2010

Es por las trabas anunciadas para los productos alimenticios. Lo aseguró el ministro de Industria de ese país, Miguel Jorge. Y serán aplicadas, dijo, si el Gobierno avanza con la prohibición dispuesta por el secretario Guillermo Moreno.

Por: Eleonora Gosman

Lo que hasta ahora era "preocupación" ayer se transformó en: "Vamos a adoptar represalias". Fue lo que dijo el ministro de Desarrollo e Industria Miguel Jorge cuando anticipó que Brasil aplicará sanciones a la Argentina si el gobierno de Cristina Kirchner avanza con la restricción al ingreso de alimentos procesados por empresas brasileñas.

El funcionario no se cuidó de ocultar la contrariedad que le produjo la resolución del secretario de Comercio Guillermo Moreno. "Nos alarmó habernos enterado que se trata de una medida verbal, que además es extemporánea" dijo al referirse a las instrucciones dadas por el funcionario a los supermercadistas argentinos la semana pasada, a quienes indicó que no podían importar alimentos que se produjeran en el país. Así, por caso, quedaban afectado los pollos o el choclo en lata que Brasil vende en el mercado argentino.

Los periodistas preguntaron a Jorge qué sectores podrían ser alcanzados por un eventual castigo a ser dispuesto por Brasil. Jorge prefirió no avanzar sobre el tema "hasta que no se agoten los canales negociadores" indicaron fuentes de su ministerio. En su entorno se especuló sin embargo con la posibilidad poner barreras a una franja similar de alimentos argentinos. Con todo, el ministro de Lula da Silva sostuvo: "Estamos trabajando para evitar ese escenario de pelea" señaló el funcionario.

Jorge confirmó las versiones que circulaban sobre que ya había freno a embarques desde Brasil hacia Argentina. Según el ministro habrían existido camiones detenidos en la Aduana, en parte porque los propios importadores argentinos no saben a qué atenerse.

Lo que hizo subir el tono de la disputa fue la percepción por parte del canciller Celso Amorim sobre la veracidad de las dificultades informadas por los sectores privados brasileños, aun cuando la medida del gobierno de Cristina recién debe entrar en vigencia el 1° de junio, según dijo Moreno a los supermercadistas. Hasta el miércoles por la tarde, cuando el embajador en Buenos Aires Enio Cordeiro se reunió con el secretario de Relaciones Comerciales Internacionales Alfredo Chiaradia, en Brasilia sólo conocían los hechos por las publicaciones de la prensa argentina y brasileña. "Nadie me notificó oficialmente", subrayó el ministro Jorge.

Entre los privados brasileños, quienes más temen ser perjudicados son los productores de aves y porcinos; aunque también miran el tema con aprehensión los fabricantes de choclo y tomate en latas. "Esta manera de prohibir importaciones sin un aviso oficial indica la falta de integración que existe en el Mercosur. Esto no puede ocurrir entre vecinos", sostuvo Francisco Turra, titular de la Asociación Brasileña de Exportadores de Aves: "Cada uno lucha por sí sin tener ninguna visión de conjunto de defensa regional", completó el empresario y ex ministro brasileño de Agricultura. Paulo Tigre, líder de la Federación de Industrias de Río Grande del Sur, exigió una acción inmediata del gobierno de Lula da Silva para frenar "una medida que amenaza al exportador brasileño". Otros indicaron que Argentina tiene superávit en el comercio de alimentos con Brasil (exporta más de lo que importa).

La Unión Europea, por su parte, ayer hizo conocer su molestia con la medida a través de declaraciones de los embajadores en Buenos Aires. El miércoles, emitió el miércoles un comunicado donde manifiesta la incompatibilidad de tales prohibiciones con "las normas de la Organización Mundial del Comercio y con los compromisos que asumió la Argentina en el marco de las reuniones del G-20". Pero además, la UE indicó que tales medidas parecen inexplicables "a pocos días del relanzamiento de las negociaciones comerciales entre la Unión Europea y el Mercosur". Pero también es cierto que hasta ahora esas negociaciones fueron trabadas por Francia y países del Este europeo que quieren preservar a sus productores rurales frente a potencias productoras como Brasil y Argentina.

El Gobierno puso la lupa en el saldo comercial

14/05/2010 | Por: Alejandra Gallo

Mientras que en las últimas 48 horas desde Brasil fue subiendo el voltaje de las reacciones por el freno argentino a los alimentos importados, el Gobierno de Cristina Kirchner sigue en silencio sobre la polémica decisión.

Fuentes gubernamentales admitieron, sin embargo, que en las últimas horas hubo contactos entre el secretario de Industria, Alejandro Bianchi, y su par brasileño, Ivan Ramalho. Ambos funcionarios son los técnicos que monitorean el comercio bilateral de los denominados productos sensibles, entre los que no están los alimentos (por lo menos hasta ahora). Las mismas fuentes confiaron que el gobierno de Ignacio Lula da Silva no pudo precisar la lista de compañías de su país afectadas, por lo que la Argentina minimizó el reclamo.

El tema habría sido mencionado en un encuentro que tuvo anoche Cristina Kirchner con la ministra de Industria, Débora Giorgi, y su par de Economía, Amado Boudou. Fue en el marco de las próximas negociaciones entre la Unión Europea y el Mercosur, que arrancan la semana próxima, y de la que participará la Presidenta.

Lo que disparó la decisión de frenar la importación de alimentos, que hasta ahora no está escrita en ninguna resolución, habría sido la preocupación oficial por el rumbo de la balanza comercial. En el primer trimestre de este año, el propio INDEC admitió que el superávit se achicó casi un 30% respecto de igual período del año anterior.

El achicamiento del saldo preocupó al Gobierno, que monitorea de cerca la inflación, la demanda de dólares y los ingresos de divisas estadounidenses. Lo que especialmente preocupó fue que mientras las importaciones crecieron un 33% en el trimestre, las exportaciones pararon de crecer. Las ventas al exterior comenzaron con una suba del 19% en enero pero luego, mes a mes, se amesetaron..

El Gobierno habría leído como explicación una fuerte compra de alimentos terminados en el exterior por parte de supermercados y alimenticias debido a las transferencias internas entre multinaciones y habría decidido el freno a los importados como paliativo a la descompensación en la balanza comercial y a la suba de precios.

Ayer el ex secretario de Industria y titular de la consultora Abeceb, Dante Sica, consideró que la medida sólo "mete ruido donde no había" y sostuvo que "si el Gobierno toma esta decisión debe encontrarle algún sentido".

La ministra de Industria reiteró que "no habrá faltantes en las góndolas" y que las decisiones "están dentro de lo que marca la OMC". En cambio, en declaraciones a radio Mitre, el presidente de la Comisión de Agricultura, Ricardo Buryaile, dijo que "esta medida es un disparate más en el conjunto de decisiones vinculadas al campo y a la industria agroalimenticia".

En Copal, la cámara que agrupa a las alimenticias y que preside Daniel Funes de Rioja, insistieron ayer en que había algunas compañías de alimentos y supermercados con algunos embarques parados en Aduna. El titular de la Cámara de Importadores (CIRA), Santiago de Santiesteban aclaró que "no hay una resolución formal escrita, pero sí demoras en las autorizaciones de certificados imprescindibles para sacar los productos de los contenedores y volcarlos al mercado".

Piden a los súper un compromiso escrito de que no importarán
Es para poder completar el ingreso de mercadería que ya tenían comprada.

14/05/2010 | Por: Natalia Muscatelli

Mientras la prohibición oficial de importar alimentos que se fabrican en el mercado local generó todo tipo de repercusiones, la puesta en práctica de la medida en las góndolas está en una "nebulosa", según coincidieron algunos representantes del sector supermercadista. No obstante, lo único que tienen en claro los empresarios es que, si en este momento tienen alguna importación en ciernes, el único aval para poder completar el ingreso de esa mercadería sin mayores trastornos es asumir, -por escrito- ante la secretaría de Comercio, un compromiso de que no importarán más ese producto.

Mientras tanto, en la práctica, los consumidores no cambiaron su actitud de compra, "no se volvieron locos comprando productos porque vayan a faltar", confió otra fuente del sector. "Lo cual demuestra la irracionalidad de la medida", opinó. En tanto, otra fuente del sector comercial estimó que la idea del secretario es reducir un tercio del ingreso actual de alimentos importados. Si bien, "en realidad nadie sabe a ciencia cierta si está alcanzado por la medida porque la normativa no existe", reflexionó tras comentar la preocupación de un importante importador de cervezas.

Hoy, en la habitual reunión de los viernes por la carne, los supermercadistas calculan que recibirán alguna instrucción sobre el tema de parte de Moreno. En tanto, otra versión señaló que el lunes por la tarde, el secretario se reuniría con un grupo de importadores de las cadenas para hablar específicamente del tema.

Lo cierto es que, tal vez por la reacción de los mercados con quienes la Argentina tiene vinculación, como la Unión Europea, China o Brasil, el Gobierno mostró -en las últimas horas- una mayor flexibilidad para la aplicación de la medida.

En una reunión que Moreno mantuvo el miércoles con representantes de la Cámara de Importadores de la República Argentina (CIRA), el polémico funcionario se mostró más propenso a trabajar en un esquema de importaciones consensuadas con cada uno de los sectores implicados, según explicó Diego Pérez Santisteban, titular de la entidad.

Moreno se mostró abierto a las propuestas y reconoció que era conveniente estudiar caso por caso porque, de otra manera, "se igualan situaciones que son disímiles", explicó el directivo. "En cambio, en el tratamiento puntual, caso por caso, se pueden evaluar otras variables como por ejemplo, las inversiones que esté haciendo tal o cual sector en el mercado local", dijo.

Según el titular de CIRA, es necesario analizar el tema porque la complementación de la oferta local con los productos importados es necesaria. Y una medida, que no contemple ciertos aspectos podría traer problemas no previstos, como por ejemplo, la suba de los precios. Quienes están a favor de la embestida oficial aseguran que "el objetivo es no perturbar el consumo y lograr el mayor superávit posible", aseguran.

Sin embargo, Marcelo Elizondo, ex titular de la Fundación Exportar, quien ahora maneja una consultora especializada en Comercio Exterior explicó: "No se justifica una medida protección de este tipo cuando la Argentina exportó alrededor de U$S 20.000 millones el año pasado en alimentos elaborados, e importó solo unos 1.200 millones. El sector alimenticio argentino es claramente competitivo a nivel internacional. Y tiene futuro como proveedor de alimentos si cumple con los comportamientos lógicos a nivel internacional", señaló.

sexta-feira, 14 de maio de 2010

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High stakesWhat has the fund got itself into by participating in Europe's bail-out?

Lame ducks no longerWritten off just months ago, the Kirchners are bouncing back. But if a divided opposition is outwitted at the next election it will have only itself to blame

Plus ça changeBut the balance of diplomatic power shifts to Brazil

Economic and financial indicators

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Lula Must Not Undermine Brazil's Chance to Be the Next "Indispensable Nation"

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They might be giants
Emerging-market banks have raced ahead despite the financial crisis as their Western colleagues have languished. Patrick Foulis (interviewed here) asks how they will use their new-found strength

High stakes
What has the fund got itself into by participating in Europe's bail-out?

Lame ducks no longer
Written off just months ago, the Kirchners are bouncing back. But if a divided opposition is outwitted at the next election it will have only itself to blame

Plus ça change
But the balance of diplomatic power shifts to Brazil