Greek Bonds & Petrobras - Shell games?

China Becomes Lender Of Last Resort To Failing Greece
Submitted by Tyler Durden on 10/02/2010 13:07 -0500

Here is how you kill two birds with one stone, all the while confirming that Europe has been about a step away from a full collapse. Greece, which like Ireland, has been unable to peddle its bonds to anyone now that Bunds spreads are back to all time record levels, has just seen the last white knight of the Keynesian system come to its rescue: China. As Bloomberg reports, the European lender of last resort is no longer the ECB: "China has already bought and holds its Greek bonds,” Wen said in joint comments with Papandreou today, which were carried live on state-run ET-1 television. “It commits, very positively, to buy new bonds to be issued by Greece." Yet herein lies the rub: in exchange for the Chinese last-ditch rescue financing, which by the way is so transparent that everybody, except maybe for the Norwegian wealth fund will see right through it, Greece, in what is an almost identical replica of the Petrobras shell game, will use the money to turn around and buy Chinese ships.
"Wen said a $5 billion shipping fund will be set up to tighten relations between the countries’ two maritime industries and facilitate the sale of Chinese vessels to Greeks." Truly brilliant what Keynesians will come up with in the last days of a collapsing economic religion.
And one wonders just how far the reach for yield has pushed China - instead of buying US bonds, the country with the $2 trillion + trade surplus is investing in the sovereign equivalent of subprime. Which makes sense, when your cost of capital (i.e. artificial GDP growth) is 8%+, buying 2 Year US bonds at 0.4% just won't cut it any longer.
Greece received a 110-billion euro ($151 billion) bailout from the EU and International Monetary Fund in May to avoid default. The country, which has been locked out of international credit markets, plans to issue new bonds in 2011.

In the first visit to Greece by a Chinese premier in 24 years, Wen said he wants to signal a vote of confidence in Greece and the European Union in overcoming the international financial crisis.

“With our common efforts the total mass of imports and exports between the two countries in the next five years can double to $8 billion,” Wen said. He called on Chinese businesses to invest in Greece.
As for the JV in what could be the most oversupplied industry in the world, here is how China and Greece hope to confirm that all is well, despite a Baltic Dry Index which after its latest dead cat bounce, so vapidly extolled by those who have no idea about supply/demand mechanics in the Capesize sector which has about 5 boats of excess supply for every boat in demand, has been down for nearly two straight weeks with one or two day exceptions:
The two leaders will today visit Piraeus Port, Greece’s biggest, where Asia’s third-biggest container terminal operator has a 35-year concession to run some operations. China plans to deepen its Piraeus investment to move 3.7 million containers a year by 2015.

Cosco Pacific Ltd. won the concession to run container operations at Piraeus Port’s Pier II and build and run Pier III in 2009. Greece’s government owns 75 percent of Piraeus Port Authority SA, the company that manages the harbor.

Wen will speak in the Greek parliament on Oct. 3, Ambassador Luo Linquan said in an interview with China’s state- run news agency Xinhua.
For all intents and purposes, this is equivalent to Buffett buying a stake in Goldman, or convertible preferred in GE, just before the bottom fell off the market. The problem here is that after China, there is no other backstop left, period, unless one discovers some rather prominent printing presses on Mars, coupled with some intelligent life. Which, unfortunately for Greece... and Earth... would mean no Keynesians.

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.. AOK > and here's what happened with the referenced Petrobras IPO ...

Explaining The Massive Shell Game That Is The Petrobras IPO

Submitted by Tyler Durden on 09/29/2010 12:46 -0500

Last week, to much pomp and circumstance, Petrobras IPOed in a $69 billion offering of stock, which was promptly praised by Brazil president Lula as the "the biggest equity offer in the history of capitalism." Yet when one digs through the numbers it becomes glaringly obvious that not only was the "real" IPO one third the size of the vaunted amount, but that a major part of the offering is nothing less than a major shell game, which not only distorts the perception of end demand for the offering for other, more naive investors, but also allows the Brazilian government to lie in open public that it has met its primary account surplus of 3.3% of GDP. Market News has broken down the math works behind what is quickly becoming the biggest act of diversion since the days of Houdini.
As Market News explains, of that $69 billion "raised" in the IPO, "$43.5 billion came from Petrobras itself, to pay the government for 5 billion barrels of undeveloped ultra-deep water petroleum reserves, and that in turn was paid for using a government loan. In sum, for $43.5 billion of the $69 billion capitalization, no money changed hands, as the company essentially gave the government shares in return for the petroleum reserves."
But it gets much worse:
However, R$24.7 billion ($14.4 billion) of the government's loan to Petrobras came via the state BNDES development bank. The government is lending $14.4 billion to the BNDES, which it is lending it to Petrobras, to pay the government. But government accountants are booking this $14.4 billion as revenue.
Get that: the government, via two intermediaries, is paying itself. All the while idiot investors get the impression that there is actual fund flow going into proper capital allocation. Poor fools.
And the piece de resistance:
With this revenue, the government will be able to officially "meet" its 2010 budget target of a primary account surplus of 3.3% of GDP.

"This is clearly an accounting trick," Roberto Padovani, chief economist for WestLB in Brazil, told MNI Wednesday. "The primary account balance no longer has any meaning."

Salto said the Petrobras operation was structured this way precisely in order to permit this accounting trick.

"It would have been simpler for the company to just give the government the shares to pay for the reserves," he said.
In something that by all appearances could have only been discovered by an administration thug out of Chicago, the final result ends up actually boosting government data!
Salto estimates that once this and other "accounting tricks" are discounted, the government will achieve a primary surplus of only 2.6%of GDP.

Over the last 12 months, the consolidated public sector has had a primary surplus of only 2.01%, and a nominal (cash flow) deficit of 3.38% of GDP, according to Central Bank data released Wednesday.
Such an ingenious way to pad the numbers could have only come from our own Bureau of Labor Statistics.
With current account deficits also expected to exceed 3% of GDP, Brazil is increasingly dependent on international capital flows, and another international crisis or a change in investor sentiment could cause a "sudden adjustment," he said.

"If the next government does not change course, and we do not expect it to, in the medium term, the risk of a crisis will grow."

WestLB's Padovani said this medium term is probably about two years.

"Right now, there is a lot of complacency in the markets surrounding Brazil, but once the rest of the world comes out of recession and there is more competition for capital flows, market agents will start paying attention to Brazil's fiscal problems," he told MNI.

"Brazil is building a risky scenario. Sooner or later things will explode," Padovani warned.
As Market News concludes, the entire scam is nothing less than the latest brilliant Keynesian scam to "redistribute "the pain into the future, while getting the benefits now.  Of course, none of the excess will actually ever be reinvested in the middle-class.
Of course, the government could take advantage of current strong growth to impose fiscal austerity relatively painlessly, but Padovani also doubts this will happen.
At the end of the day, the whole thing is nothing less than a way to fool the idiotic Keynesian professors over at Harvard and Columbia (sorry, not even worthy of capitalization) that all is good, so they can rubberstamp their pathetic little reports that all is good in Keynesia. Until it all blows up.