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The turbulent two

26 January 2016 By Rob Cox

Two big deals dominated the agenda in Davos last week: Argentina’s negotiations with holdout creditors and Saudi Arabia’s sale of a piece of its national energy leviathan, Saudi Aramco. One would open up a robust democracy to global markets after years of feckless governance and isolation. The other would help a repressive regime retain its grip. That both would arguably leave the world better off underlines its fragile state.

The plutocrats assembled at the World Economic Forum, which concluded on Jan. 23, spent most of their time reassuring each other that sliding stock markets represent no 2008-type threat to their prosperity. When their discussions ventured further afield – and beyond the surging poll numbers of Donald Trump’s presidential bid – Argentina and Saudi Arabia were front and center. They represent starkly divergent developments that, while not suggestive of crisis at the doorstep, showcase the tenuous nature of global stability.

Argentina’s return to the economic mainstream is the happier of the two. Newly elected President Mauricio Macri hopes to reach a settlement with creditors led by Elliott Management who went unpaid when his predecessors defaulted. Though Macri said he hadn’t met with Elliott boss Paul Singer, his delegation of cabinet members, including finance minister and former JPMorgan banker Alfonso Prat-Gay and even the leader of the opposition party, charmed the pants off the international bankers and world leaders in attendance.

In addition, the Argentines used their Swiss visit to meet with mega-bank chief executives to lay the groundwork for expanding the country’s dollar reserves. By lending money to the central bank in return for as-yet-to-be-determined collateral – via a so-called repo operation – financial institutions can help bring Argentina back to the markets. That presumably entails support from the International Monetary Fund, with whom Macri and his entourage also tangoed in Davos.

As Macri made a point of noting, that will benefit everyone. In an interview with Reuters, he boasted that Argentina’s agricultural sector could feed 600 million people – but only if it could reach them. “For that we need infrastructure. We need roads, ports… for that we need financing,” he said. “We are near (to having) the worst logistics in Latin America. That’s a great opportunity also for companies and investors.”

Macri’s performance should increase external pressure on the hedge fund holdouts headed by Elliott to accept any offer that looks objectively reasonable. Singer has a strong track record of holding fast to his legal convictions, but does he really want to be known as the man who deprived the world’s hungry of prime Argentinean bife ancho?

Contrast Argentina with the other big deal floating around Davos: a stock offering from the national petroleum company of the kingdom of Saudi Arabia. Bankers on Wall Street and in the City of London were last week feverishly preparing underwriting proposals for the share sale, which would likely be limited to a downstream division of Aramco to avoid shining the full spotlight of transparency on the parent’s books and vast oil reserves.

Top executives from banks working on the pitches professed little alacrity about the deal, for reasons that are both selfish and moral. On the first point, though an initial public offering of Aramco could be the biggest equity deal in history, the fees will be negligible. The last big Saudi IPO, a $6 billion offering for National Commercial Bank in November 2014, paid underwriting commissions of below one-tenth of a percent. By contrast, Chinese e-commerce group Alibaba paid 12 times as much to the banks that took it public in a $25 billion deal two years ago.

That might be tolerable to the banks if the deal were of a more philosophically palatable character, along the lines of, say, restoring Argentina’s access to credit. Saudi last year summarily executed more than 150 people, the most in two decades, according to Amnesty International. Notwithstanding Deputy Crown Prince Mohammed bin Salman’s talk of transparency, the IPO has to be seen as part of the Al Saud dynasty’s coping mechanism for sliding oil prices and the damage this is doing to the finances of the kingdom.

Sustained low oil prices, partly the result of the kingdom’s hopes to squeeze out higher-cost producers from Iran to Calgary and from North Dakota to Brazil, threaten the social spending that is critical to keeping social unrest at bay. As my colleague Andy Critchlow estimates, Riyadh may need to sell half a trillion dollars of assets to cover budget shortfalls if oil hits $20 a barrel.

In an Aramco IPO, there’s no money to be made and no pathway to moral redemption. So why participate? Though the idea of financing a regime that kicked off this year with 47 beheadings is troubling, the alternative would be worse for global stability: a chaotic, Libya-style breakdown.

It’s naïve to think that financiers alone have the power to prevent Saudi from spreading geopolitical anxiety, or to turn Argentina into a trustworthy, developed market. But given the delicate state of the global economy, Davos Banker Man should give it his or her best shot.


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