Daily Archives: November 23, 2015

The people who ran the Sun

By Nicholas Asheshov

The Incas, living as they did at 3,000m a.s.l., focused on the Sun’s capacity to provide more than warmth for their fertile, glacier-fed tropical valleys. They and their predecessors grasped, like the Egyptians and others, that the movements of the Sun, moon, and stars could predict rain and temperatures.

Informatica, then as now, was power. But the study and understanding of the sun and the stars gave the Andean peoples much more than a weather channel. They were able to reflect the orderliness and mathematical precision of the heavens into their own world. The unequalled exactitude of Inca stonework and their careful, magnificently engineered, imaginative landscaping of their mountain world was a statement of philosophical power on a Shakespearean scale. They would control the uncontrollable: the earthquakes, enemies, famine, and disease. Under the Inca there would be no apocalypse.

The Incas took it a logical step further. They would control the Sun itself. At Machu Picchu, Choquequirao, Pisac, and a score of other centres, they placed carefully-engineered granite blocks and windows so finely that at the solstices —June 21 and December 21— needles of light would hit exactly at such-and-such a marker.

The Incas, like politicians through the ages, spun the Sun story. It was they who were family with the Sun, sons no less of the Sun. Running the universe had become a family business. The sun’s rays would change direction on the orders of the Inca every 187.5 days.

At the winter solstice, the Inti Raymi, visitors to Ollantaytambo today can climb high up to the other, western, escarpment of the Rio Vilcanota and at 7:00 a.m. on and around June 21 can look down across the river half a kilometer away and watch a sudden sharp spotlight, then, moments later a couple of hundred yards away, another and then another, appear on an Inca throne-room the size of a tennis court.

If this is a stirring experience today it is not difficult to imagine the awe,, the grateful weeping, the roars of enthusiasm with which tens of thousands of Inca faithful would watch this mystic magic five, six and more centuries ago. They would see their Inca and his family re-born, the unchallengeable nexus of this world with the past and the future.

Accurate knowledge of how to interpret and predict stellar movement was a vital part of the management of a heavily populated agricultural society for which control of irrigation water and of the rivers was essential in both drenching monsoons and periodic drought.

The Incas upgraded the Tiahuanaco and Huari terrace systems and roads into one of the world’s safest and most productive polities, as we can see today from a million terraces in great flights of ingenious engineering of one of the planets most spectacular sculpted landscapes. The renovations included unequalled mountain hydrologic and civil construction, together with agricultural and genetic research.

The magnificent interconnected terraces in the Colca, the Urubamba, the Pisac and a score of other Andean valleys needed sophisticated agricultural techniques and engineering controlling water, heat, and experienced biological genetic experimentation. These terrace systems were so delicate that most of them are today unused because no one is sufficiently knowledgeable and well-organised to use them.

The Inca Empire, stretching thousands of miles along the Andes from Colombia to Argentina, was joined by perhaps 15,000 miles of stone all-weather roads with A, B and C grades of size for lateral valleys of better quality and deeper penetration than any land communications system anywhere in the world until the advent of the railways in the 19th century. Legal, census and production records were kept on the decimal-based khipu knotted strings.

Warehouse complexes stored food and clothing. The Andes were more cohesive, more productive than anywhere in contemporary Europe, on a par with Ming Dynasty China.

Today energy not the Sun, has become the new god. It is energy, starting just two and a half centuries ago with the invention, in England, of the steam engine, which has created a different universe. Before 1750 no one moved faster than a horse, a running man, or a sail-driven galleon. Wood fires became coal, electricity, petroleum and nuclear.

A Bank of England economist calculated the other day that if we look at the 50,000 years of the existence of modern homo sapiens and call it 24 hours, 99% of the progress will have taken place in the last 20 seconds. It’s a nice notion though it might be seen to give short shrift to the Acropolis, to Leonardo and Bach. But it makes the point that few among the seven billion of us can understand the world today and for sure no one can control it. It is built to change. Intrinsically unstable. It must, faster and faster, keep on the move.

By contrast, anyone can see, at Machu Picchu and at Sacsayhuaman that the people who built these achievements did indeed understand their universe. They had done it themselves, stone by careful stone. It was built never to change, to last forever. Maybe it will. FIN

First published in Spanish in Caretas in March, 2015

Finance Tightens — Peru joins the Troubled Ten

By Nicholas Asheshov

Morgan Stanley has told its clients that its MSCI division, which monitors international markets, is preparing to downgrade Peru from EM, Emerging Market, to Frontier status.

MSCI has also expanded its Fragile Five 2013 list —Brazil, Turkey, India, Indonesia and South Africa— to its Troubled Ten for 2016, to include also Peru, Colombia, Chile, Malaysia and Singapore. MSCI says these countries have new and above-average currency risks. These countries will have increasing difficulty in covering their current account deficits, meaning that debt payments plus imports will be higher than today’s low, slow income from exports.

The party is over.

For Peru it was a good one, by far and away the best in memory. During the first dozen years of this century it catapulted Peru into a respectable new level of economic growth and management. An urban middle class expanded by millions. Poverty in the Andes dropped by millions. Pay levels and property values doubled.

But today in 2015, the rapid growth of China that helped Peru, Brazil and a score of others to flourish is finished. This was signaled last week by an initial 4.4% devaluation of the Yuan, the Beijing currency. It was this that woke up the Wall St. analysts even though the slowdown had started a year ago.

The practical effect is twofold.

One is that China is saying it will need less and pay less for oil, gas, copper, iron ore, lead, zinc, gold and silver. Second, it means that for the coming few years at least, China will be growing not at seven percent, much less the ten percent of earlier years, but more like one or two percent. This is the new normal, like the United States struggling to get higher than two percent a year, Europe which cannot get yet to one percent. China is joining them, just another shambling mammoth.

Peru, though no monster, marches to the same drumbeat. A remarkable part of the past couple of decades, here and elsewhere, is how much has changed for the good despite the weak quality and performance of the government, and the public administration. The ministries and the Central Bank have been slow and often indecisive. There is no sign that they are improving. Out in the provinces it has become seriously dysfunctional.

But this has always been a rough neighborhood. Few other countries in Latin America are any better and some are much, much worse. Brazil’s economy is falling this year as it will in 2016, in the midst of world-class corruption and mountainous mismanagement. Sao Paulo, for instance, has run out of water. Venezuela and Argentina, two of the best-endowed countries in the world, continue to sink into incoherence, apparently endemic. This is a level of political stress from which Peru has notably escaped with no sign of a turn, much less return, to the serious confusion of the 70s, the 80s and the 90s.

The most consistent measure of the perversity of today’s financial markets is in the commodities. These will continue to stay low and to sink. This is not, exactly, because the world is in recession. It is not even that demand for copper, oil, lead, zinc, tin has fallen but that it is not rising to absorb what is coming every day onto the market.

New iron ore mines and oil and gas fields and techniques have opened, paid for with cheap money. The problem is that even cheap money has a price, has to be paid for. The iron ore companies, including Vale do Rio Doce, Anglo American and BHP, have between them issued $200,000mn worth of bonds to finance mines without a market. China was supposed to buy it but is disappearing back into its Oriental mist. A part of this is the heat-hazy nature of Chinese accounting where statistics, profits, loans and taxes are spelled differently in Chinese. The same happened in Japan as of a quarter of a century ago.

Copper is in the same slow boat. In Peru, Toromocho (Chinese), Cerro Verde (Freeport M), and Las Bambas (Chinese), fine mines all, will be getting $2/lb instead of the $4-5/lb they expected just three years ago. Chile, led by Codelco, the state-owned, high-cost mammoth, has it even worse which is why it, too, is being downgraded.

Morgan Stanley says that its downgrade warning on Peru will be confirmed on September. 30 but this is a formality. It means that foreign funds will be selling their investments in companies like the Banco de Credito, Graña y Montero and Buenaventura quoted in Lima, and Peru-based companies quoted in New York and London. Many funds will be selling, too, some of their holdings of bonds issued by companies in Peru. The sums may be impressive. Between 2010 and 2013 alone, US$15,000mn worth of bonds were sold to international investors, according to Bloomberg. Peru is just a part of a bond bubble including China itself, as well as other members of the Troubled Ten.

Similar downgrades are being issued for other countries in Latin America and elsewhere. The government-backed debt of Brazil, not long ago a Wall St. high flyer, has been knocked down to a notch over junk.

This is not the case for Peru, which has just raised $2,000mn on Wall St at only 2.5% more than the rate paid by the United States Treasury. It is remarkable, looking back a couple or three decades, that loans of this size and price should have become routine, merely a note in the middle of the financial pages. The money is needed, this time, to shore up the government deficit that has appeared because of the slowdown of the economy, and they will certainly need more to fill an even bigger tax shortfall in 2016.

Another sign of homebrewed discomfort is that inflation is running strongly higher than the Central Bank’s target of 2%: it is probably higher than six percent. This week Mr. Velarde, executive president of the Central Bank, cited inflation, which he has a constitutional mandate to control, and the exchange rate as among his “growing fears.”

Peru’s Central Bank, the BCRP, and even the lame-duck Humala government, may want to take comfort from being in the same lifeboat as bigger, noisier countries. Peru is only three percent of the dollar investment to Latin America. Another way of looking at it is that Peru is being dragged down by the neighbors.

This is not going to persuade many Peruvians. They will remember that the economists at the Central Bank, BCRP, and the Ministry of Finance, the MEF, were predicting as recently as this past Christmas that Peru would be growing this year at a tear-away 5.6%.

This made no sense (PT, Jan 22 and 29, 2015) but set the scene for inappropriate policies. They should long ago have launched an emergency plan, with low Soles interest rates and a fast-track devaluation of the Sol, from S/.3=$1, as it was at the beginning of the year down to S/.4=$1, before the end of the year. This was the path taken by well-managed central banks like those of Japan and the EU, Canada, Sweden and Mexico. Instead, the Central Bank in Lima has moved the exchange rate only just a tad more than inflation, to just over S/.3.25, burning $1,000mn a month of dollars that are going to be needed 2016-2018. This is allowing bankers here and abroad to buy billions of dollars at a giveaway price. This questionable policy is why Peru has been dumped, as Bloomberg has it, into the bucket of the Troubled Ten.

Forget a recovery, even of the United States

There is no prospect that basic commodities prices will increase for years. Huge iron ore mines in Brazil and Australia will be producing at a loss. Oil will be priced at thirty-something dollars a barrel. Natural gas will be down to prices that only the huge fields in North America, Australia and the Middle East can do.

For Peru as for other third-level hydrocarbon areas, this means that the jungle oilfields and the Camisea gas fields are today, and maybe forever, worthless. They are, in today’s terminology, “stranded assets”, on the books as potential profit centers but in practice valueless.

Peru has great resources and fine prospects, in agriculture, for instance, as well as mining.

But in today’s world, Peru is nowhere for oil and gas. As part of a Peru emergency plan to ride out the recession, the government should close down Petroperu and write off the jungle gas and oilfields. Peru will be able to buy cheaper for years from Mexico, Canada and the United States.

Work on the Southern Peru Gas Pipeline should be halted immediately. This $8,000mn piece of corruption-ridden nonsense, being constructed by Odebrecht, Sao Paulo, whose chief executives are in jail for similar boondoggles at home, should be transferred to the Brazilian taxpayer.

Any expectation that the Peru economy might stay afloat is made unlikely by predictions in Lima, the United States and elsewhere that a big El Niño is beginning. Based on the experience of 1972, 1983 and 1997-8, this will subtract between two and four percent from the country’s output.

The good news is that a capable new government may take control in less than a year’s time, ready and able to turn the progress of the past several years to good account.

Published in English by the Peruvian Times on August 21, 2015.

A Spanish version of this article appears in Caretas No. 2399 under La Fiesta se Acabó. 

The Berlin Wall 1989, Peru Elections 2016

By Nicholas Asheshov

Deutsche Bank, DB, Germany’s flagship financial institution, has announced that for the past quarter it has lost $7 billion and for the first time in half a century it will not pay the dividend on which tens of thousands of German families rely. A big part of the loss is to pay fines by European and United States courts and regulators for dishonesty in London, New York and in Germany itself. The dishonesty consisted in part in selling clients valueless bonds and paper, and in rigging interest and currency exchange rates.

The latest losses follow years of criminal activities, as described by New York, London, and Berlin prosecutors, by DB among a dozen French, English, Swiss and U.S. global banks caught rigging markets. The money, the funny money, goes to directors and managers, not to shareholders much less to the tax collector. The DB announcement came a few days after Volkswagen admitted to fixing the exhaust emissions of its diesel vehicles. VW faces $20bn worth of criminal charges and trading losses. The head of VW, a 68-year-old engineer, said it was nothing to do with him. He has been replaced, taking $70mn in retirement benefits.

Lufthansa allowed earlier this year one of its planes to be deliberately crashed, killing 200 passengers.

VW, Deutsche Bank, and Lufthansa have represented German, European, world dependability and engineering and social responsibility. Ambitious capitalism toned down by worker and government involvement, a contrast to Anglo-American a ultranza combative corporations, ruthless but often as we see today, more open. Japan, so successful for a few decades after the War, is tight and closed and its famously turgid economy seems to reflect this.

It seems to be a similar story, perhaps, in the EU. VW, DB and Lufthansa have represented, created, today’s version of the European tradition.
Next door, in Switzerland, the Swiss president of FIFA, Herr Blatter, is being investigated by U.S. and Swiss law enforcement agencies as the head of a criminal organization, with its HQ in Zurich, running the world’s biggest, bar none, recreation business.

Long-respected Swiss banks like UBS, Union des Banques Suisses, and Credit Suisse are in court, like Deutsche Bank, for rigging the markets and running money-laundering and tax rackets. They also face charges of rigging precious metals and money markets.

Credit Suisse is raising $6bn in new capital to make up losses, as also is DB itself. Today’s shareholders are being watered down. They are losing part of their investment as well as their dividends. It is difficult to put together half a dozen names that have better represented the most reliable, responsible face of 21st Century capitalism.

Everyone also knows that the European banks, led by DB and the International Monetary Fund, have lent Greece $460bn and that every last euro of this has disappeared into new accounts at the same banks. European taxpayers will pay the losses via the Brussels printing presses. To put this in context, the total loans to Latin America in the 1980s banking crisis was under $200bn loaned to 15 countries with a population of 600mn. They paid it back, give or take.

The population of Greece is 10mn. Every Greek man, woman, and child should be sitting on $40,000. But many of them are hungry or worse, out of work, facing a daily invasion of thousands of war refugees from the Middle East.

It was just 25 and a bit years ago that Communism and the Berlin Wall collapsed. The capitalist West had won a 70-year confrontation. Good had vanquished Bad. Christian values had emerged as the dominant, indeed the only, world scheme. If it was not Christian, it was a first cousin, Liberal Democracy, the rule of law.

When the Berlin Wall fell in 1989, Peru was a failing nation, as is today, for instance, Venezuela. The government was collapsing, terrucos and cocaine cartels seemed to be taking over. Peruvians had to carry their money in shopping bags, wheelbarrows even.

A quarter of a century later, Peru is a liberal democracy with a solid financial system. It meets its international obligations. It has a lively line in corruption. But its best efforts are a modest, tropical shadow of the German and Swiss corporations, which have set out to cheat their customers and stakeholders.

The failed nation of 1989 has had elections every five years, since 1980 with a whoops to bring in the new millennium. In six months there will be another election. And another again, it’s reasonable to expect, in 2021.

This is not to say that Peru does not have a long way to go. Nor that the Germans and the Swiss are not thoroughly good people, world leaders in all sorts of valuable ways.

Many Peruvians would understandably harumph! at the “rule of law” clause that necessarily goes with liberal democracy. But just this week the Constitutional Tribunal with an occasionally fuzzy record, cracked down decisively on an attempt by Nadine Heredia, President Humala’s wife, to slide past due process with openly inappropriate legal maneuvers. Instead of skirting the issue the Tribunal quickly, decisively, cleanly blew the whistle on the lively Sra. Humala and stopped her efforts to avoid investigation by the courts into her colorful financial history.

It may be that the Tribunal will have done her a favor and that her financial doings may be less than meets the eye. But the point is that Peru has shown that when push comes to shove, as it certainly did in this case, the system has proven to be not only better than expected by most, but getting better than it used to be.

First published in the Peruvian Times, October 23, 2015

 

Peru Eurobond Issue— A Lemon, Shows Government Financial Confusion

By Nicholas Asheshov

The minister of Finance, Alonso Segura, is patting himself on the back for selling €1bn worth of bonds on the European market at 2.75% above the ECB base rate, which is as everyone knows an eyelash above zero.

This brings the amount borrowed by Peru on the international market this year to the equivalent of $4.5bn, according to official statements. There are two problems, more like half a dozen, with this.

The first is that this latest, huge issue, is going to be thrown straight into the black hole of the government current account deficit. It will not create a single new job. It will not build a meter of road, a school or a first aid post in the Sierra.

Instead, the Central Bank, the BCRP, will be slurping it up in just one month to pay foreign and local bankers to keep the Sol at or near its present damaging, unrealistic, and unsupportable rate — this week a centimo or two below S/.3.30=$1. This brings the devaluation of the Sol against the dollar in these first 10 months of the year to 10%, between a third and a half of the rate of respectable neighbors like Chile and Colombia. This means that dollars are cheap in Peru, and local and foreign bankers are buying them while stocks last.

One of many bad results from this short-sighted expensive policy is that the Peruvian economy has slowed much more than need be. Non-traditional exporters are closing, hundreds of thousands of jobs have disappeared and will continue to disappear long after some sensible action is taken, presumably with a new government at the end of next July. Government economists like to say that government money is different from the Central Bank’s. This is incorrect. It is in one pocket. Economists, like accountants, count the dead and like to put them in neat cemeteries.

The Central Bank has been spending dollar reserves at the rate of $1bn/month for the past two and more years, call it $25 bn though the real figures are fudged by issuing swaps in soles with a guaranteed dollar repurchase.

A second problem with the new Peru Eurobonds is that they are way overpriced, at 2.75%, and much too short, only 10 years. Minister Segura himself said he had received offers for three times the amount, over €4.2bn, a sure sign that they were too expensive, from Peru’s point of view, and too short. If the issue had been properly prepared, he could have sold them at 30 years, maybe more, and with a much lower interest coupon. Crummy risks like Portugal, France, Spain and Italy just pay the eyelash, without the 2.75% These days Peru is a much better risk than these and dozens of others. If the bonds had been 30- or 40-years, some of the cost would disappear into the distant mist of the inflation that will be needed to wipe away today’s round-the-world trillions in unbacked debt, the Greek holes snow-banking through the markets today.

Debt payments impact the budget but are not yet an issue for Peru reserves, thanks to the good fortune and decent management of previous governments. But Peru, like the rest of the world, is facing a future with the certainty that things will be slow for many years. The world economy is not growing even though virtually unlimited quantities of dollars, euros and yen continue to be issued. Today few businesses and governments are using capital or credit to invest in infrastructure like roads, schools and ports. Or in mines and agriculture facilities.

In the United States and Europe governments continue to insist on austerity, meaning roads are not repaired, much less built. In Peru austerity is not a policy but the public works agencies, mostly in the provinces, are not functioning properly. The result is the same. Instead, the economies of the world, capitalism itself, has become distorted, destabilized The only assets that have increased in face value with all the trillions of quantitative easing are shares and bonds on Wall St and the European, Japanese and Chinese bourses.

This is the dangerous financial world through which the government is wandering, babes in a darkening wood. They have been predicting, this past week, for instance, that next year will see Peru growing at 4.2%, according to the Central Bank, 5.6% according to the Ffinance ministry. Either figure is the other side of silly, a warning sign only that they intend to borrow more abroad. The government people did the same for 2015 as a way, as old as the Andes, of papering over the sure-thing hole in their accounts. Peru’s budget deficit is ballooning under the sparse cover of these ‘predictions.’
Today the problem for banks, starting with central banks, is to lend. Borrowing is easy, as the youthful Mr Segura has discovered, at the expense of Peru’s taxpayers over the coming decade. Italy, a financial sinkhole if ever there was one, is paying its bondholders negative rates. These accept this payment because they believe that Germany will pick up the tab. More worrying, the financial markets sense the possibility of deflation where their bonds will increase in value. Italy, by the bye, is the third-largest, after the U.S. and Japan, issuer of sovereign debt in the world and, if it were not for Brussels and the Bundesbank in Frankfurt, would be below Russia and way below Peru on a risk/reward balance, another of the new perversities of 21st century finance.

The new Peru bond issue is not just a mistake in financial strategy but a complete misconception of the world, and the Peruvian economy today. The BCRP in Lima today should be pushing, forcing local banks to lend, soles and dollars, euros, whatever.

Peru is not the same as the dead-in-the-water economies of Western Europe —Eastern Europe is a different animal— Japan and the United States. It could and should have an agricultural export business 10 times, for starters, of today’s: this is a better California. Its metal-working shops have been honed on supplying a big, by any standards, mining province. There is more, like textiles. These can compete easily in today’s ho-hum world economy even with the Peru cost of, for instance, out-of-date labor legislation. But they cannot compete where the Central Bank is gerrymandering the exchange rate —it should today be S/.4.30, not 3.30— and increasing, not decreasing, the cost of bank credit. Both these, devaluation and cheap money, are the only Central Bank options today. With the exception of disasters like Venezuela, Argentina and, increasingly Brazil, everywhere else, bar none, is using them. Right or wrong, this is the world 2015-2020 and Peru’s agro- and metal-based companies are being short-changed by the Lima government, the Central Bank and the four big Lima banks themselves, willing fools in Lenin’s phrase. These have turned themselves for the nonce into expensive exchange houses with the equally willing Central Bank’s approval: anything for P & Q until the new government comes in.

It is a new financial world out there, where it is not exactly that money no longer counts, but it is equally sure that no one any longer can count the money.

First published in the Peruvian Times, November 2, 2015

 

World Bank, IMF Meeting Opens Window for Peru’s Next Step Up

By Nicholas Asheshov

The World Bank/IMF meeting in Lima this coming week is the biggest, most prestigious get-together of the year for bankers and finance people. Anyone who is anyone from anywhere will be here, has to be here, and it is a great thing, for Peru. It puts the country firmly, perhaps a little unexpectedly, on the list of world centers, up there with Rio and Mexico City.

Peru’s finances and politics will take little of the attention of the ten or twelve thousand financiers and camp followers. But the reputation of Peru’s cuisine will fill the restaurants in Miraflores and San Isidro from midday to after midnight. Many of the visitors will want to take in Cusco and Machu Picchu. Good news as it reflects, as with the restaurants, the arrival of first-rate hotel and airline service, a true hospitality industry that did not exist even a decade ago.

The priority of the ministers, the central bankers and their aides will be to get a fix on what is happening to the world economy. They will be looking with increasing concern for guidance, ideas about what to do, once they get home. Not since the Lehman explosion in 2008 have government finance people in the emerging countries had to face the certainty of falling prices, falling production, falling employment and falling income.

Worldwide, only a small handful of countries — starting with India and the United States— is growing. Not much but at least moving forward. Europe and Japan are stagnant, with no immediate prospects of growth as are usually reliable heavyweights like Canada, Australia, and the Scandinavians. This group includes as respectable tail-enders Peru and Chile, Mexico and Colombia, Singapore and Indonesia with, as it may be, Iran about to join in.

The rest, led by Brazil, China, Russia, Turkey, and South Africa, not to mention the Middle East and Africa, are in recession or in open disaster.

Looking for ideas

The delegations from 150-odd countries members of the IMF and/or the World Bank will be hoping to bump into someone, perhaps from the international investment and commercial banks, who can give them ideas about how best to keep afloat for, it has become clear, at least the rest of the decade.

This used to be the job of the IMF and of the World Bank. Not so long ago the World Bank was the main inspiration for public works and infrastructure for Latin America and elsewhere. It was a full-service institution, much more than a bank, providing moral backing as well as technical expertise, funds and guarantees.

The IMF, a similar building of conference halls and honeycombs of offices across M St in downtown DC, provided emergency funds and financial backbone for governments in problems. This included big names like the United Kingdom, not just third world backsliders. It may be that many of the World Bank projects did not work as advertised. Certainly the IMF’s austerity demands often produced pain with little immediate gain. Europe, including Greece today, are inheritors of this tradition. But the notion that orderly public finances and statistics are a good idea and not just an imperialist plot has become standard issue to the enormous benefit of countries round the world, starting with Peru and in this often-bolshie neighborhood, Chile, Colombia, Bolivia, Panama, Costa Rica, and Mexico. It also included during the 1990s and the early years of this century, Brazil as star pupil.

Brazil — the 800-pound gorilla

But this year Brazil has become an 800-pound gorilla. At this Lima meeting it is not China that has already joined the other elephants like Japan and Europe, but Brazil that will be a feature of concerned conversation.

A couple of years ago Brazil had become the world’s seventh biggest economy, a few pounds ahead even of the United Kingdom, a century ago the world’s greatest. Until earlier this year it seemed to the financial markets as though Brazil could treat the commodities slump like a road-repair diversion. It could have been thus. Instead, “We got hit by a turtle,” a disgusted Sao Paulo executive told the Wall St Journal this week. Brazil is turning into an international mega-problem. It is not just that Brazil’s public finances are in tatters. . . Infrastructure like roads and water supply is in deep disarray, with crime rising. National and regional politics, traditionally complex, are disintegrating with the opposition as weak as the government itself.

These days this is not just another colorful third world sad story but one that could detonate a run on the international credit markets This week here in Lima the single biggest topic of discussion will be how to prevent or at least postpone a Brazil debt default.

Not so long ago it was the IMF that could put out the fire. But today the credit markets are huge and unstable. The money that has gone, virtually uncontrolled to companies in Brazil, China, Turkey, and South Africa went often into ventures that do not work, often mines and hydrocarbons facilities which themselves have created today’s low prices. It is no accident that the copper price has moved below its 200-month moving average, setting the tone, too, for the other industrial commodities.

At the beginning of the week, the bonds and other debt issued by Glencore Mining dropped along with its share price by 30%. Glencore, with a long association with Peru through Xstrata and Marc Rich, developer of the massive Antamina and Las Bambas copper mines here, saw its market value at $16bn, down from $80bn earllier in the year, and its debt at just under $50bn — huge numbers and huge dislocation.

Other mining and hydrocarbons companies, including BHP Billiton and Anglo American, are developing the same kind of dislocation between the productive value of their assets and their ability to service the debt paper bought with enthusiasm not long ago by investment and retirement funds in Europe and the United States. Top of the list are Petrobras and Vale do Rio Doce. Petrobras debt today is, at $470bn, 10 times greater than Glencore, one of the world’s biggest.

Wall St analysts say they have always assumed that the Petrobras debt is backed by the government, but famously Brazil’s sovereign debt has itself been marked down by the rating agencies to junk. By coincidence, the foreign debt of Greece is within a dollar or two of Petrobras’ obligations. In the case of Greece, of course, every widow’s mite is going to be picked up by the German taxpayer.

$60 trillion in debt issued worldwide since 2009

These are just straws in the IMF and World Bank’s headwinds this week though, there’s plenty more of the same. For instance the IMF itself has published a report saying that $18 trillion — i.e. $18,000,000 billion, give or take— in bonds and similar have been issued by companies in China, Brazil, Turkey, up from $4 trillion in 2004, and warns that a lot of this is held by US mutual funds. This in turn is part of the $60 trillion in debt that has been issued worldwide as of 2009, over and above whatever it had been before that.

This is the context of the IMF/World Bank meeting here this week. If economies around the world were growing as they did from 2009, then lenders and investors could as usual suspend their disbelief. But the IMF itself has said that it will be lowering, again, its growth forecasts for the coming few years so the lack of connection between reality and the credit markets has become even clearer, China or no China.

For sure the tip-top bankers and economists, investors and traders here are aware, convinced in fact, that it is them and not the elected politicians who are in charge What sets the annual IMF/WB meeting apart is that there is more to it than just international bureaucrats, paper-pushing government officials and the blank-eyed economists and lawyers who run central banks. The juice, and the big money, for this meeting comes from the investment and commercial bankers from Wall St., London, Frankfurt, Toronto, Tokyo, Sao Paulo who come to meet each other as well as government officials. The meetings take place at dozens of cocktail parties, buffet breakfasts and lunches and, naturally, cups of coffee and drinks at the bar. Lima’s main banks, the Credito, Interbank, the BBVA Continental, and Scotiabank are putting on big shows.

Two out of every three years the WB/IMF meeting is held in Washington itself where there is a well-oiled hospitality industry. Traffic is a known quantity. The hotels are geared to big-name conferences. It is easy to get things done. Phones and taxicabs work. Then one in every three years the meeting is held away from home. It might be somewhere well-organized like Berlin. Or Bankok or Lima with dreadful traffic and security worries. Lima is more of an adventure but that adds spice.

There will be real interest for the participants in the Prospects for Peru as an up-and-coming junior BRIC. The collapse of Brazil, joining Argentina and Venezuela, means that Peru, Chile and Colombia will have a chance to shine, to provide, along with Mexico, the main positive focus in Latin America, a valuable door-opener for the coming decade.

First published in the Peruvian Times on October 2, 2015