Enron Mail

To:jeff.skilling@enron.com, andrew.fastow@enron.com, ben.glisan@enron.com
Subject:FW: Brazil/Argentina Update
Date:Tue, 17 Jul 2001 06:45:36 -0700 (PDT)

I'll get you guys added to the distribution list.



-----Original Message-----
From: Fitzsimmons, Brendan
Sent: Monday, July 16, 2001 7:34 PM
To: Shankman, Jeffrey A.; Hickerson, Gary; Hannon, Kevin; Kinneman, Jeff; Fiala, Markus; Pizzolato, Paul; Gordon, Michael; Shahi, Pushkar; Stuart III, William; Su, Ellen; Seyfried, Bryan; Wiggs, Brett; Shapiro, Richard; Collonges, Remi; Lee, Derek; Scott, Eric
Cc: Tholan, Scott; Johnston, Robert
Subject: Brazil/Argentina Update
Importance: High
Sensitivity: Confidential

Defining Brazilian Central Bank's crisis strategy: Facing dilemma of raising rates decisively now or holding fire while waiting on Argy; real can wait
IMF and US Treasury: still behind Brazil, behind the scenes, while giving Argentina an opportunity to extricate itself from its current problems
Fraga will seek to avoid repeat of last month's mistakes: will not weaken a large rate rise with easing bias again; will not give market new targets to bet against

Some arguing a decisive pre-emptive raise - as much as 675bp to 25% by central bank. In light of the unsettled situation in Argentina and market response to Turkey's 400bp increase (met with continued selling pressure: lira set new lows, bonds down) there may be a move to conserve ammunition in case of a Argentina-induced external shock. Despite breaking through 2.6BRR/$, the real held and rallied today. Wait-and-see approach may be chosen on fears of a challenge to a rate rise fueling an upward rate spiral amidst further real depreciation. Central bank not expected to hold interventions to $50 mil./day, particularly if there are further problems in Argy.


Domestic politics continues to drive near-term outcome
Cavallo continues to freelance, yielding uncertainty at home and abroad
Latest trial balloons focus on prepayment of taxes by banks and privatized companies
Letes swap talk still swirling
Next Letes auction scheduled for next Tuesday (7/24), something has give
Endgames: political compromise and/or Letes swap; tax prepay compromise; Cavallo going to international bankers for 'non-confrontational', voluntary restructuring; (if Cavallo goes) 'confrontational' default and/or breaking of convertibility peg

If resolution does not come before Friday (both political and on Letes swap), expect a very long weekend in Buenos Aires as G-8 leaders meet in Genoa.
For now, holding pattern continues as no news is the news. Latest figures from the central bank (from Thursday) show continued hemorrhaging of foreign reserves. Capital flight is a key risk factor in the pace of crisis. FRB debt trading below August 1998 lows. Despite hue and cry of contagion fears, debt markets outside of Argy still holding up. Wall St., Pennsylvania Ave. (WH and UST), and IMF still on the same talking points about rhetorical support but no new funds committed. Even in the currency channel the resilience of the Mexican peso, Chilean peso has been notable. In Brazil, the real continues to bear the brunt of the assault, but the steepness of the slide has attenuated. Further evidence of 'Brazil-as-defensible' line from the investment community in concert with behind the scenes IMF and governments support.

Opposition political (Peronist) leadership and several provincial governors have yet to lend support for President De La Rua's austerity plan. Despite repeated expectations of agreement from Friday evening on, the Peronist governors have stalled, arguing that they cannot commit until the governing coalition has agreed its plan between its partners. Alfonsin and leftwing Radicals and junior coalition Frepaso party continue to seek adjustments to the De La Rua-Cavallo austerity package in order to protect their working class and lower middle class bases. Rhetoric continues to reinforce nationalist populist imperatives.

Cavallo's team started spreading the rumor in Argentina that the US was going to help (e.g., telling friends about Cavallo's call to Condi Rice), hoping to spur confidence; instead forced the US to deny it. Bush's letter to De La Rua offered little more than to say that our prayers are with Argentina. A national unity government might not include Cavallo if Alfonsin and leftwing of Radical party gains sway in negotiations.

The economic team is initiating conversations with the privatized companies (including utilities) and banks in order to push them to pay next year's taxes in advance. The goal is to collect $2 bil. This number will cover the estimated deficit for the 2H01 ($1.5bil.). The banks should advance $1 bil., and the privatized companies another $1 bil. Repsol has already agreed to advance $150 mil. Cavallo talked personally with the Presidents of the Spanish companies (Telef?nica, Telecom, Endesa, etc.) and some Italians. If successful, these collections will improve this year's numbers and would satisfy Alfonsin and the left wing by allowing normal social spending.

Repeat of drip, drip of market information ala May-June 'mega-swap'. Goal: swap $4.8 bil. in 91-day debt still to be auctioned during remainder of 2001 into a 1-year bond, a structured product for domestic pension funds, and/or special mutual funds. Details promised by Wednesday. Optics tied to political bargaining. Last Letes auction though fully funded to $800+ mil. goal was not oversubscribed as usual and primary dealers unable to pass it along.