World Economic News
Nigeria Going for an Argentina-Style Default; Points to Bankers' Arithmetic
"Nigeria is heading towards an Argentinian-style default on its $33 billion of overseas debt unless western creditors accept a deal to alleviate the country's financial burden, a delegation from West Africa's biggest economy said in London yesterday," wrote the British Guardian April 26. Senior Nigerian politicians are visiting four creditor countries, and "warned that unrest was growing over the hardline approach adopted by the West and that time was running out for negotiations," the Guardian writes.
"It is unconscionable that Nigeria has paid 3.5 billion pounds in debt service over the past two years but our debt burden has risen by 3.9 billion poundswithout any new borrowing. We cannot continue. We must repudiate this debt," said Farouk Lawan, Chairman of the Finance Committee of the Nigerian House of Representatives.
Britain is Nigeria's largest creditor (21%). British Treasury sources say that the starting point for negotiation is a paper by a Washington think-tank, the Center for Global Development, which calls for a write-down of the debt. British Chancellor of the Exchequer Gordon Brown is supporting a proposal to use Nigeria's windfall from higher oil prices to pay creditors a fraction of what they claim.
Senator Udo Udoma, chief whip of the Senate, said, "We are spending three or four times as much on debt service as we are on education, and 15 times as much as we are spending on health. Time is running out. The level of frustration is very high."
The Nigerian delegation said that their plight was far worse than that of Argentina, according to the Guardian.
German Mittlestand Targetted for Takeover
Thousands of German Mittelstand (small to mid-sized) firms are becoming targets of unwanted takeovers by hedge funds and private equity investors, stated the British rating agency Fitch, in a report "Who Will Finance the Mittelstand?" The report, covered in the Financial Times April 5, noted that German banks are withdrawing from financing the small and medium-sized company sector. This doesn't just mean reluctance to grant new credits. It also means that banks are selling their existing Mittelstand credits to foreign funds. As an example, billions of euros of non-performing loans at Dresdner Bank, HVB, and Commerzbank have already been acquired by specialized funds. In the case of any solvency problems, such funds are eager to convert the debt into equity; that is, they would seize ownership. Therefore, says the report, the business of many German Mittelstand companies could soon be controlled by foreign funds. "Mounting evidence of 'capital market'-style developments suggest Mittelstand borrowers, once accustomed to patient and flexible House Bank lenders, can quickly find themselves facing a new breed of creditor." The Fitch reports adds: "Hedge funds, in particular, frequently seek near-term realization of investment returns," for example, by "forcing asset sales or wholesale refinancings to improve the price of a loan position in secondary markets."
A key factor for the unpleasant financing situation of the German Mittelstand, says the report, is its traditional reluctance to replace bank credit with standard outside equity, because that would dilute family ownership. As in Italy, German firms are now preferring another alternative, that is securitization. Outstanding debt from different companies is being pooled into bonds, which are then being sold to international investors. Thereby, says the report, a new "Parmalat" could easily emerge in Germany, where a rising number of corporate defaults lead to the insolvency of the retail bond issuers, which then causes a series of forced mergers, emergency asset sales, restructurings, or insolvencies.