The latest Romania`s achievement in terms of raising foreign debt was a sovereign bond issue worth $1.2 Bn bearing an annual 5.2% interest rate and a maturity of 30 years. As an aside, that was an opportunity that Romania will not easily encounter any time soon. For several reasons. As I showed in a previous article, investors are increasingly worried about the US, the emerging markets and Italy. As a result their risk appetite is probably on the wane and expect higher and higher yields on emerging markets treasuries. Moreover, completely unrelated, Romania`s economic policies are paving the way for an increase in its risk profile given the rising economic unbalances and the disappearance of any breathing space should an unfavorable foreign development happen.
An annual 5.2% for 30 years… Do you know what that means from the perspective of nationalist journalists and politicians? That Romania`s creditors will repatriate over the 30 years a “profit” 1.5 higher than the initially offered amount. So for every $100 they lent, they will receive an accrued final amount of around $250.
Isn`t that outrageous? How is this possible? Having such huge gains on Romania`s account? Why aren`t those watching closely capital repatriations by strategic investors in Romania asking such questions? Why aren`t those who think that a cumulated dividend payment exceeding the initial investment is outrageous horrified now, about loans taken out by Romania and interest rates which, in total, will exceed the value of the initial investment?
The answer is straightforward. The nationalist opinion leaders are brave enough to flex their muscles only when they know that their attitude cannot trigger immediate and effective measures from the individuals concerned. Sovereign bonds markets are highly competitive with the number of countries interested in and eligible for foreign financing under similar risk conditions reaching double digits. These are Romania`s competitors for funds. For this reason, an incrimination of creditors by making angry nationalistic statements would have them walk away immediately. At the end of the day they have sufficient opportunities lined up for them.
This is the reason why no one can afford speeches hostile towards creditors, even though the “logic” of so-called outrageous returns can be invoked in their case as well. Because they can immediately turn their back and leave us without the money. Something that strategic investors cannot do.
These are businesses which were bold enough to bring capital into Romania to set up plants and create jobs. They are in for the long run and they clearly cannot pull out Romania overnight by selling their equipment and other assets. To a large extent this makes them hostage investors. The more fixed assets you own and the higher their value, the tighter the bonds of captivity.
This hostage situation is now exploited by all those who promised highways which they now keep postponing or the “brave men” who point an accusing finger at them for the nerve of making a profit and repatriate it as dividends. And yes, at some point they will most likely exceed the initial investment. Faster than bonds? I very much hope so! At the end of the day, the risk profile of a business is much higher than that of sovereign bonds.
In the end, we should note the absurd situation in which the finger is pointed at those who bring in capital and invest in Romania for daring to come and make more money than they invested, while issuing bonds to creditors is celebrated in style even though they will end up with more than they paid for. In other words, instead of encouraging the capitalization of Romania we drive it into more debt.
That is nonsense, isn`t it?
Have a nice weekend!
