SA borrows big money cheaply
The Greeks’ far more expensive debt will push the euro down further and the rand higher
ANGLOGOLD ASHANTI, still South Africa’s biggest gold miner, last week obtained US$1bn on the international capital market with ease – and at attractive interest rates. The company placed 10-year bonds to the value of $700m at an interest rate of 5,375%/year which is a premium of only 165 basis points over 10 year Treasuries and $300m of 30-year unsecured notes at a coupon of 6,50%, a premium of 200 basis points above the rate at which 30-year US government bonds are currently trading. The issue was significantly oversubscribed. Investors wanted more.
“This is the first 30-year investment grade issue by a South African issuer and speaks volumes for the confidence international investors have both in AngloGold Ashanti and corporate SA,” says the company’s Mark Lynam.
What he failed to add was that the Greek government would give its eye teeth to borrow so much money at such a low premium. Greece is part of the Eurozone. It no longer has its own currency and now also has to borrow in euro. And Greece needs money soon. Very soon.
In the euro region the interest rate on German government bonds – the so-called bunds – is used as the basis. The percentage point higher than that rate at which a borrower has to borrow money reflects the investors’ confidence – or, in the case of Greece, lack of confidence – in the borrower’s ability to repay the capital plus interest.
The graph shows the lack of confidence in Greece rose very sharply over the past few weeks. If the Greek government now wanted to place government bonds in euro with a short duration of only two years on the world’s capital market successfully a premium of almost 1 000 basis points above the rate at which German government bonds are trading would be necessary to attract investors.
The poor Greeks are really in a financial pickle. They apparently have to find a huge €10bn to €15bn within the next few weeks to pay off existing debts. If Greece really has to borrow new money at an effective rate of more than 10%/year the country will in any case be bankrupt.
Now the man in the street, the one who votes governments in and out, is saying all the financial sacrifices currently being asked of them are only necessary to save the banks, which invested so generously in Greece’s national debt.
“Let’s play bankrupt, refuse to pay our debt and make it the banks’ problem,” they’re saying in Athens’ the coffee shops. “No, we can’t do that,” the government replies. “It doesn’t matter what you do: we aren’t going to use German taxpayers’ money to save you,” is Germany’s Chancellor Angela Merkel’s view.
Congratulations to AngloGold on negotiating its huge loan successfully.
Keep an eye on the development of this latest Greek tragedy. It could push the value of the euro down even further. And remember that after 28 April – the settlement date for its $1bn loan – AngloGold will probably bring some of that money to SA. Along with the weak euro that predicts a stronger rand.