SA bor­rows big money cheaply

The Greeks’ far more ex­pen­sive debt will push the euro down fur­ther and the rand higher

Finweek English Edition - - Insight - VIC DE KLERK vicd@fin­

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.

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