Explaining The Massive Shell Game That Is The Petrobras IPO
Last week, to much pomp and circumstance, Petrobras IPOed in a $69 billion offering of stock, which was promptly praised by Brazil president Lula as the "the biggest equity offer in the history of capitalism." Yet when one digs through the numbers it becomes glaringly obvious that not only was the "real" IPO one third the size of the vaunted amount, but that a major part of the offering is nothing less than a major shell game, which not only distorts the perception of end demand for the offering for other, more naive investors, but also allows the Brazilian government to lie in open public that it has met its primary account surplus of 3.3% of GDP. Market News has broken down the math works behind what is quickly becoming the biggest act of diversion since the days of Houdini.
As Market News explains, of that $69 billion "raised" in the IPO, "$43.5 billion came from Petrobras itself,
to pay the government for 5 billion barrels of undeveloped
ultradeepwater petroleum reserves, and that in turn was paid for using a
government loan. In sum, for $43.5 billion of the $69 billion capitalization, no
money changed hands, as the company essentially gave the government
shares in return for the petroleum reserves."
But it gets much worse:
However, R$24.7 billion ($14.4 billion) of the government's loan to
Petrobras came via the state BNDES development bank. The government is
lending $14.4 billion to the BNDES, which it is lending it to Petrobras,
to pay the government. But government accountants are booking this $14.4
billion as revenue.
Get that: the government, via two intermediaries, is paying tiself. All the while idiot investors get the impression that there is actual fund flow going into proper capital allocation. Poor fools.
And the piece de resistance:
With this revenue, the government will be able to officially "meet" its 2010 budget target of a primary account surplus of 3.3% of GDP.
"This is clearly an accounting trick," Roberto Padovani, chief economist for WestLB in Brazil, told MNI Wednesday. "The primary account balance no longer has any meaning."
Salto said the Petrobras operation was structured this way precisely in order to permit this accounting trick.
"It would have been simpler for the company to just give the government the shares to pay for the reserves," he said.
In something that by all appearances could have only been discovered by an administration thug out of Chicago, the final result ends up actually boosting government data!
Salto estimates that once this and other "accounting tricks" are discounted, the government will achieve a primary surplus of only 2.6%of GDP.
Over the last 12 months, the consolidated public sector has had a primary surplus of only 2.01%, and a nominal (cash flow) deficit of 3.38% of GDP, according to Central Bank data released Wednesday.
Such an ingenious way to pad the numbers could have only come from our own Bureau of Labor Statistics.
With current account deficits also expected to exceed 3% of GDP, Brazil is increasingly dependent on international capital flows, and another international crisis or a change in investor sentiment could cause a "sudden adjustment," he said.
"If the next government does not change course, and we do not expect it to, in the medium term, the risk of a crisis will grow."
WestLB's Padovani said this medium term is probably about two years.
"Right now, there is a lot of complacency in the markets surrounding Brazil, but once the rest of the world comes out of recession and there is more competition for capital flows, market agents will start paying attention to Brazil's fiscal problems," he told MNI.
"Brazil is building a risky scenario. Sooner or later things will explode," Padovani warned.
As Market News concludes, the entire scam is nothing less than the
latest brilliant Keynesian scam to "redistribute"the pain into the
future, while getting the benefits now. Of course, none of the excess
will actually ever be reinvested in the middle-class.
Of course, the government could take advantage of current strong
growth to impose fiscal austerity relatively painlessly, but Padovani
also doubts this will happen.
At the end of the day, the whole thing is nothing less than a way to fool the idiotic keynesian professors over at harvard and columbia (sorry, not even worthy of capitalization) that all is good, so they can rubberstamp their pathetic little reports that all is good in Keynesia. Until it all blows up.