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from Breakingviews:

Portugal Telecom pays the price for weak controls

By Fiona Maharg-Bravo and Christopher Swann

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

The show will go on. Portugal Telecom and Brazil’s Oi are forging ahead with their planned merger after an Espirito Santo group company failed to repay a $1.1 billion loan to PT. The Portuguese telco is paying the price for its weak controls over its own cash management. Its shareholders will now hold a smaller stake in the group it planned to form with Brazil’s Oi.

Rather than diversify its investments, PT invested 897 million euros, equivalent to nearly 40 percent of its cash balance, in Rioforte commercial paper. Rioforte’s unit Espirito Santo Financial Group is a large shareholder in Banco Espirito Santo, which in turn holds a 10 percent stake in PT. Oi says it was unaware of the investment.

The revised deal shields Oi shareholders from any fallout from the Rioforte debt fiasco. That debt was transferred to the Brazilian telco in May as part of the PT contribution to a capital increase at Oi. Portugal Telecom will get the toxic loan back, and must return Oi shares in exchange. That will shrink its stake in the combined entity from a planned 38 percent to 25.6 percent.

from Counterparties:

MORNING BID – Next for Puerto Rico, Argentina and the Fed

The market's recent chatter has revolved specifically around whether the strength in the jobs figure from last week moves forward the expected timing of the first interest-rate hike from the Federal Reserve.

The answer: yes, but probably by not that much. Jobs growth of 288,000 for June was better than expected, and that 6.1 percent unemployment rate looms large for those who figured the Fed would be ready to start raising rates after at least 6.5 percent was surpassed. So we're there on that, but as Kristina Hooper of Allianz points out, the wage growth seen hasn't been terribly strong, and the types of jobs being created – a lot of which are in lower-paying industries like retail – don't portend the same kind of economic strength that might have been manifest by now in other iterations of U.S. recoveries.

from Edward Hadas:

The stupidity of student debt

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The fast increase in loans to pay for higher education is a trend that is moving in the wrong direction. The idea that borrowing should play an important role in financing higher education, now standard thinking in the United States and the United Kingdom, is financially dangerous and economically wrongheaded.

from Global Investing:

Ecuador: a successful emerging market?

A colleague of mine, Marius Zaharia (@MZaharia) interviewed Moritz Kraemer, Standard and Poor's head of sovereign ratings for Europe, Middle East and Africa. (you can read the interview here) Kraemer offered this piece of advice to the African governments who are busily tapping bond markets these days:

    What I want to tell all those governments in africa is that you are not a successful market participant when you've issued your first eurobond. You are a successful participant when you've paid it back for the first time.   

from Counterparties:

MORNING BID – Climbing the Wall

Eventually, lack of volatility, rock-bottom rates and this accommodating monetary policy will realize the build-up of excesses that causes some kind of market crack that devastates people - particularly in areas where many do not expect it. But it won't be today, and investors should continue to ride that so-called Wall of Worry through the 2,000 mark on the S&P 500 before long.

Goldman Sachs strategists note in a piece overnight that volatility is likely to remain lower for longer, but the slowness of the economic expansion and the additional regulations as a result of the financial market crisis of 2008 mean that the buildup of those speculative excesses is happening at a much slower rate. That's not to say they aren't out there - Brian Reynolds of Rosenblatt Securities is adamant that we are now in a "runaway bull market," which of course usually ends in tears for someone, but again, not today.

from Counterparties:

MORNING BID – Two to Tango

Wednesday's version of reading tea leaves involves Argentina's economy minister Axel Kicillof, who will be in New York to speak to the United Nations about Argentina's debt situation. In case the U.N. missed it, Argentina defaulted a while back - 12 years ago - and they've been fighting with a group of investors on paying some of their debt since. Which is a roundabout way of saying Kicillof may not just be in New York to talk to the U.N., not when NML, Aurelius and the other holders are all also in New York too, and the judge in question, and any special envoy he introduces to try to wring some kind of compromise out of this situation. There's a big coupon payment due June 30, and the country has been prohibited from doing so unless it pays the holdouts, which it has pledged not to do, giving it a 30-day grace period before being declared in default.

So the thing to watch for is something like a clandestine meeting between all parties to find a way to reach an accord, even if it's the kind of thing that comes down to the July 30 wire - when Argentina would be considered in default again (double-secret default, as Dean Wormer would have it, and really, if John Vernon were alive, he'd have solved this mess a long time ago).

from Hugo Dixon:

Is Greece losing its reform drive?

By Hugo Dixon

Hugo Dixon is Editor-at-Large, Reuters News. The opinions expressed are his own. 

Is Greece losing its reform drive? Prime Minister Antonis Samaras has stuck to a harsh fitness programme for two years. But just as it is bearing fruit, he has sidelined some reformers in a reshuffle. There is only one viable path to redemption for Athens: stick to the straight and narrow.

from Breakingviews:

China’s vanishing metals corrode confidence

By John Foley 

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Faith in metal-backed lending in China is corroding – and so is confidence in the country’s giant credit system. Authorities and banks including Standard Chartered and CITIC are investigating whether traders at Qingdao port used the same lot of copper and aluminium to back multiple loans. Vanishing collateral isn’t a new problem, but could prove to be China’s weakest link.

from Data Dive:

Consumer debt spiked in April

Consumer debt is back in the US. Matt Phillips at Quartz reports that after a long period of low or negative debt since the crisis, households seem to be breaking out their credit cards again. In April, revolving consumer debt spiked above $5 billion for the first time since 2008:

credit-card-debt

 

Phillips explains why that's a bad thing:

So is an increase consumer credit use good news or bad news? Well, if you’re simply rooting for GDP growth, without regard for how it occurs, you can argue that this is a great sign. Roughly 70% of US economic activity is driven by consumption ... But if you care about the long-term sustainability of US economic growth and the financial health of American households, it’s not particularly heartening to see signs of backsliding into a widespread reliance on credit cards.

from Breakingviews:

Spanish soccer needs a financial bootcamp

By Fiona Maharg-Bravo

The author is a Reuters Breakingviews columnist. The opinions expressed are her own. 

Spanish football needs a financial bootcamp. Spain enter next month’s World Cup as defending titleholders and Real Madrid just beat their cross-town rivals Atletico to become European champions. Yet the domestic game is far less robust.

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