In its latest bid to slow dollar inflows in a "global currency war," Brazil has dealt an unexpected blow to its own commodity exporters, choking off medium-term trade financing at a vulnerable time for the sector. Brazil - a source of much of the world's sugar, coffee, soy, beef and iron ore - has imposed a series of taxes on foreign capital over the past year to slow what President Dilma Rousseff called a "tsunami" of cheap money flowing from the rich world. But exporters say the central bank went a step too far on March 1, when it quietly implemented a 6 percent financial transactions tax on medium-term loans offered to exporters by banks, a critical tool used by major commodity producers across the globe to finance their operations. That 6 percent tax has shifted demand to one-year credit lines in dollars, known as ACCs, driving up the costs as trading houses and raw materials exporters rush to shift financing needs."Of the two types of export credit in Brazil, the government just killed one by taxing it to death and the cost of the other is going up," said a local executive at a multinational trader who asked not to be named. Brazil's largest commodities exporters are now lobbying the government to roll back the so-called IOF tax, which is applied to foreign credit and exchange operations. They say the loss of such dollar-linked loans beyond one year has crimped their access to cash and will eventually limit investments."We are going to have to find some solution," said Luiz Carlos Carvalho, president of Brazil's Agribusiness Association, which is pressing the government to remove or alter the tax. Prior to this month, big producers like Bunge (BG. N), Louis Dreyfus, ADM (ADM. N) were free to bring in the dollars when they needed to pay for seed, fertilizer, equipment, fuel or labor. Importers eventually paid off the foreign bank loans through intermediary collection agents after the goods were delivered. The so-called IOF tax ended this for terms beyond one year."Even exporters in minerals and technology had been putting up future foreign delivery contracts to secure financing in dollars with three to five years to pay back," said Renato Buranello, an attorney in trade finance at Brazilian law firm Demarest & Almeida.<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^GRAPHIC on Brazil's real: link.reuters.com/seg37s^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
BAD TIMING The squeeze comes at a delicate time for both exporters and major trade-finance banks like France's BNP Paribas (BNPP. PA), Credit Lyonnais (CRLPp. PA) and Societe Generale. In late 2011, European banks, a leading source of financing for raw materials trade across the globe, were paring back loans to assure they would meet capital requirements in the face of increasing writedowns in asset values. Meanwhile the Brazilian sugar industry, which accounts for half of global trade in the sweetener, is still recovering after the 2008 financial crisis tipped many mills into bankruptcy."We used to use this financing -- but no more," said Luiz de Mendonça, chief executive of ETH - one of Brazil's biggest cane ethanol producers. He said the value of this type of export financing meant $200 million-$300 million for his company alone."The loss of it will weaken an already fragile sector and could unleash more consolidation."Brazil's soybean and corn producers are in the worst drought in half of decade. Some will not meet delivery contracts.
Exports in general have been declining here due to weak demand in China, Europe and the United States - and Brazil is struggling with a dwindling trade surplus. The incoming dollars have strengthened the Brazilian real, punishing local manufacturers by making imports cheaper and Brazilian exports more expensive. ABUSES Brazil's central bank declined to comment on the extension of the IOF tax to export finance. A government source, however, said some companies were not using the credit lines to finance production and exports. Rather, they were using them to make bets in Brazil's currency and debt markets without paying taxes aimed at slowing speculative dollar inflows. In recent years foreign investors have flooded Brazil with capital hoping to take advantage of zero-bound interest rates in the U.S., Europe and Japan to bet on Brazilian bonds that paid near low double-digit returns and get the added boost of a strengthening currency. In 2011, the real firmed to its strongest in 11 years, due in part by exports of raw materials. The strong currency undermined Brazilian manufacturers, though, who had to fight a flood of cheap imports. To help them the central bank laid a tax on speculative dollar inflows. Some companies seeking to skirt these taxes began using export credit to chase high returns on the financial markets, rather than pay for land, shipping or grow more foodstuffs, said Ademiro Vian, assistant director of financing at the Brazilian Federation of Banks, or Febraban.
"There's speculation going on. You don't need five years' worth of export financing in all ag-export sectors," Vian said. SUGAR But the big trading houses, particularly in the sugar and ethanol industry, are scrambling to shore up new financing."I have big exporters as clients that are at a loss over what to do," said Lucio Feijo Lopes, a local attorney in trade finance. "This marks a big change in how trade finance is structured. There will be an impact on exports."Grain producers and exporters say they will manage more easily with the lack of longer-term export financing, as the annual nature of their business allows them to rely more on the 360-day ACC export-exchange contracts for financing. But this short-term debt is not well suited to longer-term investment needs. Large sugar groups, of which Brazil has plenty, make investments that only pay off in exports over several years. Long forgotten medium-term export financing contracts that were created in the 1970s under the military dictatorship are being dusted off by the local banks to try to fill the void, but the so-called Export Credit Notes, or NCEs, are based on the real, which exposes the exporter to swings in the currency. Raw material producers, who are dependent on exports, hold longer-term debt in dollars as a natural hedge against currency risks. If the dollar, which is the currency in which the exports are paid, weakens against the real, so does the firm's debt. The government recently exempted exporters from a separate tax on currency futures that hampered hedging against exchange rate risks inherent in the export business. Exporters said it is a step in the right direction but will not offset the loss of medium-term dollar financing."If I hold real-linked debt and the dollar falls to 1-to-1 with the real, then my debt balloons against my revenue stream," the local executive at a multinational trader said. "Companies don't last long if they have debts in one currency and revenue in another. As a Brazilian exporter, I have to be in dollars."
Rapid growth of Islamic finance is increasing pressure for the industry to enter the accounting mainstream, by seeking guidance from the International Accounting Standards Board (IASB), the global body which sets the tone for book-keeping in conventional finance. It would be a controversial move - by basing itself on religious principles, Islamic finance seeks to set itself apart from conventional finance. But some experts think the industry is becoming so big that it can no longer sit comfortably outside a trend towards harmonizing accounting rules across the world."The whole thing about financial reporting around the world today is the global move towards a single comparable set of high-quality financial reporting standards..." said Samer Hijazi, financial services audit director at accounting giant KPMG, who monitors the development of Islamic finance. Islamic financial assets hit $1.3 trillion globally in 2011, a 150 percent increase over the past five years as the industry expanded into new countries beyond core markets in the Middle East and Malaysia, financial lobby group TheCityUK estimated last week. At present the industry remains governed by a patchwork of national regulators, Islamic standard-setting bodies and scholars interpreting Islamic law - a recipe for different rules and practices. This is creating confusion among investors, especially as major Western banks begin to enter the market. Most of the countries in which Islamic banks operate already use the IASB's International Financial Reporting Standards (IFRS). But these standards have been developed for conventional finance, not Islamic transactions, in which interest and pure monetary speculation are banned and trades must be underpinned by physical assets. So there is the potential for conflict between Islamic finance and conventional accounting rules. For example, in order to earn returns but not contravene the ban on interest, Islamic banks buy an asset such as a house on behalf of a customer and lease it out until the customer is able to acquire ownership. Under current IFRS standards, accountants say, this would probably be treated as a financial lease, requiring the bank to record the lease as an interest-earning loan - in apparent contravention of sharia law."IFRS is all about substance over form whereas sharia law is very much about compliance with legal form," said Andrew Hawkins, director at PricewaterhouseCoopers.
GUIDELINES The solution, some experts say, is to have the IASB introduce standalone guidelines under its IFRS framework that are tailor-made for Islamic finance. These guidelines would ensure a uniform approach across the industry while blending with the IASB's standards for conventional finance. Bodies such as the Asian-Oceanian Standard Setters Group (AOSSG), a regional organization which creates accounting guidelines, are calling on the IASB to put the drafting of Islamic finance standards on its agenda. The AOSSG has set up a working group to liaise with the IASB. More than three-quarters of 24 financial standards-setting bodies that responded to a survey by the AOSSG at the start of this year said there should not be separate Islamic accounting standards issued by other bodies outside the IFRS framework, because they could be incompatible with the global move towards convergence around IFRS, according to the AOSSG. Involving the IASB in Islamic finance may not be easy, however. While the IASB has said Islamic accounting may move onto its agenda as it begins to identify its project priorities in coming months, the body is preoccupied with a range of regulatory initiatives around the world, so it is unclear if Islamic finance will become a priority anytime soon.
Also, the whole idea of having global reporting standards is that there is one set of rules which are not industry-specific. Adding standards specifically for Islamic finance could undermine the uniformity of IFRS standards and spur demands for other exceptions to be made. For example, the problem of how Islamic banks classify their leases to customers might be solved if the IASB agreed to describe them as operating, not financial, leases. But the IASB might not be willing to do this for fear of violating a basic accounting principle and disadvantaging conventional banks. In an interview with Reuters, Alan Teixeira, senior technical director at the IASB, said his body would consider the issue of Islamic finance. But he declined to say whether, when and how it might get involved in standard-setting."The ideal situation is to have one set of words that everybody can use," Teixeira said. "The biggest challenge will be to see whether or not we can write the right words that don't conflict with sharia law but fundamentally get the same level of transparency and good level of reporting."
Teixeira said the IASB was thinking of setting up a working group to educate its board about sharia law so that it could make informed decisions."It might be that we can address any concerns by having guidance about how to apply or interpret certain aspects without necessarily changing an IFRS," he said. RIVALRY Another potential problem is that any IASB involvement in Islamic finance could bring it into rivalry with other organizations. The Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) already sets standards for the industry; Khaled Al Fakih, newly appointed secretary general of AAOIFI, has said it is conducting a strategic review of all its standards to make sure they are fresh, complete and relevant. Results of the review are expected this year. AAOIFI does not carry as much weight with regulators around the world as the IASB does, and many financial firms may prefer to deal with a single organization for both conventional and Islamic accounting, rather than contending with two separate bodies. So the IASB might ultimately win any contest for influence in Islamic finance - but the tussle would not be pleasant, and it could further confuse investors."The challenge AAOIFI has is in persuading various regulators to adopt its standards and that's going to be difficult in the current environment," said Hijazi."There is so much regulatory and governance change in the pipeline, it will be very difficult for the regulators to now call on financial institutions to produce an additional set of accounting or financial statements."
Austria hit back at critics of its banking secrecy on Thursday by urging Britain and the United States to crack down on money laundering and tax havens in their own backyards, as EU ministers prepared to debate the issue in Dublin. Isolated in the European Union following Luxembourg's move this week to share foreigners' bank data to foil tax cheats, Austria's finance minister said she could discuss such a change of tack - but insisted it could not be a "one-way street" and accused London and Washington of failing to close international tax loopholes in the likes of Delaware and the Channel Islands."Delaware and Nevada are tax havens and money-laundering centres that have to be laid bare just as much," Fekter told Die Presse newspaper and adding that Britain was "the island of the blessed for tax evasion and money-laundering". Last month's $13-billion EU and IMF bailout of Cyprus, which raised questions over the way the island's crippled banks had ballooned with money from Russia and elsewhere, has given new prominence to efforts within the EU and between Europe and the United States to make it harder for citizens to shelter savings from tax in secret accounts in other countries. The Irish hosts said the EU's 27 finance ministers will discuss a pilot project being pursued by the bloc's five largest economies to deepen cooperation on tackling tax evasion during two days of talks in Dublin that start on Friday. There could be some frank talking as Vienna defends a long tradition of banking secrecy, of a kind the likes of non-EU member Switzerland, and now Luxembourg, have agreed to curtail. France's budget minister, whose predecessor was forced out last month in a scandal over a secret Swiss bank account, warned Austria on Thursday that it risked being blacklisted for financial transactions if it did not agree to reveal to their governments which foreign EU citizens had accounts in its banks."It's not normal that a country like Austria for example doesn't communicate the information it has concerning EU citizens who hold accounts there," Bernard Cazeneuve said."If these countries don't cooperate, if there isn't an agreement for an information exchange that allows for total transparency at the heart of the European Union, these countries expose themselves to the risk of appearing on the list of non-cooperating states and territories," he told France-Info radio.
AUSTRIAN DEFENCE For her part, Fekter said Britain, and notably associated territories like the Channel Islands, should be bound by rules that EU governments now required of Cyprus to prevent people controlling companies and trusts anonymously:"What we demand of Cyprus, a small island, we also demand of the (United) Kingdom," Fekter, a conservative member of Austria's governing coalition, told Die Presse. She told Kurier newspaper: "We want a trust registry for the Channel Islands but also for countries where British law applies such as the Cayman Islands, Virgin Islands or Gibraltar ... These are all areas that are havens for those fleeing taxes."Luxembourg, the only other EU country that had refused to swap personal data on savers in its banks, said on Wednesday it would so by 2015, heaping pressure on Vienna to follow suit. Chancellor Werner Faymann, a Social Democrat, said this week that Austria was ready to negotiate with Brussels as long as bank secrecy remained intact for Austrian citizens. But his conservative junior coalition partners have taken a harder line.
The European Commission warned Austria on Monday that its banking secrecy would put it in a "lonely and unsustainable position" if it did not adopt the same rules as other countries in sharing data on foreign depositors. The United States is also after citizens that stash wealth abroad, and is set to start talks with Austria soon. EU officials have threatened to sue Austria if it gives the United States information about its citizens' bank accounts here but refused to do the same for other EU members. Austria now withholds tax on EU citizens' interest income and sends the money anonymously to their home countries. Austrian bankers have played down the potential impact of sharing information on foreign depositors.
CYPRUS RESCUE Fallout from the Cyprus bailout will top the agenda of the EU finance ministers meeting, with focus also on growing German reluctance over euro zone banking reform. Unease surrounding the rescue package for Cyprus grew on Wednesday after Reuters and other news organisations obtained documents detailing how the bailout will be financed and how much of the total Cyprus is now expected to contribute. Cyprus was originally meant to come up with 7 billion euros, and the EU and IMF would provide 10 billion, but the documents show the total package will now cost 23 billion euros, with Cyprus providing 13 billion of that. There is likely to be intense debate over whether the deal was successfully handled. The Dublin meeting, an informal gathering at which no decisions are expected, will also examine the deepening problems in Slovenia and debate how to press ahead with a fully fledged "banking union" across the euro zone countries and wider EU. In the long-run, it is the banking union debate that is most critical since it touches on issues such as how to resolve bad banks, how to put in place a single deposit-guarantee scheme and how to establish a single resolution fund. In June last year, EU leaders agreed that establishing a banking union was an essential next step in breaking the "doom loop" between big, problem banks and indebted sovereign governments, so as to avoid one dragging the other down. But momentum towards banking union has slackened, especially among some German officials, as the complexities and potential difficulties of the plan have come into clearer focus. Although no formal decisions will be taken at the meeting, ministers are expected to give their endorsement to extending by seven years the time that Ireland and Portugal get to repay loans they have already received from the bailout funds. This would be a significant concession to Ireland, helping to seal its return to normal borrowing on markets, as well a boost to Portugal as it struggles to push through spending cuts.$1 = 0.7642 euros)
Feb 12 Brazilian steelmaker Usinas Siderúrgicas de Minas Gerais SA is negotiating with banks the refinancing of about 4 billion reais ($1 billion) in loans maturing in the next two years, four sources with direct knowledge of the matter said on Friday. Usiminas, as the company is known, has contacted Itaú Unibanco Holding SA, Banco Bradesco SA, Banco Santander Brasil SA and Banco do Brasil SA to grant a standstill agreement effective immediately, said two sources, who requested anonymity since talks are preliminary.
The banks would agree if shareholders commit to injecting $1 billion into Usiminas to prevent debt metrics from deteriorating further, a third source noted. However, an ongoing dispute between controlling shareholders Nippon Steel & Sumitomo Metal Corp and Techint Group has made it tougher for Usiminas to raise new capital, all the sources said.
Usiminas, Techint and Santander Brasil did not have an immediate comment. Itaú, Bradesco and Banco do Brasil did not comment. Efforts to reach Nippon Steel officials in Brazil were unsuccessful.
($1 = 3.9801 Brazilian reais)