NEWS/BLOG

Things Looking Up in Brazil

Brazil is becoming an increasingly more attractive as a place to live and to invest. In September the real pegged a 14-month high against the dollar. Moody’s elevated Brazil’s credit rating to investment grade on. Shortly after, Brazil’s Ibovespa index hit 62,000 points, a target set by many investment banks for year’s end. Moody’s is the last of three credit rating agencies to do this; Standard & Poor’s and Fitch granted Brazil investment-grade status last year.

Investors who have bought property in Brazil have seen steady appreciation, especially in the Northeast. A strengthening exchange rate is significant. The US dollar was worth R$2.33 at the beginning of 2009, but is now only worth R$1.80. (The greenback was worth R$2.65 at the start of 2005 and R$3.54 at the start of 2003.) The euro was worth R$3.71 and R$3.59 at the beginning of 2003 and 2005 respectively, but is now only worth R$2.66.

Earlier this year Brazilian President Luiz Inacio Lula da Silva launched the My House, My Life housing program, with the stated goal of building one million affordable homes. The program has helped create favorable conditions for real estate investors.

Finance for homebuyers has been altered radically since 2007, offering buyers 240-month mortgages instead of ones lasting only 60 months.

Inflation in Brazil stands currently at around 4.3%.

The End of Summer

Welcome to all those who’ve recently signed up as affiliates. 

Summer is over, and I’ve just heard a weather forecast predicting a 30% chance of snow tomorrow here in Santa Fe. This would be unusual, but it feels as though it could happen.

For my summer reading, I continued with John Le Carre, whose books are, I think, worthwhile for their elegant language as well as for the suspense. I also believe Le Carre is keenly aware of cultural differences as well as political and historical matters. A couple volumes that I stumbled onto recently also provide insight into the troubled history and raw feelings of the people in the breakaway republics in the Caucasus, specifically Chechnya.

Our Game is the odyssey of a former British agent, Tim Cramer, who has retired to an inherited estate and vineyard in the English countryside. An agent he trained has disappeared and evidence points to Cramer as having been responsible. Meanwhile, Cramer’s young live-in girlfriend has also disappeared. What follows is not only a hair-raising tale but one in which the main character, a not very likeable sort at the onset, transforms himself into what we might call a hero. Written in the 1990s after the end of the cold war, the book was a best seller, yet does not seem dated.

More recently, Le Carre wrote A Most Wanted Man The story takes place in Hamburg, Germany, a beautiful old city where foreigners are generally welcomed. The “wanted man” is a young Chechnyan, who is soon surrounded by an international cast of characters. A Turkish immigrant and his mother befriend him; a young liberal, upper-class German woman becomes his lawyer and a British banker appears because a large sum of money is involved. Secret agents from Germany, Britain and the U.S. with interests of their own enter the picture and the conflict evolves from there.

Please - let us know what you’re reading and where you’re going. Keep sending news and resources of interest to expats and prospective expats. Thanks.

Medicare in Mexico

Perhaps the chief obstacle for U.S. citizens’ retiring in a foreign country is the fact that Medicare, which provides for almost free healthcare, stops at the U.S. border. A number of groups are lobbying for Medicare in Mexico, where approximately 1 million U.S. citizens already live.

Congress will have to be convinced that healthcare for retirees in Mexico is both feasible and cost effective. Expat groups who are bringing this issue to the attention of the U.S. government include the Puerto Vallarta based chapter of Democrats Abroad and the bipartisan group of American Citizens Abroad (ACA). 

The Americans for Medicare in Mexico, A.C. (AMMAC)is working hard to promote this benefit to eligible retirees and is urging members of Congress to initiate a demonstration project. They argue that not only have these eligible Medicare recipients paid into the fund over a lifetime, but the cost to the U.S. taxpayers will be significantly less than if these retirees sought healthcare in the U.S.  Anyone following the current healthcare debate is aware that Medicare costs constitute a major issue.

Proponents of the law change include David C. Warner of the Lyndon B. Johnson School of Public Affairs, University of Texas. author of Getting What You Paid For:  Extending Benefits to Eligible Beneficiaries in Mexico (U.S.-Mexican Policy Reports). The newly appointed U.S. Ambassador to Mexico, Carlos Pascual, has shown an interest as well and recently accompanied President Obama to a North American Summit in Guadalajara where one of the topics covered was Medicare in Mexico.

Separately, some private insurers have begun encouraging U.S. policyholders to seek less costly services in certain foreign countries.

Offshore Banking Update

The IRS has established an amnesty program for taxpayers who have not paid taxes on foreign accounts. Taxpayers who contact the IRS by Sept. 23 could avoid criminal prosecution but still must pay all back taxes, plus interest and penalties. Note: this deadline has been extended to Oct. 15.

The Swiss government has agreed to a settlement under which the Swiss bank UBS will turn over to the IRS the names of about 4,450 accounts held by Americans. The IRS claims that UBS holds about 52,000 such accounts, and of these the 4,450 are those most likely to involve tax evasion.

The settlement calls for UBS to hand over names gradually to the IRS through a review panel set up by the Swiss tax authority. UBS plans to notify account holders that their names are being turned over. The deal is supposed to discourage tax evasion.

Note: All U.S. citizens and permanent residents are required to disclose and pay taxes on their worldwide income, regardless of the source. The IRS usually gives a credit for taxes paid to a foreign government.

One Year after the Lehman Collapse

An update from the currency exchange firm World First

Because of the shortened trading week, this update will offer a retrospective of the previous year. It was 12 months ago that Lehman Brothers collapsed, and the subsequent fall out caused by years of malaise within the banking system is still being felt today.

Links to the subprime mortgage market lead to the onset of the rot in 2007 when it became obvious that defaults on loans would be larger than expected. This led banks to reassess their balance sheets in an attempt to ascertain their exposure to this toxic market.  t was only at this stage that the inextricable complexity of the ownership of this debt became apparent. The debt had been packaged up into complex financial instruments that had become freely traded between banks, repackaged and traded again. Increasing default on subprime loans caused a landslide of escalating losses throughout the banking sector. Unsurprisingly, with hindsight, Lehman Brothers’ exposure to this market ended up being fatal. On 15th September 2008, Lehman Brothers one of the world’s oldest and most successful investment banks filed for Chapter 11 Bankruptcy.

Although the subprime mortgage is the most high profile factor leading to the credit crunch it is important to at least consider some of the other contributory factors that lead to a reduction in availability of credit. This then feeds forward into the consequences we have been experiencing in the currency markets.

It is undeniable that financial deregulation had its part to play in the crisis. However, the political and social debates this question raised are beyond the scope of our update. Certainly the two factors that contributed to harsher lending conditions and also caused aftershocks in the currency market are the over-leveraging and the subsequent commodity boom.  Example of the consequences of over-leveraging are Fannie Mac and Freddie May in the US and Northern Rock in the UK. The commodity price bubble saw the price of Oil rise from $50 a barrel in 2007 to $150 a barrel at the end of 2008.

The most arresting effect on currency markets was unprecedented price volatility.  Sterling for example lost approximately 18% of its value against the euro in the preceding four months.  It saw sterling approach parity with the Euro around Christmas 2008. We also saw sterling collapse against the USD by approximately 25% in a similar time frame. The cause for sterling weakness was due to its reliance on the financial sector and the importance to the strength of UK GDP. Also, once the lender of last resort, the UK taxpayer, had been called in and Government firmly involved in the UK private financial sector, all bets were off on the scale of the damage caused to our nation. USD strength was another issue as the ‘flight to quality’ cause USD to strengthen beyond all reckoning as global investors sought a safe haven for their funds.

Commodity currency prices fluctuated wildly as traders unwound their positions. This initially saw a rapid and unsustainable depreciation in the value of these crosses. However, as the Chinese economy spluttered back into life their value slowly came back.

At the one year anniversary of this financial “perfect storm” of the new millennium markets are begging for stability and starting to contemplate moving in a much more comprehensible manner. We have seen this with the USD in particular. The dissolution of the relationships between risk appetite response to positive USD fundamentals and risk aversion to negative USD fundamentals is a positive sign. With markets responding to fundamental data more succinctly we believe this will in turn lead to more stable currency markets although volatility will continue linger.

If we compare the range of GBPEUR trading in the first 4 months of the crisis to the last 4 there has been a marked calm. A return to narrower trading bands and trading on fundamentals will signal the return to stability and emergence from crisis. However, as we always forewarn, we are not out of the woods yet. If proof were needed we need look no further than to the previous month of GBP trading in which the market has reacted to negative sterling news and not traded on positive UK data.

This week we see the first meeting of the BoE since the bombshell of quantitative easing policy expansion. With the minutes of August’s meeting revealing that 3 members, including Governor King, voted to increase the policy beyond the extra £25Bn agreed we should certainly not take anything for granted.  Again, all eyes will be on Threadneedle St. on Thursday. While the storm has certainly abated, don’t expect calm seas to prevail for sometime yet.

For more information, see www.worldfirst.com.

See disclaimer below. 

Chinese Markets Cooling Off

While U.S. markets continued their rally through August, Chinese markets began plunging and on Monday, August 31, the Shanghai composite index sank 6.7%.

Volatility in Chinese stocks may be the result of the Chinese government easing its free flowing fiscal stimulus. Beijing has fought recession by pumping unprecedented sums through state banks as part of a $586 billion package. It has been highly effective, resulting in growth of 7.9% during the second quarter.

Lou Jiwei, head of China Investment Corporation, the government’s investment fund, stated last weekend that both China and the U.S. were “creating more bubbles” in their attempts to fix the global crisis.