Wednesday, July 03, 2013

The rise and fall of Brazil's No.1 tycoon tells you a lot about the global economy

Rio’s Maracana stadium was the centre of attention on Sunday, as protestors clashed with police outside over the billions spent on preparations for the World Cup and the Olympics. Behind the very public scenes another drama is playing out.

It’s one that brings together many of the threads of the crisis racking the global economy. Corruption ranks high amongst the issues enraging the protestors who took to the streets more than three weeks ago. And multi-billionaire Eike Batista, owner of the EBX group of companies, is at the centre of it all.

Batista’s property arm IMX has a small stake in the consortium that is leasing the newly-renovated stadium from the state government. IMX pitched the idea for the deal, carried out the financial viability analysis, and then, to nobody’s surprise, since Batista is a friend of Rio’s governor Sergio Cabral, won.

But there’s much more to this than a seedy scandal.

As well as property, Batista has interdependent interests in oil, mining, ports and railways, technology, as well as sports, entertainment and catering. You name it, he’s into it. At the start of 2012 he’d become the seventh richest man in the world. His personal wealth was estimated at $30 billion. He’d set his sights on becoming top of the world’s rich list. King of the 1%.

A year later and the horrible truth is out. None of his companies is making a profit.

On Monday, the oil company OGX called it a day, more or less, telling the world that output from its only producing wells was coming to an end, and would probably close next year, leaving it with one unproved field still under development. 

From 2009, the value of the EBX group soared on the commodity price boom that resulted from global attempts to engineer a credit-fuelled recovery from the 2007-8 financial and economic crash. 

The optimism around Batista reflected a desperate belief – more a baseless fantasy – that Brazil, Russia, India and China (the BRICs countries) would drag the battered capitalist world economy back from recession, depression, stagnation – all of those and more.

But it hasn’t turned out like that. China’s manufacturing is shrinking, and its government, risking a credit crunch as it attempts to forestall a renewed credit crash, has now joined others around the world in stemming its supply of the stuff.

Just the suggestion that the US Federal Reserve might soon start reducing its programme of credit expansion sent markets around the world spinning. Now speculators on the commodity and emerging markets are betting that China’s demand for Brazilian or any other country’s commodities will fall.

So the EBX group’s value has dropped by more than 90% compared with its 2011 peak.

On the way down as well as on its way up, Batista’s group of companies sucked in credit, mostly from Brazilian banks. These include state development lender BNDES and Caixa, the nation's largest mortgage lender, as well as private-sector lenders Banco Bradesco SA, and Itaú Unibanco Holding SA.

And, borrowing more to service his debts, Batista tapped into $1 billion in capital from Malaysian oil company Petronas in May, and in March from German utility E.ON SE and fellow Brazilian billionaire Andre Esteves' investment bank, BTG Pactual.

Now with debts far exceeding its value, the group faces restructuring, bankruptcy or both.

Like giant corporations everywhere Batista’s companies are closely enmeshed in the state. As OGX crashed, three of its board members rushed for the exit. The high-profile trio are: Pedro Malan, a former long-serving Brazilian finance minister; Rodolfo Tourinho, a former energy minister; and Ellen Gracie, a former chief justice of Brazil's Supreme Court.

Batista’s rise and fall is a microcosm of a global economy still heavily dependent on and weighed down by debt . Today's early sell-off of shares in London in response to China's slowdown and the political crisis in Egypt are more than straws in the wind.

Gerry Gold
Economics editor

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