Eurobonds: Bread Today, Hunger Tomorrow

There is no such thing as a free lunch. What is being borrowed today so that the state can continue carrying on with its criminal rate of consumption, will have to be paid for tomorrow, of course, with interest.

Thursday, August 9, 2012

The analyst Juan Carlos Hidalgo, on his blog Por la Libre in Elfinancierocr.com, rightly describes the issuance of Eurobonds that the Costa Rican Congress has just approved, as what it really is: A deferred tax package.

Hidalgo details the many inconveniences that Eurobonds will mean for Costa Rica: "Dollars entering the country as debt must be changed into colones in order for the government to pay its obligations. This will cause an oversupply of dollars in the economy and, therefore, the value of the dollar will fall in relation to the colon. Or in other words, the colon will face upward pressure. Remember that the exchange rate is currently attached to the lower band of ¢500 and the Central Bank has said that if the threshold is lowered, it will intervene in the market buying dollars in order to defend the exchange rate floor. And in order to buy the dollars, the BCCR will print colones which will enter the economy diluting the value of money that was already circulating, generating inflation. "

Hidalgo insists: "In this way the Eurobonds are simply a deferred tax package. The government will receive a huge amount of money that it can spend in time for the 2014 elections with the same wisdom and honesty that it has shown so far. Eventually that debt will have to be paid via higher taxes, but the short-term consequence of the debt will be higher inflation. And the great benefit that was promised (a decline in interest rates) will not occur. The best alternative, of course, would be that the government significantly reduces its spending so that they do not need to resort to more borrowing, whether internal or external. "

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From a publication in Pulso Bursátil, a blog by Aldesa:
Costa Rica today launched on the international market a new bond debt in the amount of $1 billion, which will make it the most liquid bond emitted outside the borders of our country, followed by the issue $500 million by the Instituto Costarricense de Electricidad.

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