Economy

Can Dilma And Cristina K Solve A Six-Billion-Dollar South American Mining Crisis?

Can Dilma And Cristina K Solve A Six-Billion-Dollar South American Mining Crisis?
Eleonora Gosman

SÃO PAOLO – Brazilian mining giant Vale has halted work on its $6 billion Rio Colorado project in Argentina’s Mendoza province, until its demands for special breaks in tax and exchange rates are met by the government in Buenos Aires.

The Argentinian government had given Vale a Feb. 4 deadline to submit a new timeline for the project, threatening to revoke Vale’s mine concession. Even though the deadline has come and gone, the issue, could finally be resolved on March 7, when Brazilian President Dilma Rousseff meets with Argentinian President Cristina Kirchner, sources have told Clarín.

Vale suspended its operations in December, even though it had already invested more than $1 billion in the Rio Colorado mine. It has said it would only resume operations if Argentina accepted two conditions: tax exemptions and a more favorable dollar-peso exchange rate to compensate for inflation.

The mining company, which is the second largest in the world, considers that the exchange rate it is getting for its dollars is outdated, with the Argentinian peso largely overvalued against the dollar. Argentina’s rampant inflation is also an issue, because the peso is not depreciating at the same rate, resulting in a soaring increase in costs for Vale – by 40 to 50%, according to analysts from BofA Merrill Lynch.

Vale also wants Argentina give them “fiscal facilities,” meaning breaks on value-added taxes until mine output starts.

“Unreal” demands

Brasilia has a big interest in the continuity of the mining project, which will extract potassium chloride from a deposit in Malargue, in the Mendoza province. Potassium chloride is a key compound used in the production of fertilizers. However, Brasilia believes that Vale’s demands are “unreal” and could derail the project.

The $6-billion dollar Vale project has 4,500 employees, whose futures are also on hold with the project – something that has Brazilian and Argentinian authorities worried. Vale has extended the workers’ end of year paid holidays while the project is halted.

In the only recent statement by the company, during a presentation to investors in Rio de Janeiro, CFO Luciano Siani said Vale has an "obligation to consider what we've already invested but to look at the perspective going forward" as well. That is, keeping the company’s balance sheet assets profitable, which wouldn’t be possible if Vale’s demands were not met. In Brazil, Vale enjoys important tax breaks and an image that has been tarnished for environmental reasons.

Further meetings will be held in the next few days among Argentinian and Brazilian officials. Argentine Minister of Foreign Relations Hector Timerman will meet with Foreign Minister Antonio Patriota in Brasilia on Feb. 19. Both must prepare the March meeting between Dilma and Cristina, which should decide the future of the Vale mine. On Feb. 28, there will be a second bilateral meeting to advance negotiations.

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Society

Debt Trap: Why South Korean Economics Explains Squid Game

Crunching the numbers of South Korea's personal and household debt offers a glimpse into what drives the win-or-die plot of the Netflix hit produced in the Asian country.

In the Netflix series, losers of the game face death

Yip Wing Sum

-Analysis-

SEOUL — The South Korean series Squid Game has become the most viewed series on Netflix, watched by over 111 million viewers and counting. It has also generated a wave of debate online and off about its provocative message about contemporary life.

The plot follows the story of a desperate man in debt, who receives a mysterious invitation to play a game in which the contestants gamble their lives on six childhood games, with the winner awarded a prize of 45.6 billion won ($38 million)... while the losers face death.


It's a plot that many have noted is not quite as surreal as it sounds, a reflection of the reality of Korean society today mired in personal debt.

Seoul housing prices top London and New York

In the polished streets of downtown Seoul, one sees endless cards and coupons advertising loans scattered on the ground. Since the outbreak of the pandemic, as the demand for loans in South Korea has exploded, lax lending policies have led to a rapid increase in personal debt.

According to the South Korean Central Bank's "Monetary Credit Policy Report," household debt reached 105% of GDP in the first quarter of this year, equivalent to approximately $1.5 trillion at the end of March, with a major share tied up in home mortgages.

Average home loans are equivalent to 270% of annual income.

One reason behind the debts is the soaring housing prices. In Seoul, home to nearly half of the country's population, housing prices are now among the highest in the world. The price to income ratio (PIR), which weighs the average price of a home to the average annual household income, is 12.04 in Seoul, compared to 8.4 in San Francisco, 8.2 in London and 5.4 in New York.

According to the Korea Real Estate Commission, 42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s. For those in their 30s, the average amount borrowed is equivalent to 270% of their annual income.

Playing the stock market

At the same time, the South Korean stock market is booming. The increased demand to buy stocks has led to an increase in other loans such as credit. The ratio for Korean shareholders conducting credit financing, i.e. borrowing from securities companies to secure stock holdings, had reached 21.4 trillion won ($17.7 billion), further increasing the indebtedness of households.

A 30-year-old Seoul office worker who bought stocks through various forms of borrowing was interviewed by Reuters this year, and said he was "very foolish not to take advantage of the rebound."

In addition to his 100 million won ($84,000) overdraft account, he also took out a 100 million won loan against his house in Seoul, and a 50 million won stock pledge. All of these demands on the stock market have further exacerbated the problem of household debt.

42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s

Simon Shin/SOPA Images/ZUMA

Game of survival

In response to the accumulating financial risks, the Bank of Korea has restricted the release of loans and has announced its first interest rate hike in three years at the end of August.

But experts believe that even if banks cut loans or raise interest rates, those who need money will look for other ways to borrow, often turning to more costly institutions and mechanisms.

This all risks leading to what one can call a "debt trap," one loan piling on top of another. That brings us back to the plot of Squid Game, "Either you live or I do." South Korean society has turned into a game of survival.

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