Latest / Trumponomics / This Food Company Is the Lehman Brothers of Croatia

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This Food Company Is the Lehman Brothers of Croatia · Trumponomics

• 0:00
  Speaker 1: In two thousand and eight, an investment bank named Lehman
• 0:03
  Speaker 1: Brothers collapsed, sending the United States and much of the
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  Speaker 1: world into a financial crisis and recession that it's still
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  Speaker 1: recovering from today. On benchmark, we're turning our attention to
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  Speaker 1: another country, this time in Eastern Europe that's facing its
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  Speaker 1: own Lehman like moment, except this time, the troubled company
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  Speaker 1: that could bring down that nation's economy is not an
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  Speaker 1: investment bank. It's one that makes and sells food. I'm
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  Speaker 1: Scott Landman, an economics editor with Bloomberg in Washington, and
• 0:44
  Speaker 1: I'm Daniel Moss, I brought about global economics for Bloomberg
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  Speaker 1: View in New York. So the country we're going to
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  Speaker 1: talk about today is Croatia, And like most Americans, I
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  Speaker 1: haven't visited the place. I don't know a whole lot
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  Speaker 1: about it except that it was involved in a really
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  Speaker 1: terrible ethnic conflict in the former Yugoslavia. Can you help
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  Speaker 1: me out, Dan, Have you been there before? I have not,
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  Speaker 1: but I am intrigued that a supermarket could swallow a
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  Speaker 1: country's g d P. And when not talking about Amazon
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  Speaker 1: or Walmut, All right, let's bring in our two resident
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  Speaker 1: experts who have been on top of this story in
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  Speaker 1: recent months. Yasmina Kuzmanovich is a reporter for Bloomberg based
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  Speaker 1: in the Croatian capital of Zagreb. Luka Kasaragi is a
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  Speaker 1: corporate finance reporter for Bloomberg in London. Yasmina, Luca, thanks
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  Speaker 1: for joining us. Thank you, Yasmina. Can you start us off?
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  Speaker 1: The company that threatens Croatia is called agro Core. Can
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  Speaker 1: you give us a brief history of where it started
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  Speaker 1: and how it got so big? That's right. The company
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  Speaker 1: was started by its owner if it's a Toddo rich
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  Speaker 1: who started it as a flower business in the nineteen seventies.
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  Speaker 1: This is when Croatia was still part of socialist Yugoslavia
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  Speaker 1: and the country was introducing some pro market reforms. Then,
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  Speaker 1: after creation independence, when the government abandoned the communist model
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  Speaker 1: for the market economy, uh Toddo Riches business really took off.
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  Speaker 1: It grew into a retail and also food conglomerate, not
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  Speaker 1: only in Creatia but also in neighboring countries. He expanded
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  Speaker 1: by borrowing, usually at very high interest rates. Even in
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  Speaker 1: those early years, because Creatia was seen as a new
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  Speaker 1: country as a as a risk in the past year,
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  Speaker 1: the borrowing caught up with the company, and eventually in January,
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  Speaker 1: the lenders stopped offering additional financing and death sent the
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  Speaker 1: company into a dead crisis, at which point the government,
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  Speaker 1: concerned about the spill over to the rest of the
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  Speaker 1: creation economy and the region, brought a special law designed
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  Speaker 1: to shield the economy and systemic risk and todder each
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  Speaker 1: The owner invoked the law in April, So since April,
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  Speaker 1: the government, the companies under the government restructuring. Let's zoom
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  Speaker 1: out a little bit, how much of croatious GDP is threatened?
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  Speaker 1: If you take everything together, including suppliers to this company.
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  Speaker 1: Nobody has really offered a definitive figure for this. We
• 3:26
  Speaker 1: can we can definitely say that our core annual revenue
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  Speaker 1: is about seven billion dollars, which is equivalent to about
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  Speaker 1: fifteen percent of creatious g d P. However, when you
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  Speaker 1: take into account the suppliers, and the suppliers ranged from
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  Speaker 1: the smallest farmers to the big food producers and processors,
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  Speaker 1: then this effect is obviously multiplied. The administrator, the state
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  Speaker 1: appointed administrator who is now overseeing the company, recently said
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  Speaker 1: that about half a million people in the agent could
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  Speaker 1: be affected if, in the case of agricults collapse. So
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  Speaker 1: this company is Croatia's economy in a way, Yes, yes,
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  Speaker 1: I mean, like you're talking about at the top ten.
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  Speaker 1: If you're trying to take some analogy to the US economy,
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  Speaker 1: would probably be something like Amazon and Walmart and you know,
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  Speaker 1: Kroger or other large grocery chains, and you roll them
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  Speaker 1: all together, and you know, it would probably account for well,
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  Speaker 1: if you have if you have a nineteen trillion U
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  Speaker 1: S economy, you're talking you know, at least several trillion
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  Speaker 1: dollars worth of GDP or the equivalent, if you're kind
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  Speaker 1: of making that straight comparison, right, and if you were
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  Speaker 1: including the supplies a lot more exactly. I mean, it's
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  Speaker 1: certainly it's certainly bigger than than what Lehman's brothers represented it.
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  Speaker 1: It is bigger than the impact for creation. Is bigger
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  Speaker 1: than the impact of the car industry in the US
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  Speaker 1: and a similar event when the government was saving the
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  Speaker 1: car industry. It's it's really it's really hard to describe
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  Speaker 1: the in terms of other countries globally what what this
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  Speaker 1: would mean. But this company, yes, it is, it is
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  Speaker 1: Croatia and looka let me bring you in so you
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  Speaker 1: can talk about the the international financial angle on. That's
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  Speaker 1: how jasmin I was talking about how it started to
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  Speaker 1: take on debt and it got it got trouble in
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  Speaker 1: that angle. What exactly did the company do and how
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  Speaker 1: did it get into the situation with international lenders. The
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  Speaker 1: company has been a bond issuer for for many years.
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  Speaker 1: Um has offered interesting yields for investors. International investors because
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  Speaker 1: of its it's perceived as an Eastern European company, so
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  Speaker 1: riskier than Western European equivalents. The turning point in the
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  Speaker 1: story in the story here Agricore is probably when the
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  Speaker 1: company acquired a large competitor in the in the region,
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  Speaker 1: as Slovenian company called Mercatur, hoping it would make could
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  Speaker 1: merge its own retail business with Mercatur's retail business, improved profits,
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  Speaker 1: make savings and shield the company from the competition from
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  Speaker 1: other retailers from the European Union. Remember here that Creatier
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  Speaker 1: joined the U in twent but after that they realized
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  Speaker 1: that the merger wasn't going as planned. Profits didn't improve,
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  Speaker 1: competition from other especially discount retailers like Legal in Croatia,
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  Speaker 1: who was getting stronger and stronger. As Yasmina said earlier,
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  Speaker 1: at the beginning of twenty seventeen, the company tried to
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  Speaker 1: refine and some of the loans they had taken out
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  Speaker 1: with Western and Eastern European Russian banks in previous years.
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  Speaker 1: The market wasn't ready to refinance those, uh, those debts,
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  Speaker 1: and that triggered panic that spread from bond holders, two banks,
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  Speaker 1: two suppliers, landlords, and eventually the govern the Creation government
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  Speaker 1: and also other governments in the region where our Work
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  Speaker 1: Corps operates felt they need to intervene to to prop
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  Speaker 1: up the company. So, in other words, investors just didn't
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  Speaker 1: feel that even though they were offering probably pretty generous yields,
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  Speaker 1: I mean, what kind of yields were they offering on
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  Speaker 1: their on their ponds slightly less than ten percent, which
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  Speaker 1: in the current environment is even even with that, that
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  Speaker 1: was still you know, those are very high for that
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  Speaker 1: region basically, and that was just too risky for people
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  Speaker 1: to take on, right. Yeah. And at the time also
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  Speaker 1: he was starting to become clear that there were some
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  Speaker 1: problems with the accounting of the company. A few months
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  Speaker 1: into these crisis, we still don't have an exact figure
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  Speaker 1: for the total debt of agro Core because there were
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  Speaker 1: a lot of the suppliers took out loans from local
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  Speaker 1: banks eventually guaranteed by agro Core, which may have not
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  Speaker 1: been recorded on our core balance sheets. Countants are still
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  Speaker 1: looking into that, but again at at this moment, we
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  Speaker 1: still don't have an exact figure for for for the
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  Speaker 1: debt on the company. How is Russia involved in all this, Well,
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  Speaker 1: there are two elements here that we need to bear
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  Speaker 1: in mind. Russian banks UM controlled by directly by the
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  Speaker 1: Russian State by the Kremlin, are the biggest lenders to
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  Speaker 1: agro Cores. BA Bank, which is Russia's largest bank a
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  Speaker 1: loan lands almost one point five billion dollars to Agricore
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  Speaker 1: in the past few years UH, and it did that
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  Speaker 1: as it expanded outside its domestic market around twenty VTB,
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  Speaker 1: the second largest bank is also is the second largest
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  Speaker 1: lender to to agro core UM. The other elemental bearing
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  Speaker 1: mind is that Croatia is a crucial country for geopolitical
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  Speaker 1: region reasons within southeastern Europe. It's part of the U,
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  Speaker 1: it's part of the nature UH and as large access
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  Speaker 1: student mediterraneancy historically has been aligned with Germany and the US.
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  Speaker 1: It's a predominantly Catholic country, but Russia at the same
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  Speaker 1: time has had an historical interest in the region and
• 9:46
  Speaker 1: is closed to Serbia, which is the largest country informer
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  Speaker 1: Yugoslavia and the main enemy of Croatia during the ethnic
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  Speaker 1: conflict of the nineties. UH. We don't know whether the
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  Speaker 1: loans to Agricore, the loans by Russian banks to Agricore,
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  Speaker 1: how a geo political motivation to start with. We don't
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  Speaker 1: have it and we don't have evidence for that. But
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  Speaker 1: what we can say is that Croatian politicians want to
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  Speaker 1: avoid the country's largest company goes under Russian control, and
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  Speaker 1: they've tried to avoid that since the start of the crisis.
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  Speaker 1: Where we are at at the moment is a Burbank,
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  Speaker 1: as the largest lender, wants to recover its money, but
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  Speaker 1: it walked out of a deal signed by other creditors
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  Speaker 1: of Agricore, including banks and funds, Hedge funds, American edgemants,
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  Speaker 1: and it's starting legal battles against the company and also
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  Speaker 1: the Croatian government in um several Bokan countries, including Croatia, Serbia, Slovenia,
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  Speaker 1: but also in the uk not so much the end
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  Speaker 1: of history. No, it feels like we are just at
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  Speaker 1: the beginning of it. And we'll probably hear more about
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  Speaker 1: this company in the next the next few months. So
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  Speaker 1: this is much more than just a Lehman like effect
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  Speaker 1: on the economy. This is something that you know, it's
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  Speaker 1: almost like the West versus Russia again. You know, you
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  Speaker 1: have you have Ukraine not too far away, and that's
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  Speaker 1: been kind of a tug of war in recent years,
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  Speaker 1: and now it seems that could affect Croatia too. I mean,
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  Speaker 1: it's just even more interesting angle to the story. Maybe,
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  Speaker 1: um Yasmina, I'm curious, how does this affect the average
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  Speaker 1: citizen in Croatia and how would people feel about, uh,
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  Speaker 1: you know, this company being in trouble and also the
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  Speaker 1: potential power play by the Russians too, uh, maybe get
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  Speaker 1: more leverage in the region there, right. I mean, as
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  Speaker 1: we said, Agrocot has about fifty people employees, about half
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  Speaker 1: of them in Croatia. So considering that Agrocot makes things
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  Speaker 1: from pok sausages to ice cream, it has business in tourism,
• 12:00
  Speaker 1: in travel, in real estate. Uh, it owns the main
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  Speaker 1: newspaper distributor in creation it owns luxury hotels on the
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  Speaker 1: Creation coast, movie theaters in Belgrade. Uh. It is really
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  Speaker 1: hard to find a family that doesn't have some connection
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  Speaker 1: to Agricre, either through somebody who is directly employed to
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  Speaker 1: somebody who supplies or even somebody who writes for a
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  Speaker 1: fashion magazine whose magazine has is sold on this Uh.
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  Speaker 1: Through this chain of newspaper kills that ag Record owns,
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  Speaker 1: people actually lost jobs because of the agrocor crisis in
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  Speaker 1: the in the French magazine L, you know, the the
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  Speaker 1: creation version, the creation edition of L magazine. That sounds
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  Speaker 1: really bizarre, but bizarre people are people are concerned what
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  Speaker 1: is going to happen to ag Record. There was some
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  Speaker 1: shot and freud in the beginning because the person the
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  Speaker 1: owner of a re record. We we have to remember
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  Speaker 1: that though the government is running restructuring, the owner formally
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  Speaker 1: of this whole conglomerate is still if it's at Todo
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  Speaker 1: rich uh. And he ran the business as um as
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  Speaker 1: a taikoon. He he ran it as a family fiefdom.
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  Speaker 1: His three adult children were employed at top positions, family
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  Speaker 1: friends in laws. He made always sure that among his
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  Speaker 1: employees are spouses and children of ministers, judges, of regulators,
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  Speaker 1: of politicians. So there was a little bit of glee
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  Speaker 1: that this that this emperor has fallen down. But now
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  Speaker 1: I think people are concerned, and people understand the geopolitical
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  Speaker 1: reasons that they don't want Russia to become or Russian
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  Speaker 1: or Russian owned bank to become the owner of the
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  Speaker 1: biggest avocorate is the owner of most agricultural land in Creatia.
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  Speaker 1: So they don't want Russian state or the Russian bank
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  Speaker 1: to get that. As Luca said, it's interesting that the
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  Speaker 1: Russian the two Russian banks came into the landing game
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  Speaker 1: quite late in two thousand fourteen, and what was their
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  Speaker 1: interest in in in landed to Agricore, which already was
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  Speaker 1: had financial troubles. It's it's quite clear. Now, Um, we
• 14:21
  Speaker 1: have to see what happens in this type of war
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  Speaker 1: because bad bankers, Luca said, is suing Agricore from London
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  Speaker 1: through the Balcons in every form. It was count almost
• 14:31
  Speaker 1: every Slovenia and Bostonia, Croatia and Serbia and uh. I
• 14:35
  Speaker 1: think the next year will be crucial for for all this.
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  Speaker 1: So what happens next if people don't want Russia expanding
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  Speaker 1: its influence in a region where it has historically middled.
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  Speaker 1: What's the alternative? The I m f UM the short
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  Speaker 1: timeswer on the IMF. I don't think this is likely.
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  Speaker 1: The Creatia was lost in the IMF program in the
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  Speaker 1: ninety nineties and then after that had a long recession,
• 15:02
  Speaker 1: six year long recession, but it it recovered and currently
• 15:05
  Speaker 1: creatos GDPs actually expanding. The government has stopped this possible
• 15:12
  Speaker 1: chaotic bankruptcy by bringing the special law in April, so
• 15:16
  Speaker 1: it stopped the situation from deteriorating. And whether the question
• 15:21
  Speaker 1: of bailout comes up again really depends largely on how
• 15:25
  Speaker 1: successful the government will be in the restructuring, whether it
• 15:28
  Speaker 1: can help arrange a successful settlement, because there are only
• 15:31
  Speaker 1: two outcomes here, a settlement or bankruptcy. But can you
• 15:34
  Speaker 1: have a successful settlement without your biggest creditor, and that's
• 15:38
  Speaker 1: a bad bank. That's a huge question here. Can we
• 15:43
  Speaker 1: make this about something more than agricole and Croatia? What's
• 15:48
  Speaker 1: the parable here? The parable as in um? How is
• 15:53
  Speaker 1: this all possible? No? I mean, is there a broader
• 15:57
  Speaker 1: significance here than just a recall and its travails? And
• 16:02
  Speaker 1: whither Croatia is there a story here about how a small,
• 16:10
  Speaker 1: relatively new country which was part of a broader grouping
• 16:16
  Speaker 1: is finding it tough to stand alone. I can answer
• 16:19
  Speaker 1: from the Eastern European point of view, and specifically from
• 16:22
  Speaker 1: from the from the point of view of former Yugoslav countries.
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  Speaker 1: This I think the parable is and the lesson here,
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  Speaker 1: if you want, is that Agriculty is the result of
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  Speaker 1: the of the chrony economy, of the of the chrony
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  Speaker 1: socialism that became chrony capitalism, because you simply couldn't have
• 16:44
  Speaker 1: such a company UH doing the business so untransparently and
• 16:50
  Speaker 1: in a gray area, as Luca mentioned, the way they
• 16:53
  Speaker 1: didn't pay the suppliers on time, the with the suppliers
• 16:57
  Speaker 1: had long delays in payment UH. The Creation Central Bank
• 17:04
  Speaker 1: played the good role because several years ago it limited
• 17:07
  Speaker 1: the bank's exposure the creatian banks exposure to agro Coord,
• 17:10
  Speaker 1: but other regulators were not so quick. So because it
• 17:14
  Speaker 1: couldn't get any more cash from the local banks, Agrocord
• 17:17
  Speaker 1: developed this whole way of financing UH through suppliers actually
• 17:23
  Speaker 1: getting loans and then giving ag Record the biggest part
• 17:26
  Speaker 1: of those funds. It seemed that everybody knows every knew
• 17:30
  Speaker 1: everything and this was this was tolerated by every government
• 17:34
  Speaker 1: for well obviously for a quarter of the century. And
• 17:38
  Speaker 1: the lesson here is this, this has to stop. Even
• 17:43
  Speaker 1: the suppliers that are now in problems also played their
• 17:46
  Speaker 1: part here. They they continue to help Agricord under those circumstances,
• 17:53
  Speaker 1: and they need to another thing. When you said, is
• 17:56
  Speaker 1: this going to lead to to bail out it all
• 17:59
  Speaker 1: the pens whether the companies all that by Agricot and
• 18:03
  Speaker 1: other creation companies will change their business model, whether they
• 18:08
  Speaker 1: will diversify, whether they will go to other retail chains
• 18:11
  Speaker 1: and they had to become more competitive. They need to
• 18:14
  Speaker 1: change all this for the for the camp for actually
• 18:19
  Speaker 1: for the company and for the whole economy to to
• 18:21
  Speaker 1: get not to end in in in a chaotic situation.
• 18:25
  Speaker 1: And the next year will be crucial for all that.
• 18:28
  Speaker 1: Look at you want to get an last word here, yeah,
• 18:31
  Speaker 1: I thought, as another lesson, maybe we can. It's probably
• 18:36
  Speaker 1: for its a lesson for UH for international investors UM.
• 18:41
  Speaker 1: When Agrico came to the market, it paid more than
• 18:45
  Speaker 1: competitors than peers in Western Europe, not only because it
• 18:49
  Speaker 1: was based in UH in Eastern European country, but also
• 18:52
  Speaker 1: because analysts and I spoke to many of them after
• 18:56
  Speaker 1: the crisis started. These analysts at Credit for could not
• 19:01
  Speaker 1: get to the bottom of the of Agropos accounts. There
• 19:06
  Speaker 1: was always something that they could not explain in terms
• 19:10
  Speaker 1: of how to reconcile their numbers. And the company aptly
• 19:14
  Speaker 1: paid a few extra percentage points in in yield in
• 19:19
  Speaker 1: its bonds and its loans in order to get away
• 19:23
  Speaker 1: with that uncertainty over over the numbers. But in the
• 19:28
  Speaker 1: end this came back to bite them because the recoveries
• 19:32
  Speaker 1: for for investors may be very low. Well, I think
• 19:36
  Speaker 1: I know what Dan was maybe driving at here and
• 19:38
  Speaker 1: when Luca, Luca, when you talk about that, that reminds
• 19:41
  Speaker 1: me of Lehman Brothers nine years ago. And analysts were
• 19:44
  Speaker 1: saying pretty much the same thing. Couldn't reconcile the books together,
• 19:48
  Speaker 1: something wasn't quite right, didn't add up, and the result was, well,
• 19:53
  Speaker 1: we know it now. It was It's what happened in
• 19:55
  Speaker 1: two eight global financial crisis. Yasmina and Luca, thank you
• 20:00
  Speaker 1: much for joining us today. This was really informative and interesting.
• 20:03
  Speaker 1: Thank you, Thank you. Benchmark will be back next week
• 20:09
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  Speaker 1: at Scott Landman Dan. You are at moss Underscore Echo
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  Speaker 1: Thanks for listening, See you next time.