The Emerging Markets Problem and debt jubilees

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by Shaun Richards

Some familiar topics are doing the rounds and making a few headlines and today I shall use the focus of the problems of many of what are called Emerging Markets to focus in on them. So let me open with the issue of the apparent lust for US Dollars that keeps popping up and return to an issue we analysed on the 18th of March.

*Bank Indonesia Governor Says New York Fed Will Provide $60B Repo Line ( @VPatelFX )

So we see another country on its way into the US Federal Reserve liquidity swaps club so let us ask the Carly Simon question which is why?

Indonesia’s foreign exchange (forex) reserves dropped US$9.4 billion in March to $121 billion as Bank Indonesia (BI) stepped up market intervention to stabilize the rupiah exchange rate amid heavy capital outflows, according to the central bank.

Forex reserves have continued to decrease since February,  when they dropped from $131.7 billion in January, the second-highest level in the country’s history. March’s figure is enough to support seven months of imports and payments of the government’s short-term debts and is above the international adequacy standard of about three months of imports. ( Jakarta Post

Di you notice how Bank Indonesia reports its foreign currency reserves in US Dollars? That is a slap in the face for those reporting its hegemony is over and as an opening salvo confirms the issue at hand. The secondary issue is that the level of foreign exchange reserves is only $10 billion below the second highest ever and yet if not panic stations there are clear worries. Next comes something I have pointed out before when a crisis hits it is the rate of change of reserves which worries people more than the size left. So in fact only a certain percentage of reserves are what one might call “usable” in that you them have to do something else as well. Finally we get to the nub of the issue which is how long you can pay for your imports and finance your debts. Of course borrowing in US Dollars in size is something that is on our checklist of trouble as well.

The Jakarta Post goes onto point out that the heat is on.

The fear has induced capital outflow and amplified exchange rate pressures on the rupiah, especially in the second and third week of March 2020,” BI wrote in a statement on Tuesday.

The rupiah lost around 15 percent of its value against the dollar in March as investors rushed to sell riskier assets and flock to safe haven assets amid fears over COVID-19’s rapid spread.

Also on March 19th I did point out that QE ( Quantitative Easing) seems to be spreading everywhere.

The central bank has purchased Rp 172.5 trillion in government bonds, including Rp 166.2 trillion from foreign investors in the secondary market.

Indeed if we switch to Fitch Ratings this morning another response to this crisis is the beginning of what is literal printing money.

Another extraordinary measure is the decision to give Bank Indonesia (BI), the central bank, the authority to buy government securities in the primary market…….However, the move raises a number of risks, including central bank financing of the fiscal deficit (which could increase the monetary base and raise inflationary expectations), increased political interference in monetary policy decision-making and the erosion of the market’s ability to price Indonesian public debt.

As a counterpoint the extent of the crisis is shown by the fact that by one metric Indonesia has been quite conservative in economic terms.

 We believe that the fiscal loosening will push general government (GG) debt to a peak of 37% of GDP in 2022, from about 30% in 2019,

As an aside it is interesting that Bank Indonesia will be applying QE at an interest-rate of 4.5% I will be looking later at how they account for that as it is a long way from ZIRP or around 0%.

Argentina

On the 19th of March the International Monetary Fund summarised a grim situation as follows.

Since July 2019, the peso has depreciated by over 40 percent, sovereign spreads have risen by
over 2700 basis points , net international
reserves fell by half, and real GDP contracted more
than previously anticipated. As a result, gross public
debt rose to nearly 90 percent of GDP at end-2019,
13 percentage points higher than projected at the
time of the Fourth Review.

A 27% increase in sovereign spreads! This was all very different from the words of Christine Lagarde when she was managing director of the IMF.

These efforts are starting to yield results, and should lay the foundation for the return of confidence and growth.

That was then and this is now or rather the Buenos Aires Times from yesterday.

The government has issued a decree to postpone close to US$10 billion in dollar-denominated debt payments issued under local law, cancelling all such actions until the end of the year.

The move, which should relieve pressure on payments due this year, does not impact Argentina’s wider bid to restructure around US$70-billion worth of debt in foreign currency issued under international law.

So it is the dollar denominated debt which sings along with Lindsey Buckingham.

I should run on the double
I think I’m in trouble,
I think I’m in trouble.

I would have thought that reporters in Argentina would be familiar with the concept of default but apparently not.

Some experts warned that the move could be interpreted by creditors as putting Argentina in “technical default,” as it implies a change in the conditions under which those bonds were issued.

Anyway a sign of the trouble Argentina is in is show by two separate factors. Firstly how much it saves.

And by allowing the government to save some US$8.5 billion in local payments this year, it could actually be a boon for holders of foreign-law debt by freeing up cash.

Secondly it has tried to avoid affecting these foreign bonds presumably knowing that just like The Terminator “I’ll be back”

Argentina has already been unilaterally delaying payments on some peso-denominated debt, even as it kept current on overseas obligations and embarked on restructuring talks over its overseas notes.

Comment

We have looked at two different ends of the spectrum today as we see why so many what we call Emerging Markets are in trouble. There are quite a few metrics where Indonesia is strong but the US Dollar is making it creak and of course poor Argentina is at the basket case end of the spectrum. Indeed I rarely quite from Zerohedge but this is a masterpiece.

There is a saying: three things in life are certain: death, taxes and another Argentina default.

Also it reminds me of something that bemused me at the time as I note this from the 21st of May last year.

The 100 year bond is trading at 68.5, but I suppose you have 98 or so years left to get back to 100.

They still have 97 or so years to go but with a price of 28.5 now a lot further to go.

The pressure is leading to two suggestions. Firstly from DebtJubilee.

Borrower governments have it within their power to stop making debt payments but they should not suffer any penalties for doing so. All lenders should therefore agree to the immediate cancellation of debt payments falling due in 2020, with no accrual of interest and charges and no penalties.

It has its strengths but ignores what happens to those who were relying on the interest payments as you may simply be kicking the problem can elsewhere.

There is also this from the Brookings Institute.

Last week, we put forward a proposal for a major issuance of the IMF’s Special Drawing Rights (SDRs) as a key tool to attack the worldwide spread of the financial fallout. In essence, we proposed that IMF members agree to an allocation of the equivalent of at least $500 billion as part of the global response to the crisis generated by the corona virus pandemic.

The catch is that you can create money as this does. But there are two problems that immediately occur to me. If you have more money but as we stand fewer goods and services you are solving one problem by creating another ( inflation) for others. That may be asset inflation ( look at equity markets right now) more than consumer inflation. Next is the way that non elected bodies get power and distribute it, who are they responsible too?

 

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