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Chinese Debt Could Cause Emerging Markets to Implode

May 13, 2020

CHINESE DEBT COULD CAUSE EMERGING MARKETS TO IMPLODE

The novel coronavirus has brought the world economy to a grinding halt. Global growth is set to fall from 2.9 percent last year into deep negative territory in 2020—the only year besides 2009 that this has happened since World War II. Recovery will likely be slow and painful. Government restrictions to prevent the virus from resurging will inhibit production and consumption, as will defaults, bankruptcies, and staffing cuts that have already produced record jobless claims in the United States.

But not all countries will bear the pain of the global recession equally. Low-income countries suffer from poor health infrastructure, which inhibits their ability to fight off the coronavirus, and many of them had dangerously high debt levels even before the pandemic necessitated massive emergency spending. Foreign investors are now withdrawing capital from emerging markets and returning it to the rich world in search of a safe haven. As a result, countries such as South Africa, Kenya, and Nigeria are seeing their currencies plummet in value—making it difficult, if not impossible, for them to service foreign loans.

Faced with the threat of financial ruin, poor countries have turned to multilateral financial institutions such as the International Monetary Fund and World Bank. The IMF has already released emergency funds to at least 39 countries, and by the end of March more than 40 more had approached it for help. The World Bank has fast-tracked $14 billion for crisis relief efforts. Yet even as they offer extraordinary amounts of aid, the IMF and World Bank know that these sums won’t be nearly enough. For that reason, they called on Group of 20 creditor nations to suspend collecting interest payments on loans they have made to low-income countries. On April 15, the G-20 obliged: all of its members agreed to suspend these repayment obligations through the end of the year—all members except one, that is.

…click on the above link to read the rest of the article…

Did Russia Really Dump Its U.S. Debt?

August 22, 2018

DID RUSSIA REALLY DUMP ITS U.S. DEBT?


Russia dumped 84% of its American debt,” blared a July CNN headline. Russian central-bank head Elvira Nabiullina said the sales were just part of “diversifying the entire structure of currencies.” But with the U.S. dollar accounting for two-thirds of global foreign-exchange reserves and most (non-intra-eurozone) international trade, dumping this much dollar debt goes well beyond prudent diversification.

Many commentators have therefore speculated that the government was actually protecting itself against future U.S. economic attacks. “It looks like Russia was worried about sanctions and their ability to trade Treasuries,” said one head bond trader, “so they sold.”

Still, the Russian central bank needs dollars, which it has always held mainly in the form highly liquid interest-bearing U.S. Treasuries, to stabilize the ruble through market intervention and to help its banks manage liquidity. Furthermore, Russian president Vladimir Putin has stated that “Russia is not rejecting the dollar” and is “not planning any sudden moves.” This doesn’t jibe with the media headlines.

We therefore decided to explore another possibility: that the headlines are just plain wrong, and that Russia has not sold anywhere near that many Treasuries.

Let us start with U.S. Treasury Department data on holdings of Treasury securities. These do indeed show an $81 billion (84 percent) plunge in Russian-held Treasury debt—from $96 billion in March to $15 billion in May. Other figures, however, suggest that Russia’s actual selloff was much smaller than this.

One indicator is Treasury Department data that track sales, between U.S. and foreign entities, of long-term Treasuries—the sole component of Russia’s Treasury holdings that has dropped since March. From March to May, these data show just $35 billion of Russian sales, as the middle bar in the left-hand box above indicates.

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Benn Steil: The Fed Could be Tightening More Than it Realizes

November 21, 2017

BENN STEIL: THE FED COULD BE TIGHTENING MORE THAN IT REALIZES

Ten years ago, before the collapse of Lehman Brothers rocked global financial markets, the Fed’s balance sheet stood at $925 billion—mostly U.S. Treasuries. After fifty-nine months of asset purchases to push down longer-term interest rates, it had ballooned to a peak of $4.5 trillion, including nearly $1.8 trillion in mortgage securities, in October 2014.

In October of this year, the Fed at last began a slow slimming-down of the balance sheet, allowing $10 billion in maturing securities to roll off without reinvesting the proceeds. All else being equal, this represents a tightening of monetary policy, as it tends to push up longer-term (10-year) market interest rates.

In Fed chair Janet Yellen’s words, the central bank “does not have any experience in calibrating the pace and composition of asset redemptions and sales to actual prospective economic conditions.” She has therefore stressed that the Fed sees its balance-sheet reduction as a primarily technical exercise separate from the pursuit of its monetary policy goals—in particular, pushing inflation back up to 2%. The Fed’s main tool for tightening monetary policy in a recovering economy would, therefore, she explained, be raising short-term market interest rates by paying banks greater interest on reserves (IOR). Since December 2015, the Fed has raised the rate on IOR by 100 basis points (1%), which has pushed up its short-term benchmark rate—the effective federal funds rate—in tandem.

But is Yellen right that the Fed’s gradual approach to balance-sheet reduction makes it relatively unimportant in its impact on monetary conditions? Our analysis suggests that it will be, in fact, considerably more important than the market, or the Fed itself, realizes. Here is why.

…click on the above link to read the rest of the article…

PBoC Spins China’s Bad-Loan Data

May 1, 2017

PBoC Spins China’s Bad-Loan Data

In a recent speech at Bloomberg’s headquarters in New York, People’s Bank of China Deputy Governor Yi Gang reassured his audience on the level of non-performing loans (NPLs) in the Chinese banking sector.  It had, he said, “pretty much stabilized after a long period of climbing.  That’s a good development in the financial market.”

Yi was referring to NPLs as a share of total loans, which, as shown in the figure above, have stabilized over the past year.  But this is misleading.  NPLs have actually continued to grow—by RMB 238 billion ($35 billion) in 2016, reaching a total of RMB 1.5 trillion ($220 billion).  The reason the NPL ratio has stabilized is that Chinese banks have extended more loans, boosting the denominator—not because they have reduced their exposure to bad loans.

In short, Yi is spinning.  China’s bad-debt problem remains serious.

Benn Steil: Why Is Paul Krugman Still Calling For Fiscal Stimulus?

April 4, 2016

BENN STEIL: WHY IS PAUL KRUGMAN STILL CALLING FOR FISCAL STIMULUS?

Nobel economist and New York Times columnist Paul Krugman is fond of mocking his critics for being ideologues rather than economists. In contrast, Krugman’s own policy prescriptions, he assures us, are based wholly on soundeconomic science.

Case in point is the theory of liquidity traps, which goes back to Keynes. An economy is said to be in a liquidity trap when the central bank is powerless to stimulate economic growth because the public demand for liquidity has become limitless. This could happen when interest rates have been driven down to zero, a situation in which people may prefer holding cash to consuming or investing.

Krugman has argued that the rules of the policy game are different in a liquidity trap. In normal times, when short-term interest rates are positive, governments can and should rely on monetary policy – cutting rates – to stimulate economic activity if output is running below capacity. There is no need for extra government spending to substitute for deficient private demand – what we call fiscal stimulus. The private sector can do the job on its own with an appropriate level of interest rates. But if rates are at zero, and need to go lower, the central bank is out of ammunition. The government must step in with higher spending, even if it means running large budget deficits.

While in no way disproving the theory, recent years have shown, however, to Krugman’s admitted surprise, that the so-called zero lower bound on rates is not, in fact, a lower bound. Central banks in Europe and Japan have experimented with negative rates and have found that they have thus far not driven banks to hoard cash in vaults (as a means to avoid paying the central bank to hold their balances). So the lower bound is actually somewhere below zero.

…click on the above link to read the rest of the article…

Benn Steil: Could China Have a Reserves Crisis?

February 16, 2016

BENN STEIL: COULD CHINA HAVE A RESERVES CRISIS?

China reserves
Last summer, U.S. lawmakers were condemning China for pushing down its currency, arguing that it was still “terribly undervalued.” But those days may be long gone.  Chinese and foreigners alike have been stampeding out of RMB, leaving the Chinese central bank struggling to keep its value up and prevent a rout.

The People’s Bank of China has been selling off foreign currency reserves at a prodigious rate to keep the RMB stable.  At $3.2 trillion, China’s reserves still seem enormous.  But they are down $760 billion from their 2014 peak, and $300 billion in just the past three months.  As shown in the figure above, at the current pace of decline China’s reserves will, according to the IMF’s framework for reserve adequacy, actually fall to a dangerously low level in the spring.  This means that China would be at risk of a balance-of-payments crisis, unable to pay for essential imports or service its dollar debt payments.

China has for years been pursuing what has been called the “Impossible Trinity”: controlling interest and exchange rates while leaving the capital account significantly open.  Chinese residents are permitted to send up to $50,000 overseas annually – this is enough to allow trillions in outflows.  So what can China do to staunch the rapid decline in reserves?

It could impose tighter capital controls, as Bank of Japan governor Haruhiko Kuroda controversially urged it to do.  As shown in the figure, this would allow China to operate safely with fewer reserves.  But it would also put a halt to China’s plans to transform the RMB into a major reserve currency.

China could also raise interest rates, which might encourage capital inflows and discourage outflows, but this would hurt growth in an already sinking economy.

…click on the above link to read the rest of the article…

Interview With Dr. Benn Steil, Director of International Economics at the Council on Foreign Relations

February 9, 2016

INTERVIEW WITH DR BENN STEIL, DIRECTOR OF INTERNATIONAL ECONOMICS AT THE COUNCIL ON FOREIGN RELATIONS

Dr. Benn Steil is senior fellow and director of international economics at the Council on Foreign Relations in New York.  He is also the founding editor of International Finance, a top scholarly economics journal, and lead writer of the Council’s Geo-Graphics economics blog.  Prior to his joining the Council in 1999, he was director of the International Economics Programme at the Royal Institute of International Affairs in London.  He came to the Institute in 1992 from a Lloyd’s of London Tercentenary Research Fellowship at Nuffield College, Oxford, where he received his MPhil and DPhil (PhD) in economics.  He also holds a BSc in economics summa cum laude from the Wharton School of the University of Pennsylvania.

Dr. Steil has written and spoken widely on international finance, monetary policy, financial markets, and economic history.  He has testified before the U.S. House, Senate, and CFTC on financial market and monetary issues.  He is a regular op-ed contributor at the Wall Street Journal and the Financial Times.  His latest book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, won the 2013 Spear’s Book Award in Financial History, took third prize in CFR’s 2014 Arthur Ross Book Award competition, was shortlisted for the 2014 Lionel Gelber Prize (“the world’s most important prize for non-fiction,” according to The Economist), and was the top book-of-the-year choice in Bloomberg’s 2013 poll of global policymakers and CEOs.  The book has been called “a triumph of economic and diplomatic history” by the Financial Times, “a superb history” by the Wall Street Journal, “the gold standard on its subject” by the New York Times, and “the publishing event of the season” by Bloomberg’s Tom Keene.

…click on the above link to read the rest of the article…

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