Skip to main content

Developing countries' debts soar.

 The global bank­ing industry has warned that devel­op­ing coun­try debt piles have hit a fresh high,

Dollars

adding to fears of a wave of defaults this year. The com­bined gov­ern­ment, house­hold, cor­por­ate and fin­an­cial sec­tor debts of 30 large low- and middle-income coun­tries rose to $98tn at the end of Decem­ber, as their cur­ren­cies slumped against the dol­lar. The debt bur­den for the 30 coun­tries was up from $96tn a year earlier and from $75tn in 2019 before the pan­demic began, the IIF, a trade body for the global bank­ing industry, said in the latest edi­tion of its quarterly Global Debt Mon­itor. Gov­ern­ment debts alone were equal to almost 65 per cent of gross domestic product by the end of 2022, an increase of 10 per­cent­age points over pre­pan­demic levels and the highest-ever year-end total.

The dol­lar soared against most emer­ging mar­ket and advanced eco­nomy cur­ren­cies throughout 2022, rais­ing the cost of meet­ing exist­ing debt oblig­a­tions, many of which are denom­in­ated in the US cur­rency. The dol­lar's rise fol­lowed a series of aggress­ive interest rate increases to com­bat high infla­tion from the US Fed­eral Reserve, which had a knock-on impact on global bor­row­ing costs. The strength of the dol­lar against most emer­ging mar­ket cur­ren­cies last year led investors to dump emer­ging mar­ket stocks and bonds. This trend went into reverse last Octo­ber after the dol­lar weakened.

However, recent data on the US eco­nomy sug­gest­ing infla­tion and interest rates may remain high for longer than pre­vi­ously expec­ted has led to a fresh bout of dol­lar strength. Emre Tiftik, an IIF eco­nom­ist, said the dol­lar's strength had left low-income coun­tries facing extra fund­ing costs because many relied heav­ily on dol­lar­de­nom­in­ated fund­ing to secure interest from global investors. As a result, the ratio of debt ser­vice prices to gov­ern­ment rev­en­ues had risen to «excep­tional levels», Parker said. In advanced eco­nom­ies, total debt declined by almost $6tn to just under $201tn, leav­ing the total global debt bur­den down slightly, from $303tn at the end of 2021 to below $300tn at the end of last year.

Even so, the Fed is not the only insti­tu­tion we need to help fight infla­tion, espe­cially given the sup­ply dis­rup­tions from the pan­demic and the war in Ukraine. The Fed, by rais­ing interest rates, can push down demand, but it can­not push up sup­ply. And Adam Sha­piro, an eco­nom­ist at the San Fran­cisco Fed, estim­ates that about 40 per cent of infla­tion is sup­ply-driven, 40 per cent is demand-driven, and the other 20 per cent is ambigu­ous. Given that real­ity, the Fed alone can­not get infla­tion back to the 2 per cent tar­get.

Its primary tool to rein in infla­tion is the fed­eral funds' rate that influ­ences the interest rates at which con­sumers and busi­nesses bor­row. The Fed rate hikes work through fin­an­cial mar­kets, and mon­et­ary policy is only one factor determ­in­ing the price of debt, mean­ing that the cent­ral bank's primary tool is not a pre­cise one. As a result, many could pay down debt dur­ing the pan­demic.

Busi­ness fixed invest­ment has con­trac­ted since the second quarter of last year, and hous­ing starts plunged by 20 per cent. However, the effects on the labour mar­ket are mod­est, even in areas like con­struc­tion. Com­pan­ies are likely hold­ing on to work­ers because it has been hard to rehire. That should help ease the labour short­ages and push down on infla­tion, even though they will increase demand.

Again, the Fed had no influ­ence on immig­ra­tion policy. The best way to solve a labour short­age is with more work­ers, not fewer cus­tom­ers. The US infra­struc­ture bill, the Chips Act to boost domestic semi­con­ductor pro­duc­tion, and the Infla­tion Reduc­tion Act all have ele­ments that will help with infla­tion, espe­cially in the future, by cre­at­ing or for­ti­fy­ing sup­ply. At the same time, demand man­age­ment is not an effi­cient way to deal with sup­ply-driven infla­tion.

www.sba.tax

Labels:

Comments

  1. Kyle23 February 2023 at 10:45

    We shouldn't even rely on the Fed alone to get inflation back to normal levels. It's clear they are just part of the solution.

    ReplyDelete

Post a Comment

Cloud Bookkeeping

HS2 cost cuts new routes and add delays.

 Trans­port depart­ment offi­cials have begun work on «Project Sil­ver­light» sug­gest­ing the high­speed rail scheme might face four addi­tional years of delay. The planned High Speed 2 rail line faces fur­ther delays of up to four years and more cuts to the project under plans being drawn up by min­is­ters to rein in its bal­loon­ing costs. The extra delays to the coun­try’s biggest infra­struc­ture project would mean that it would not be com­pleted until as late as 2045 — 12 years after ori­gin­ally planned. «This is a func­tion of infla­tion; we are hav­ing to find huge sav­ings because the cost of everything the depart­ment is already doing will have become so much more expens­ive by then,» said one gov­ern­ment offi­cial. In Octo­ber, the FT repor­ted that the Treas­ury had asked HS2’s man­age­ment team to identify poten­tial cuts or «scope reduc­tions» to the high-speed line. Trans­port depart­ment offi­cials have sub­sequently begun work on Project Sil­ver­light aimed at fi...
4 comments
Read more

Doubt on CS's collateral.

  Credit Suisse provided an emergency $140mn loan to Greensill Capital based partly on invoices to companies that deny ever doing the business stated on the documents. The Swiss bank provided the loan in October 2020, less than five months before the collapse of Greensill, a supply chain finance firm that counted former British prime minister David Cameron as a senior adviser. Invoices issued by metals magnate Sanjeev Gupta’s Liberty Commodities and sold to Greensill formed part of the collateral for the loan, according to documents seen by the Financial Times and people familiar with the transaction. Yet several of the parties named on the invoices have told the FT they did no business with Liberty. GFG has consistently denied any wrongdoing. Credit Suisse’s loan had a clause dictating that the collateral value had to be equal to or greater than the $140mn borrowed. The terms of the debt agreement only allowed invoices on Green-sill’s balance sheet to count towards this tally if t...
2 comments
Read more

Tax cut

  Sterling tumbled against the dollar to below $1 . 09 ,  hitting its lowest point since 1985 ,  after UK chancellor Kwasi Kwarteng unveiled a £45bn debt-financed tax-cutting package that sparked a historic increase in borrowing costs .  Kwarteng’s political and economic gamble includes the biggest set of tax cuts for 50 years ,  with the end of the 45p additional rate for the highest earners as well as a sharp reduction in levies on dividends .  But concern over the amount of debt required to finance the tax cuts triggered a frenetic day of trading that raised doubts on whether Britain’s new economic approach was sustainable .  «Britain will be remembered for having pursued the worst macroeconomic policies of any major country in a long time» . Kwarteng has staked the political fortunes of the Conservative party on the bet that the radical tax cuts and deregulation will raise Britain’s sluggish growth rate to 2 . 5 per cent .  «This is a new appr...
Post a Comment
Read more