Sri Lanka’s bankruptcy, who is the next unlucky guy?

Spread the love

Source: Li Jianqiu’s world (id:lijianqiudeshijie)

On May 19, 2022, the governor of the Central Bank of Sri Lanka confirmed that Sri Lanka could not repay the coupon of $78million. On July 6, Sri Lanka went bankrupt.

On September 9, Sri Lanka erupted in large-scale protests. Thousands of protesters entered the capital Colombo and poured into the presidential palace. The president and Prime Minister of Sri Lanka both resigned, leaving the country in a state of disorder.

In fact, there are many explanations on the Internet about why Sri Lanka fell into today’s situation. I don’t intend to repeat other people’s arguments and talk about several typical manifestations of problems in developing countries.

Historically, the debt problems of developing countries are almost related to the Fed’s interest rate hike. Whether it is the Latin American debt crisis in 1983, the Asian financial crisis in 1997, the Argentine debt crisis in 2001, or the emerging market crisis in 2015, they are all in the period of the Fed’s interest rate hike cycle.

The debt crisis of developing countries is generally manifested in the following ways:

First, the Fed’s interest rate hike has led to the appreciation of the US dollar, the relative depreciation of currencies in developing countries, and the sharp fall in commodity prices, resulting in a large deficit in some resource exporting developing countries and the intensification of the current account deficit. At this time, if the debt of developing countries is relatively high, or the debt ratio is problematic, it will lead to default.

Second, the Federal Reserve’s interest rate hike has led to an increase in the interest rate of U.S. bonds. The interest rate gap between the interest rate of developing countries and the interest rate of U.S. bonds has narrowed, resulting in the outflow of funds from developing countries. At the same time, the rise in interest rates has led to an increase in the debt servicing costs of developing countries. If the debt of developing countries is relatively high or the debt ratio is problematic, it will also lead to default.

Third, after the US interest rate hike, the US dollar appreciated and the currencies of developing countries depreciated, which led to rising inflationary pressure. In order to curb the depreciation, developing countries would be forced to raise interest rates, which would lead to the deterioration of economic fundamentals, the decline of government revenue, and also lead to default.

The default of various developing countries can not escape from the above ways, and it is more the resonance of the above reasons.

At present, the Federal Reserve has increased interest rates, superimposed the conflict between Russia and Ukraine, and superimposed the causes of the epidemic. Since 2022, most developing countries have experienced exchange rate depreciation and inflation.

Except for a few resource developing countries, such as Russia, the currencies of most developing countries have depreciated. From the beginning of 2022 to may, the average depreciation of developing countries is 6.42%, of which Turkey has the largest depreciation, followed by Argentina.

The ratio of foreign debt to foreign exchange reserves is a measure of whether a country’s debt situation is good, and the balance of payments, especially the trade surplus, is a measure of whether a country can continue to obtain foreign exchange reserves.

The overall debt scale of developing countries exceeds foreign exchange reserves, with an average proportion of 2.6, of which the three worst countries are: Argentina 7.32, Turkey 6.21, Egypt 3.75

Considering the trade problem, Egypt and Turkey have a large trade deficit.

On the whole, Turkey, Argentina and Egypt have high debt risks, followed by Colombia, South Africa and Hungary

The reasons of different countries are different. The recent bulk price rise has brought Argentina a trade surplus, but Argentina has many other problems:

First, the exchange rate has depreciated too much. The exchange rate of the US dollar against the Argentine peso is 126, compared with more than 20 to 30 in 2018. Now the depreciation of the Argentine peso is worse than that during the Argentine debt crisis.

The sultans of Egypt exclaimed that they were invincible.

Second, the sharp devaluation of the currency led to a substantial increase in CPI growth, which exceeded 60% year-on-year, higher than the previous crisis.

Third, the benchmark interest rate was raised to 52%, higher than 41.4% in the previous crisis —– yes, that’s right. Argentina’s benchmark interest rate is so good.

Fourth, although Argentina now has a trade surplus, the proportion of foreign debt going out alone has increased from 4.34 in 2018 to 7.32, and the debt situation is worse than the crisis of that year.

Argentina is in a deep quagmire and can hardly get out of the situation through its own efforts.

The situation in Turkey is similar to that in Argentina. The exchange rate continues to depreciate significantly, inflation rises sharply, external debt rises and external reserves decline. Turkey also has a trade deficit problem.

If Turkey is any better than Argentina, the Turkish data is not as scary as Argentina.

As for Egypt, the current problem of this country is survival, not inflation. If Arab brothers, such as Saudi Arabia, do not pull a hand, chaos in Egypt will happen sooner or later.

Dollar problem

Although the above countries do have problems with the current strength of the US dollar, look at other countries. The US dollar and the euro are now 1:1, and the US dollar is also rising against the yen. There will not be so-called “financial problems” in every economy.

An important reason why the US dollar is so strong is that the world pursues the so-called “safe assets”, and the United States is the provider of international security assets. What is more “safe” than the US dollar?

For developing countries, the biggest problem of the Federal Reserve is that the monetary policy of the Federal Reserve is too strong for developing countries. The monetary policy of the Federal Reserve first serves the United States. When inflation occurs in the United States, the Federal Reserve is bound to make a rapid monetary shift.

In the process of turning, it quickly brings pressure of capital outflow. The strengthening of the US dollar means the weakening of other countries’ currencies. The assets denominated in that country’s currency will decline due to currency depreciation, and capital will desperately flee for arbitrage. Therefore, every time the Federal Reserve raises interest rates, there will always be a few unlucky countries.

After the sharp depreciation of the local currency relative to the US dollar, the repayment pressure of foreign debt also increases, and the risk of debt default increases. In this case, in order to adapt to the Federal Reserve, the central banks of other countries are forced to follow the Federal Reserve. If the Federal Reserve raises interest rates, they must also follow suit.

And the interest rate hike itself is bad for the economy. If the domestic economy is depressed at this time, then the interest rate hike will make the domestic economy worse.

This will cause the global economy to rely heavily on the US dollar and the Federal Reserve, and the result of excessive dependence is that the risk of global finance becomes higher,

So far, only China can go against the Fed’s currency. Instead of raising interest rates, China wants to reduce them. The volume gap between China and the United States is not that large, but China is still under the pressure of the fed to raise interest rates. The reason for this situation is not only the problem of the Fed itself, but that the Fed’s interest rate hike drives other countries to raise interest rates, and the Fed + other countries have formed pressure on China.

Fortunately, at present, the world is gradually getting rid of its excessive dependence on the dollar. According to IMF data, the share of dollar reserves held by central banks fell from 71% to 59% in 2021, a decrease of 12 percentage points. There is still room for decline in the future.

This decline is not caused by changes in exchange rates and interest rates, but by the tendency of central banks to balance their investment portfolios. Central banks are actively diversifying their foreign exchange reserve portfolios to resist the risk of relying on a single currency.

The decline in the share of the US dollar is not that central banks have switched to investing in euros, pounds or yen, but in non-traditional reserve currencies, namely, currencies other than the US dollar, euros, yen and pounds. The share of non-traditional reserve currencies rose from a basically insignificant level in 2000 to $1.2 trillion in 2021, accounting for about 10% of the total reserves.

According to the information released by the IMF, one quarter of the foreign exchange reserves transferred from the US dollar are transferred to the RMB, and three quarters are transferred to non RMB assets, that is, the currencies of more dispersed and smaller economies.

Historically, only a few countries have open liquidity markets and asset depths, so foreign exchange traders can only find counterparties in the same few currencies and quote and trade at a limited number of bilateral exchange rates. In 2000, the currencies traded in the foreign exchange market were mainly dollars, euros, pounds and yen. This is indeed for a reason, so even two countries that don’t want dollars at all, Also forced to trade in dollars.

For example, if you want to use Mexican pesos to buy Canadian dollars, you can’t directly use pesos to buy Canadian dollars. You must first use pesos to buy dollars, and then use dollars to buy Canadian dollars.

At present, this situation has changed a lot, mainly because of the emergence of electronic trading platforms, the emergence of automatic foreign exchange market making and liquidity automatic management technology, and the decline in transaction costs. More and more countries have developed currency trading markets other than traditional reserve currencies.

In addition, the expanding global central bank currency swap line network has also enhanced the ability of central banks to obtain non reserve currencies,

It will not be the euro or the RMB that will eventually overthrow the hegemony of the US dollar, but a package of alternative currencies. In the future, both trade and reserves will be more fragmented,

PS: a few days ago, I suggested twice that a shares would fall. Some of my partners were unconvinced and cut the picture. I still said that: never go against the central bank. There is no good fruit to eat. I believe you have not suffered in this fall.

Leave a Reply

Your email address will not be published. Required fields are marked *