Aurelia Butler

LONDON (Reuters) – Traditional debt crisis signs of crashing currencies, 1,000 basis point bond spreads and burned FX reserves point to a record number of developing nations now in trouble.Lebanon, Sri Lanka, Russia, Suriname and Zambia are already in default, Belarus is on the brink and at least another dozen are in the danger zone as rising borrowing costs, inflation and debt all stoke fears of economic collapse.Totting up the cost is eyewatering. Using 1,000 basis point bond spreads as a pain threshold, analysts calculate $400 billion of debt is in play. Argentina has by far the most at over $150 billion, while the next in line are Ecuador and Egypt with $40 billion-$45 billion.Crisis veterans hope many can still dodge default, especially if global markets calm and the IMF rows in with support, but these are the countries at risk.ARGENTINAThe sovereign default world record holder looks likely to add to its tally. The peso now trades at a near 50% discount in the black market, reserves are critically low and bonds trade at just 20 cents in the dollar – less than half of what they were after the country’s 2020 debt restructuring.The government doesn’t have any substantial debt to service until 2024, but it ramps up after that and concerns have crept in that powerful vice president Cristina Fernandez de Kirchner may push to renege on the International Monetary Fund. GRAPHIC: The pain has spread- https://graphics.reuters.com/MARKETS-EMERGING/mopanaqkmva/chart.png UKRAINE Russia’s invasion means Ukraine will almost certainly have to restructure its $20 billion plus of debt, heavyweight investors such as Morgan Stanley (NYSE:MS) and Amundi warn.The crunch comes in September when $1.2 billion of bond payments are due. Aid money and reserves mean Kyiv could potentially pay. But with state-run Naftogaz this week asking for a two-year debt freeze, investors suspect the government will follow suit. GRAPHIC: Ukraine bonds brace for default https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrbaxrvm/Pasted%20image%201657725996621.png TUNISIAAfrica has a cluster of countries going to the IMF but Tunisia looks one of the most at risk.A near 10% budget deficit, one of the highest public sector wage bills in the world and there are concerns that securing, or a least sticking to, an IMF programme may be tough due to President Kais Saied’s push to strengthen his grip on power and the country’s powerful, incalcitrant labour union. Tunisian bond spreads – the premium investors demand to buy the debt rather than U.S. bonds – have risen to over 2,800 basis points and along with Ukraine and El Salvador, Tunisia is on Morgan Stanley’s top three list of likely defaulters. “A deal with the International Monetary Fund becomes imperative,” Tunisia’s central bank chief Marouan Abassi has said. GRAPHIC: African bonds suffering- https://fingfx.thomsonreuters.com/gfx/mkt/zdvxobognpx/Pasted%20image%201657541934055.png GHANA Furious borrowing has seen Ghana’s debt-to-GDP ratio soar to almost 85%. Its currency, the cedi, has lost nearly a quarter of its value this year and it was already spending over half of tax revenues on debt interest payments. Inflation is also getting close to 30%. GRAPHIC: How not to spend it- https://graphics.reuters.com/MARKETS-EMERGING/znpneakgkvl/chart.png EGYPT Egypt has a near 95% debt-to-GDP ratio and has seen one of the biggest exoduses of international cash this year – some $11 billion according to JPMorgan (NYSE:JPM). Fund firm FIM Partners estimates Egypt has $100 billion of hard currency debt to pay over the next five years, including a meaty $3.3 billion bond in 2024.Cairo devalued the pound 15% and asked the IMF for help in March but bond spreads are now over 1,200 basis points and credit default swaps (CDS) – an investor tool to hedge risk – price in a 55% chance it fails on a payment. Francesc Balcells, CIO of EM debt at FIM Partners, estimates though that roughly half the $100 billion Egypt needs to pay by 2027 is to the IMF or bilateral, mainly in the Gulf. “Under normal conditions, Egypt should be able to pay,” Balcells said. GRAPHIC: Egypt’s falling foreign exchange reserves- https://fingfx.thomsonreuters.com/gfx/mkt/zgpomxkqnpd/Pasted%20image%201657817324629.png KENYAKenya spends roughly 30% of revenues on interest payments. Its bonds have lost almost half their value and it currently has no access to capital markets – a problem with a $2 billion dollar bond coming due in 2024.On Kenya, Egypt, Tunisia and Ghana, Moody’s (NYSE:MCO) David Rogovic said: “These countries are the most vulnerable just because of the amount of debt coming due relative to reserves, and the fiscal challenges in terms of stabilising debt burdens.” GRAPHIC: Kenya’s concerns- https://fingfx.thomsonreuters.com/gfx/mkt/lbpgnelzjvq/Pasted%20image%201657872126738.png ETHIOPIA Addis Ababa plans to be one of the first countries to get debt relief under the G20 Common Framework programme. Progress has been held up by the country’s ongoing civil war though in the meantime it continues to service its sole $1 billion international bond. GRAPHIC: Africa’s debt problems- https://fingfx.thomsonreuters.com/gfx/mkt/lbvgneokapq/Pasted%20image%201657727788029.png EL SALVADOR Making bitcoin legal tender all but closed the door to IMF hopes. Trust has fallen to the point where an $800 million bond maturing in six months trades at a 30% discount and longer-term ones at a 70% discount. PAKISTANPakistan struck a crucial IMF deal this week. The breakthrough could not be more timely, with high energy import prices pushing the country to the brink of a balance of payments crisis.Foreign currency reserves have fallen to as low as $9.8 billion, hardly enough for five weeks of imports. The Pakistani rupee has weakened to record lows. The new government needs to cut spending rapidly now as it spends 40% of its revenues on interest payments. GRAPHIC: Countries in debt distress at record high- https://fingfx.thomsonreuters.com/gfx/mkt/klpykyzxepg/Pasted%20image%201657728812497.png BELARUSWestern sanctions wrestled Russia into default last month and Belarus now facing the same tough treatment having stood with Moscow in the Ukraine campaign. GRAPHIC: Belarus bonds: https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrbzdmvm/Pasted%20image%201657848388314.png ECUADORThe Latin American country only defaulted two years ago but it has been rocked back into crisis by violent protests and an attempt to oust President Guillermo Lasso.It has lots of debt and with the government subsidising fuel and food JPMorgan has ratcheted up its public sector fiscal deficit forecast to 2.4% of GDP this year and 2.1% next year. Bond spreads have topped 1,500 bps. NIGERIABond spreads are just over 1,000 bps but Nigeria’s next $500 million bond payment in a year’s time should easily be covered by reserves which have been steadily improving since June. It does though spend almost 30% of government revenues paying interest on its debt. “I think the market is overpricing a lot of these risks,” investment firm abrdn’s head of emerging market debt, Brett Diment, said. GRAPHIC: Currency markets in 2022- https://fingfx.thomsonreuters.com/gfx/mkt/zgpomxnjrpd/Pasted%20image%201657869185784.png More

Import prices rose 0.2% last month after climbing 0.5% in May, the Labor Department said on Friday. In the 12 months through June, import prices increased 10.7% after advancing 11.6% in May. Economists polled by Reuters had forecast import prices, which exclude tariffs, gaining 0.7% month-on-month.The report followed on the heels of data this week showing annual consumer prices shot up 9.1% in June, the largest increase since November 1981, as the cost of gasoline soared to record highs. Producer prices also accelerated last month.The hot inflation readings made it certain that the Federal Reserve would deliver another 75-basis-points interest rate increase at the end of this month. The U.S. central bank has hiked its policy rate by 150 basis points since March. But there are hopeful signs that inflation could peak soon. Crude oil prices have fallen sharply, with the global benchmark Brent trading below $100 per barrel after surging to $139 in March, which was close to the all-time high reached in 2008. Other commodity prices are also coming off the boil.Imported fuel prices increased 5.7% last month after surging 6.5% in May. Petroleum prices gained 5.0%, while the cost of imported food declined 0.7%.Excluding fuel and food, import prices fell 0.5%. These so-called core import prices decreased 0.3% in May. They climbed 4.4% on a year-on-year basis in June. Dollar strength is helping to limit the increase in core import prices. The dollar has gained 6.3% against the currencies of the United States’ main trade partners since January.The report also showed export prices rose 0.7% in June after increasing accelerating 2.9% in May. Prices for agricultural exports fell 0.3%. Nonagricultural export prices increased 0.9%. Export prices rose 18.2% year-on-year in June after increasing 18.7% in May. More

Sri Lanka’s debt default and political implosion have reignited fears that other emerging market countries could be heading into similar trouble as blistering inflation and rising US interest rates send investors fleeing.Sovereign bond yields have ballooned to levels that point to intensifying strains across more than a dozen developing economies, according to a Financial Times analysis of Bloomberg data. Emerging market investors are used to volatility, but the asset class is now being buffeted by multiple crises at once. The tumult has prompted investors to pull $52bn from emerging market bonds this year, according to JPMorgan data. “It’s pretty shocking to see this scale of a collapse in bond prices,” said Charlie Robertson, global chief economist at Renaissance Capital, adding that the sell-off is “one of the biggest I’ve seen in 25 years”.The war in Ukraine has sent food and fuel prices soaring with devastating social and fiscal consequences for the many developing countries that depend on imports. While some oil exporters, particularly those in the Gulf, have benefited from rising prices, others have seen the gains partly or wholly eradicated by pandemic-related disruption. The Federal Reserve’s move to raise interest rates in an effort to tame surging inflation has also led to a strengthening US dollar. This has piled further pressure on emerging market economies that must service their dollar-denominated debt, while tightening financial conditions are hurting developing countries already starved of capital.“Emerging markets do not like the Fed hiking rates and do not like it when the dollar’s strengthening,” said Robertson, adding that “it’s just bad news for countries that need capital when that happens, and we haven’t seen rate hikes like this in nearly 30 years”.The yield on 10-year foreign currency bonds of at least six emerging market countries have jumped by more than 10 percentage points since the start of the year, according to Bloomberg data, including Ukraine, Argentina and Pakistan.Although bonds in more than a dozen countries are trading at distressed levels that typically signal a high probability of default, analysts suggest that actual missed payments and restructurings are likely to be more isolated. Many large emerging economies are in better fiscal and monetary shape today than in past crises, making them better able to withstand today’s serial shocks.“There are big fiscal strains, particularly in frontier markets,” said William Jackson, chief emerging market economist at Capital Economics, referring to less developed emerging markets. “But [for the likelihood of default] you have to look at countries case by case.”Esther Law, senior investment manager for EM debt at Amundi, said stress in bond markets was less a signal of imminent defaults than a sign of concern over recession and inflation in the US, slow growth in China and disruption and shortages caused by the war in Ukraine.“This is more a sentiment thing than a fear that countries will fall into default,” she said. “But if this is prolonged, obviously it will increase funding costs for those countries and that will feed back into their ability to pay.”Under the greatest duress is Ukraine, which since Russia’s invasion in February has been begging foreign governments for cash to meet its soaring budget deficit, at present running at $9bn a month, up from $5bn in the early stages of the war. The yield on its 10-year bond has surged by more than 30 percentage points since the start of the year, reflecting investors’ fears.State utility Naftogaz asked bondholders to accept delayed payments last week, raising fears that the government will miss bond payments due on September 1 of $1.4bn, according to Bloomberg.The IMF said on Thursday it expected Ukraine to keep meeting its sovereign debt payments. The fund said it expected more donations in the coming days to an account it set up to support the country in April. It added that grant financing rather than loans should be the priority in the short term — the EU has delivered only $1bn out of $9bn pledged in April because of disagreements over whether to provide grants or loans.The bond yields of Pakistan, Egypt and Ghana are also spiralling higher. On Thursday, Pakistan reached an agreement with the IMF which paves the way for the country to access crucial funds and avoid a potential default. “The IMF has become the world’s firefighter,” said Robertson. “Even those who didn’t want them are now inviting them in because they saw Sri Lanka fail to do so.”Markets suggest that Argentina’s risk of another default is also high. The yield on its 10-year bond has soared by more than 10 percentage points so far this year while the price has plunged to below 20 cents on the dollar.Kristalina Georgieva, head of the IMF, sounded the alarm this week, saying: “The situation is increasingly grave for economies in or near debt distress, including 30 per cent of emerging market countries and 60 per cent of low-income nations.” More

Many Western and other foreign companies decided to quit Russia after it invaded Ukraine, while Moscow has been working on a law to allow the state to seize assets of firms that go.”We are not interested in the nationalisation of enterprises or their removal, God forbid,” Manturov told parliament’s lower house, the State Duma.But he thanked deputies for giving initial approval in May to a bill allowing the state to seize control of an enterprise in the event of a “sudden departure” by a foreign partner in order to save jobs and pay wages and taxes.”This is also a message for our foreign partners to think about how and what decisions they will take for themselves. We want a comfortable, mutually beneficial working relationship,” said Manturov.The draft law has not advanced through the Duma since passing its first of three readings in May.After making his comments to the Duma, Manturov was confirmed by lawmakers as a new deputy prime minister, while retaining his ministerial post, in line with a decree that President Vladimir Putin issued on Tuesday.The move boosts his influence on policy as Russia seeks to defend its economy against stringent Western sanctions.Moscow has already taken steps towards nationalising some foreign-held assets, including Putin’s order on June 30 for the state to take full control of the Sakhalin-2 gas and oil project, a move that could force out Shell (LON:RDSa) and Japan’s Mitsui and Mitsubishi.Companies which have decided to leave have been wrestling with how to limit the financial impact, protect jobs of Russian staff and, in some cases, leave an option to return.Western firms, including Nike (NYSE:NKE) and Cisco (NASDAQ:CSCO), have accelerated their departures in recent weeks amid speculation that new laws were imminent. The delay in passing the law on asset seizures has given foreign firms extra time.”We always try to find a balance of interests. So far, there are no cases of ‘slamming the door and leaving’,” Manturov said. More

The company bolstered its loan loss reserves by setting aside $580 million in the second quarter, compared with a release of $1.26 billion a year earlier, when aggressive monetary stimulus measures cushioned a blow from the pandemic and propped up the economy.Last quarter, the bank’s reserve release helped offset a decline in its mortgage lending business. This quarter soaring interest rates further dampened demand for mortgage originations, causing home loans to fall 53% from a year ago.After hiring tens of thousands of staff between 2018 and 2020 to handle surging mortgage originations and refinancing driven by low interest rates, the mortgage sector is downsizing.U.S. banks including JPMorgan Chase & Co (NYSE:JPM) and Wells Fargo have started cutting staff, with more industry layoffs expected in coming months, said analysts and economists. “We do expect credit losses to increase from these incredibly low levels, but we have yet to see any meaningful deterioration in either our consumer or commercial portfolios,” Chief Executive Officer Charlie Scharf said in a statement. Wells Fargo shares fell nearly 3% in premarket trading.The fourth-largest U.S. bank has been in the regulators’ penalty box since 2016 for governance and oversight lapses related to a series of sales and other scandals. It remains under the Federal Reserve’s $1.95 trillion asset cap, which has curtailed loan and deposit growth that Wells needs to boost interest income and cover costs.The fourth-largest U.S. lender reported a profit of $3.1 billion, or 74 cents per share, for the quarter ended June 30, compared with $6 billion, or $1.38 per share, a year earlier.Analysts on average had expected a profit of 80 cents per share, excluding items, according to the IBES estimate from Refinitiv.Wells Fargo’s average loans rose to $926.6 billion from $854.7 billion a year earlier. Home lending recorded a 53% fall in earnings from a year earlier.Overall, non-interest expenses fell to $12.9 billion from $13.3 billion a year earlier. Now approaching his third year as the bank’s top boss, Scharf has been battling to accomplish what his two predecessors failed to do: steer the bank in the right direction after it spent billions on litigation and remediation expenses.Scharf’s turnaround plan relies on cutting $10 billion in costs annually, scaling back the lender’s massive mortgage business and growing its investment bank, which he has called a $1 billion opportunity.Wells Fargo’s total revenue fell to $17.03 billion from $20.3 billion a year earlier. (This story corrects headline and first paragraph to remove comparison of profit with analysts’ estimates; adds “excluding items” in paragraph 11). More