Aurelia Butler

BEIJING (Reuters) -China’s explicit call to cut the amount of cash banks set aside as reserves and boost lending has reinforced expectations for imminent policy easing, but economists say any credit loosening may not be enough to beat back the prospect of a deep economic downtrend.Growth in the world’s second-largest economy has slowed since early 2021 as traditional engines of the economy such as real estate and consumption faltered. Exports, the last major growth driver, are also showing signs of fatigue.More recently, widespread disruptions to activity from China’s biggest COVID-19 outbreak since 2020 and tough lockdowns have tilted the odds towards a recession, a few economists say.On Wednesday, the State Council, or cabinet, said after a meeting that monetary policy tools – including cuts in banks’ reserve requirement ratios (RRRs) – should be used in a timely way. In the last two rounds of RRR cuts in 2021, the respective announcements of the easing were made two to three days after they were flagged by the State Council. “We expect the PBOC to deliver a 50-basis point RRR cut and potentially also an interest rate cut in the next few days,” Goldman Sachs (NYSE:GS) wrote in a note on Thursday. Most private forecasters now expect an RRR cut of 50 basis points (bps), which would free up more than 1 trillion yuan ($157 billion) in long-term funds that banks can use to boost lending.A commentary by state-run Securities Times said April 15 would be the window to watch. China on Monday will report March data for industrial production and retail sales, which are expected to reflect the impact from COVID curbs, as well as first-quarter gross domestic product (GDP).But some analysts cast doubt on the effectiveness of an RRR cut now, due to a lack of demand for credit, as factories and businesses struggle while consumers remain cautious in a very uncertain economy. [nL2N2VZ04KTransmission channels for conventional RRR and rate cuts are severely clogged due to the COVID-related lockdowns and logistics disruptions, according to Nomura.”When households scramble to stockpile food and private corporates prioritise survivorship over expansion, credit demand is weak,” Nomura analysts said in a note. “With so many lockdowns, road barricades and property curbs, the most concerning issues lie mainly on the supply side, and merely adding loanable funds and slightly cutting lending rates are unlikely to effectively boost final demand.”Nomura says China is facing a “rising risk of recession”, with as many as 45 cities now implementing either full or partial lockdowns, making up 26.4% of the country’s population and 40.3% of its GDP.It expects one 10-bps rate cut each to the rates of the one-year medium-term lending facility (MLF), one-year and five-year loan prime rates (LPRs), and seven-day reverse repo in the near term. But no change in the one-year MLF rate is expected when the central bank is set to renew 150 billion yuan of such medium-term loans on Friday, said 31 out of 45 traders and analysts in a Reuters poll. Since a flurry of cuts to key rates in January, China has kept its benchmark one-year LPR unchanged at 3.70% and its five-year LPR steady at 4.60%.”Monetary policy is not the panacea for all problems,” the Securities Times commentary said. “Unblocking supply chains and industrial chains, allowing enterprises to get orders, and allowing people to have income would be the only way the cash-flow of the real economy be improved and a turnaround be achieved naturally.” ($1 = 6.3663 Chinese yuan renminbi) More

SEOUL/SINGAPORE (Reuters) – Singapore and South Korea both tightened monetary policy on Thursday, hot on the heels of rate hikes in Canada and New Zealand, as global policymakers moved quickly to prevent soaring inflation from derailing a fragile world economic recovery.While the four central banks began tightening policy last year to stem price rises caused by coronavirus-driven logistics bottlenecks, the war in Ukraine, which started Feb. 24, has since intensified supply pressures, heightening the urgency for policymakers to bring forward planned rate hikes.”We’re likely to see more Asian central banks push forward the timing of interest rate hikes,” said Toru Nishihama, chief economist at Dai-ichi Life Research Institute in Tokyo. “That could hurt growth but with inflation becoming a more imminent concern, there’s little choice for them but to move toward tighter monetary policy.”Asia-Pacific economies largely lagged U.S. and European reopenings from the pandemic, which meant central banks in Australia, India and Southeast Asia had up until now mostly seen inflation pressures as transitory, with a focus more on shoring up their recoveries.Singapore, South Korea and New Zealand were the exceptions and were particularly concerned about surging import price costs and financial stability more generally.The Bank of Korea delivered a surprise quarter of a percentage point rate hike on Thursday.Most economists had expected it to hold fire while it awaited the appointment of a new governor but with inflation in Asia’s fourth-largest economy running at a decade-high, the bank said waiting was not an option.Singapore, meanwhile, tightened its policy, which influences its currency rather than interest rates, for the third time in six months, citing fresh risks from the Ukraine war.Both meetings came less than a day after commodity-rich economies New Zealand and Canada lifted their respective rates by a hefty half a percentage point, their largest such hikes in two decades.New Zealand’s hike was larger than what economists had expected and Canada warned more would be needed.GET THERE FAST, TAKE IT SLOWVishnu Varathan, head of economics and strategy at Mizuho Bank, said Singapore, South Korea, New Zealand and Canada were part of a group that saw an urgent need to get ahead of the inflationary threat. “The so-called ‘Kokomo Club’ of central banks that aim to ‘get there fast, and then take it slow’ necessarily are inclined to front-load tightening, with 50 basis point hikes as a hallmark,” Varathan said, referring to lyrics from the Beach Boys’ 1988 hit “Kokomo”.While larger peers like the Federal Reserve and European Central Bank were not quite as aggressive in their posturing, he said they were moving in that direction.The challenge for many economies is they have only just started to embed a sure-footed recovery from large pandemic-led downturns, though inflation has since forced their hands on concerns prices could trigger broader financial and price instability.Indeed, even some of Asia’s less hawkish central banks are feeling the pressure to wind down their crisis-era policy.The Reserve Bank of Australia last week held rates but dropped a reference in its communication about being “patient” in watching economic conditions.Australia’s labour market remains extremely tight with unemployment at a 13-year low and markets now expect the first hike since the start of the pandemic in June.India’s central bank also kept rates at a record low last week but flagged a move away from ultra-loose policy.While the Ukraine war’s economic impact has mostly be seen in inflationary terms for now, with energy and food prices soaring, analysts warn policymakers need to pay close attention to the hit to growth.Shane Oliver, head of investment strategy and chief economist at AMP (OTC:AMLTF) Capital in Sydney, compared current conditions with the Saudi oil embargo in 1973 that caused a global price shock.”(Central banks are) having this dilemma that the longer this goes on, and it’s being going on for a year now, inflationary expectations move higher and inflation will become self-perpetuating much as it did in the 1970s,” he said. More

South Korea and Singapore have become the latest Asian economies to tighten monetary policy to combat inflationary risks stoked by the war in Ukraine.The Bank of Korea on Thursday increased its benchmark interest rate for the fourth time since August to 1.5 per cent, its highest level in almost three years. The central bank made the decision as inflation in Asia’s fourth-largest economy hit 4.1 per cent in March on a year earlier, more than double the BoK’s target range and up from 3.7 per cent in February. Separately, the Monetary Authority of Singapore, which relies on exchange rate adjustments rather than interest rates to guide monetary policy, said it would raise the midpoint for the Singapore dollar’s trading band and increase the pace at which it allowed the currency to move for the first time in more than a decade.The city-state keeps the trading band and the composition of the currency basket on which it is based secret to deter speculation, but the Singapore dollar was up 0.7 per cent against its US counterpart at about $0.74 following the MAS announcement on Thursday.The MAS announced the move as core inflation, which excludes accommodation and private transport, hit 2.3 per cent year on year in January-February, up from 1.7 per cent in the final three months of last year. Singapore also upgraded its core inflation forecast for the year by 0.5 percentage points to 2.5-3.5 per cent and its all-items forecast by 2 percentage points to between 4.5 per cent and 5.5 per cent. Economists also highlighted downside risks to the city-state’s gross domestic product growth, which came in at 3.4 per cent for the first three months of 2022, just missing forecasts.The Korean and Singaporean decisions were announced a day after the Reserve Bank of New Zealand increased rates by half a percentage point, its biggest rise in 22 years.New Zealand’s most recent inflation figure, from December 2021, was 5.9 per cent, up from 1.4 per cent a year earlier. The country’s central bank expects inflation to peak at 7 per cent in the first half of 2022.South Korea and Singapore cited surging costs owing to the war in Ukraine on top of the fallout from the Covid-19 pandemic.Analysts at Fitch, the rating agency, said rising commodity prices would continue to push up inflation across Asia and probably lead to further rate increases.“Inflation in Asian [emerging markets] . . . has generally been more subdued than in much of the rest of the world,” they wrote in a note. “Policy tightening may now be brought forward, especially if commodity-price moves were to speed up Fed tightening.”

Capital Economics, the consultancy, projected the BoK would deliver at least two more 25-basis point increases this year, which would take the country’s benchmark rate to its highest level since early 2015.But Clara Cheong, a Singapore-based global market strategist at JPMorgan Asset Management, said Asian economies varied widely and inflation in the region had been more subdued than elsewhere.“Generally what we’ve seen is that inflation has been relatively more benign in this part of the world due to the delayed recovery from the pandemic,” she said, adding that China would probably ease monetary policy to be able to achieve its 5.5 per cent annual growth target.The moves by South Korea and Singapore were “unlikely to signal a wave of Asian central bank hawkishness”, she added. More

TOKYO (Reuters) -Japan’s ruling Liberal Democratic Party (LDP) on Thursday urged the government to introduce jet fuel subsidies and launch a tourism campaign as part of a relief package to cushion the blow from global commodity inflation driven up by the Ukraine war.While the proposal did not mention the size of spending, it called on the government to act swiftly by drawing on existing budget reserves of 5.5 trillion yen ($43.9 billion).”Developments regarding Ukraine are hard to predict and prices for various necessities are rising,” the proposal said, adding the LDP will consider additional steps if commodity prices continue to rise.Prime Minister Fumio Kishida has instructed his cabinet to compile measures to cushion the blow from rising fuel and food costs by the end of the month.The administration wants to keep spending relatively small, government officials with knowledge of the matter have told Reuters, with Kishida instead hoping to unveil a bigger spending plan closer to an upper house election scheduled in July.The officials were not authorised to speak to media and declined to be identified.The LDP’s coalition partner Komeito, however, wants an extra budget to be crafted as soon as possible for bigger, immediate spending.Takuya Hoshino, senior economist at Dai-ichi Life Research Institute, projects this month’s package to be sized around 2-3 trillion yen, and followed by bigger spending later this year.”It wouldn’t surprise me if the second package is sized around 10 trillion yen, given political pressure to spend big at the time of upper house elections,” he said.Spiking costs for energy and food in particular have hit Japan’s economy already struggling to emerge from the COVID-19 pandemic.The economy is expected to expand an annualised 4.9% this quarter, below an earlier prediction of 5.6%, according to a Reuters poll.($1 = 125.3000 yen) More

Instead, markets increasingly expect an imminent reduction in the amount of cash banks must set aside as reserves, after the State Council, or cabinet, called on Wednesday for the timely use of such monetary tools.Activity in the world’s second-largest economy has slowed since early 2021 as traditional growth engines such as real estate and consumption faltered. More recently, widespread disruptions from COVID-19 outbreaks and tough lockdowns have tilted the odds towards a recession, a few economists say.Still, 31 out of the 45 traders and analysts, or nearly 70% of all participants polled, forecast no change in the interest rate on one-year medium-term lending facility (MLF) when the central bank is set to renew 150 billion yuan ($23.57 billion) worth of such loans on Friday. Among the other 14 respondents, eight predicted a marginal 5 basis points (bps) cut, while the remaining six believed a 10 bps reduction would be more likely.”Citi economists’ base case is a 50 bps broad-based reserve requirement ratio (RRR) cut to be confirmed as early as April 15, releasing more than 1.2 trillion yuan of liquidity,” the American investment bank said in a note, adding such a cut could reduce the chance of an imminent MLF rate reduction.Some investors also argued that more aggressive monetary easing in China, such as lowering both RRR and key policy rates, would further diverge its policy stance with other major economies, which have started tightening, and potentially trigger more capital outflows. The yield premium between the China and the United States was wiped out this week.”The situation would become more uncertain in case of more significant capital repatriation pressure and deteriorating (yuan) sentiment later this year,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank.Lockdowns in the financial hub of Shanghai and dozens of other cities to curb the fast spread of COVID-19 have roiled markets and prompted concern over wider disruptions to economic activity, leaving policymakers with no choice but to offer more stimulus to ensure the economy is on course to hit this year’s growth target of around 5.5%.However, some economists say any credit loosening may not be enough to quickly reverse a deep economic downtrend, as businesses and consumers are in no mood to borrow money given the uncertain outlook.($1 = 6.3660 Chinese yuan renminbi) More

In a speech delivered less than a week after the Federal Reserve raised interest rates for the first time since 2018, chair Jay Powell acknowledged the historic challenge confronting the US central bank: tame the highest inflation in 40 years without causing a “hard landing” with painful job losses and a sharp economic contraction.“No one expects that bringing about a soft landing will be straightforward in the current context,” he cautioned last month. “Monetary policy is often said to be a blunt instrument, not capable of surgical precision.”Powell punctuated his warnings with optimism about the US economy’s ability to handle tighter monetary policy, but his comments underscore just how difficult the task ahead will be for the central bank as it charts a new course after two years of unprecedented support.He also poured fuel on an intensifying debate over the magnitude of the collateral damage from rate rises on the US economy.“Recession risks are no doubt elevated,” said Karen Dynan, an economics professor at Harvard University, who previously worked at the US central bank. “In terms of addressing inflationary concerns, the Fed is facing the biggest challenge it has faced in decades.”Fears the Fed will struggle to moderate inflation while simultaneously sustaining an economic expansion have been stoked by the central bank’s spotty record in successfully engineering a slowdown without causing unintended economic harm.In six of the past eight campaigns to rein in inflation since the 1970s, when the Fed raised interest rates to or above a “neutral” rate that neither aids nor constrains growth, a recession followed soon after, according to research by Roberto Perli, head of global policy at Piper Sandler. Even before the coronavirus pandemic hammered businesses and consumers, the economy was already slowing down, Perli said, as borrowing costs crimped demand for housing and other big-ticket items and businesses were forced to rethink hiring plans. Compounding concerns is the enormity of the inflation problem the Fed must now grapple with, which intensified in March as a result of Russia’s invasion of Ukraine. New Covid-19 lockdowns in China that have further gummed up supply chains also risk pushing prices higher.“There’s generally a narrow path for achieving a soft landing, and the path looks extraordinarily narrow now given how far the economy is away from the Fed’s targets and how far policy is away from neutral at the moment,” said Matthew Luzzetti, senior US economist at Deutsche Bank, who forecasts a recession in 2023.For most of past year, the Fed advocated a gradual scaling back of the pandemic stimulus it injected into the economy on the assumption that inflation would be “transitory” and moderate over time. But as price pressures ballooned and spilled into a broad range of sectors, the Fed was forced to pivot, signalling in recent months increasingly aggressive policy that economists fear could go overboard.“When you wait too long and you tighten aggressively, then you could hurt the people that are being hurt most by high prices,” said Rick Rieder, chief investment officer of global fixed income at BlackRock, referring to low- and middle-income households.The Fed is now expected to implement at least one half-point interest rate increase this year — a tool it has not used in more than two decades — as part of its efforts to bring the benchmark policy rate closer to neutral, which officials estimate to be roughly 2.4 per cent. It will also soon begin rapidly reducing the size of its $9tn balance sheet at an expected pace of up to $95bn a month.Not all economists believe a recession is a foregone conclusion, however. Like Powell, other top officials maintain confidence in the Fed’s ability to execute a soft landing. Lael Brainard, a governor tapped to be the next vice-chair, on Tuesday said the strength of the labour market, coupled with “significant underlying economic momentum”, bodes well for such an outcome.A shift in consumer spending away from goods and back into services as well the waning of pandemic-era fiscal stimulus are also expected to take the heat off of inflation, said Julia Coronado, a former Fed economist now at MacroPolicy Perspectives. She said the US central bank was “not doing all the work here”.Moreover, the Fed will adjust policy on incoming data, many economists say. Donald Kohn, who served as vice-chair in the midst of the 2008 global financial crisis, said the Fed should fine-tune policy as it did in 1994 when the central bank raised rates and steered the economy towards a soft landing. “Chair Powell and the rest of the committee will very much be in the cockpit,” said Gregory Daco, chief economist at EY-Parthenon. “If the nose is diving too much, they will lift it up a little bit by either slowing the pace of tightening or by easing monetary policy.”For Dennis Lockhart, who was president of the central bank’s Atlanta branch for a decade until 2017, an even bigger risk than a Fed-induced recession is that policymakers again fail to appreciate the severity of the inflation problem and tighten policy too slowly.Lockhart said: “I worry more about the Fed undershooting the situation and having inflation really seep into every crack of the economy and become really deeply embedded in the psychology that affects prices, the business practices of companies and wage demands of what appears to be a resurgent labour movement.” More

This week has seen a series of deeply worrying statistics that underline the cost of living catastrophe many UK households face.Soaring inflation figures do not yet reflect April’s 54 per cent increase to the energy price cap. The 3.1 per cent uprating of benefits this month covers less than half of the growing gap and wages are going backwards in real terms. In these desperate times, there is one statistic the government should be especially ashamed of. When so many are struggling, why is it that an estimated £15bn worth of means-tested benefits go unclaimed in the UK every year?This figure is the best guess of analysts at the website Entitled To which bemoans the woeful lack of government-published data on benefits uptake, particularly for universal credit. Every year, more than 4m people use its online benefits checker to see what help they might be entitled to receive. It’s a similar story at Turn2us, a charity offering a benefits calculator that takes just 10 minutes to complete, but could make a world of financial difference to low-income families. Its latest figures show over 232,000 people a year claimed new benefits after using its services, averaging £5,320 per person.

These free services are such a popular and straightforward way of navigating the confusing morass of the benefits system, that links to them now appear on the government’s official gov.uk website. But if we are relying on the goodwill of charities to raise awareness and ensure the benefits system works as it was intended, I’d argue this is a sign of a broken model in urgent need of fixing. Charities tell me the biggest obstacle is that our benefits system is too complicated. Large groups of people are simply unaware that help exists.Often, an interaction with another charity is the catalyst. Food banks, and the growing number of fuel banks providing top-up for those on prepayment meters, routinely help their users access benefits checkers to find out what other support is out there.Turn2us says one of the most chronically overlooked benefits is pension credit, with £1.7bn going unclaimed by an estimated 850,000 households. Pensioners eligible for this top-up could receive more than £3,300 per year, and as pension credit is a “gateway benefit”, even a small award could entitle claimants to help with energy bills, council tax discounts and a free TV licence for over-75s.This month, the DWP launched a pension credit awareness campaign (no, I hadn’t noticed either) and a claims hotline — the number to call is 0800 99 1234. But this highlights the second biggest problem with our benefits system — digital exclusion. It is very challenging to get the information and support you need to claim benefits if you’re offline, but being online is expensive, and the pandemic has accelerated the digital divide.

18%

Percentage of digitally excluded over-65s

Communications watchdog Ofcom estimates that 6 per cent of UK households are not online, but this rises to 11 per cent for lower income households, and 18 per cent for the over-65s.At the same time, cuts to local authority funding have forced the closure of libraries and drop-in centres at local council offices. Providing face-to-face services is expensive — just look at the extent of bank branch closures — but they are a lifeline for the poorest customers. I’ve written here before about how digital literacy is part and parcel of financial literacy, but charity leaders fear the cost of living crisis will force more consumers to disconnect. “There is already a significant swath of people who do not have online access, but as more people struggle to pay their energy bills, I fear we will see rising numbers who will be unable to afford a phone or internet connection — and then how will they claim?” says Thomas Lawson, chief executive of Turn2us. Charities are already distributing free Sim cards for people who have a phone, but cannot afford the data costs of applying for benefits online. However, Ofcom estimates 4.2m households on means-tested benefits could halve their broadband costs by switching to a “social tariff” costing as little as £10 or £15 per month, but in February, only 55,000 customers were on them. Ofcom’s campaign for providers to raise awareness is bearing fruit, with Sky and Now launching new low-cost deals this week.This could all help people file benefits applications and reduce the estimated £15bn going unclaimed, especially when you consider universal credit is an “online first” benefit. While it’s possible to claim over the phone, charities say it’s so much more difficult and time consuming, this is undoubtedly a barrier to greater uptake. And then there’s the educational penalty. Ofcom says around one in five children do not have consistent access to a suitable device for online home learning, increasing to 27 per cent of children from households classed as most financially vulnerable.Turn2ss has a searchable database of charities providing grants to cover the cost of computer equipment. If you have old phones, laptops or tablets you no longer need, consider donating them to charities, including The Restart Project, which refurbish devices and give them to those in need.Online access will be vital for lower-income families to get help with rising energy bills. I spoke to a caller on LBC radio last week who couldn’t afford a smartphone, and was desperate to find out how he could access the Household Support Fund for local councils mentioned at the Spring Statement, not to mention the £144mn pot of funding for those not eligible for the £150 council tax rebate. Every council will have a different method of distributing this support, but not being online presents a huge barrier for the poorest. What other steps could be taken?Charities praise the Scottish government’s monitoring of benefits take-up, setting targets to make sure people claim what they are entitled to. It has recently shaken up the design of its benefits system and conducts outreach work to identify and target groups that could be missing out.Turn2us says that those for whom English is a second language find the benefits system particularly impenetrable.One of the saddest facts I uncovered? Although finding out that you are entitled to more help makes an enormous difference to people’s financial lives, charities say this is often tinged with regret as benefits claims can rarely be backdated. This is why raising awareness — especially in times like these — is of the utmost importance. As part of the FT’s Financial Literacy and Inclusion Campaign, this article has been made free to read. I’d urge readers to share it with anyone who could benefit from the support I’ve signposted above, as well as writing to your local MP and asking what they are personally doing to ensure more of the unclaimed £15bn gets to those who most sorely need it. Claer Barrett is the FT’s consumer editor: [email protected]; Twitter @Claerb; Instagram @Claerb More

Jay Newman was a senior portfolio manager at Elliott Management, and is the author of Undermoney, a thriller about the illicit money that courses through the global economy. In 1965, Ralph Nader wrote Unsafe at Any Speed, exposing a car industry that systematically stifled safety features. Over the past two decades, the industry that peddles emerging market sovereign debt — countries, their bank underwriters, and the lawyers that write the contracts — has been peddling bonds that are unsafe at any price. Sovereign debt is back on the front pages in part because economic sanctions are pushing Russia to the brink of default. That is causing investors to wake up to the risk that a dozen or more developing countries could follow.Bill Rhodes and John Lipsky, co-chairmen of the Bretton Woods Committee’s Sovereign Debt Working Group, have warned that 60 per cent of low-income countries run a high risk of defaulting on their debt, and argue that existing mechanisms for dealing with sovereign-debt restructuring aren’t up to the task. Fair points. As is their observation that no one is quite sure how much debt is out there, particularly since China began flooding the developing world with massive Belt and Road loans. Sovereign debt defaults are a perennial issue, and the risk of a coming crash is real. But stalwarts of the incumbent order offer hopeless ideas for solving a problem of their own invention. Debtor countries continue to borrow whenever they have an opportunity because its free money. Thanks to Lipsky’s Sovereign Debt Working Group, a feckless IMF and the World Bank, repayment has become optional.Clause by clause, covenant by covenant, sovereign debt instruments have been intentionally and systematically stripped of nearly every provision that might safeguard the interests of creditors. Indentures often run to hundreds of pages. Dense legalese suggests that sovereign bonds contain robust, actionable legal rights. But that’s nothing more than magical misdirection: a delusion. In a default, creditors have little choice but to take what they are offered, no matter how outrageous or disconnected from a debtor’s capacity to pay, because sovereign bonds have become functionally unenforceable. The list of missing protections is long, to name but a few: Creditors once retained the rights to act individually and enforce their rights directly. Now they’re forced to work through ineffectual indenture trustees. Once upon a time, each series of bonds ranked pari passu in priority of payment with every other series, so that a debtor could not involuntarily subordinate one set of bondholders by offering preferences to others: no longer. But the biggest, most pernicious, changes have been the inclusion of complex, multipronged collective action clauses that not only allow a subset of creditors to determine the economic rights of all, but also permit the debtor to manipulate who gets to vote on what, and when.Picking your way through a bond contract is merely the first hurdle. Pursuing recalcitrant sovereigns through the courts is fiendishly complex, massively expensive, and can drag on for years. Even legal victories often end in frustration and failure. Sovereign deadbeats, just like the common sort, try to render themselves judgment-proof by structuring their affairs to evade enforcement — using opaque alter ego entities, and parking money at willing enablers like the Bank for International Settlements and the New York Federal Reserve. And clever lawyers have become expert at advising sovereigns on the game of manipulating creditors, playing one against another.In another universe, creditors would act in concert to thwart those machinations. But such is the structure of creditor groups and individual egos that collective action seems an impossibility.Throughout most of history, lending to sovereigns has been perilous. Creditors without armies had little recourse, because sovereigns enjoy absolute immunity. As a result, only the bravest lenders had been willing to lend money in a weak sovereign’s native currency, much less to risk the vagaries of chasing a country through the courts. It was precisely to address those concerns that, in the mid-1970s, both the US and the UK enacted statutory regimes — the Foreign Sovereign Immunities Act (1976) and the State Immunities Act (1977), respectively — that codified the circumstances under which a sovereign could waive its absolute immunity, agree to be bound by US or English law, and submit to being sued in New York or London if they reneged on their debts.The FSIA and the SIA were principled efforts to align best practices in law and finance, and those statutes were intended to create new opportunities for responsible nations to demonstrate their willingness to abide by international norms. Potential lenders could draw comfort from the fact that, if a country submitted to the jurisdiction of a developed country court system there would be mechanisms to force even a recalcitrant sovereign debtor to pay.That was the theory. The reality was that defaults on bonds premised on the FSIA and the SIA began almost as soon as the ink was dry, beginning with Mexico in 1982. It became clear that investors faced challenges well beyond the four corners of their bond contracts. The geopolitical deck is stacked against investors because the international political class invariably sides with even the most incorrigible emerging market debtor and heaps opprobrium on lenders who have the temerity to insist on being repaid. The IMF, the European Union, the World Bank, the United Nations, progressive-leaning NGOs, and the leaders of the G-7, all join the chorus by changing laws to protect some borrowers and intervening in court proceedings to oppose their own taxpayers. For the official sector, there is only honour in helping third-world debtors escape obligations that they have legally, contractually incurred. The moral hazard is clear: because the official sector lines up with debtors so uniformly, there is little incentive for any borrower to make its best effort to pay what it owes.Perhaps no one should care very much about investors who make bad decisions or countries that game the system. But sovereign defaults are not a victimless crime. New issues of emerging market debt typically find their way into the portfolios of mutual funds and ETFs that are widely marketed to retail investors. Only rarely are retail investors quick enough to sense trouble and dump funds holding bonds that are headed for default. More often, those investors bear the brunt of the first round of losses.We could sticker the prospectuses, but nobody reads those, so warning labels won’t do. And it’s not only a matter of protecting investors. Western jurists should not be drawn into the labyrinth of adjudicating pseudo-contracts and pretend-legal agreements. They should be relieved of the awkward job of judging complex, fundamentally political disputes that really should never have been dumped in their courtrooms in the first place.This 50-year experiment in expanding capital market access to countries that lack robust domestic institutions has been a failure: it has led to default after default as countries borrow in currencies other than their own, run into trouble, and renege. The simple, elegant solution is to give up the ghost: Repeal the Foreign Sovereign Immunities and the State Immunities acts, and make it clear to all that — once more — countries enjoy absolute immunity, and that anyone who thinks otherwise does so at their peril and must rely on the goodwill and probity of the debtor alone. These laws don’t work because politics has undermined the foundations of finance and has taken primacy under a confederation of sovereign and supranational actors. But governments should no longer be enabled in a lend-and-pretend regime based on the false premises that choosing New York or English law offers protection, or that American or English judges will champion their right to be repaid.It would be a different world, with so many salutary effects. Emerging market countries — really all weak government borrowers — would be cut off from feeding on the uninformed fantasy that contracts offer meaningful protection simply because they are long. Investors would be forced to acknowledge that the only protection they really have is the full faith and credit of the sovereign. To induce investors to lend them money, nations would have to demonstrate their probity: convince lenders that their social and legal institutions are strong, that they are responsible borrowers, that borrowed funds will be put to productive use, and that the value of their currencies will be supported by sound economic policies.To be sure, in the short run, many countries will not make the grade — they won’t be able to borrow as much as domestic political elites might like. And, when investors really dig into the details, some countries will not be able to borrow at all until — and if — they get their houses in order. It’s about time. More