Aurelia Butler

COLOMBO (Reuters) – Sri Lanka will need about $3 billion in external assistance within the next six months to help restore supplies of essential items, including fuel and medicines, to manage a severe economic crisis, its finance minister told Reuters on Saturday.The island nation of 22 million people has been hit by prolonged power cuts, with drugs, fuel and other items running short, bringing angry protesters out on the streets and putting President Gotabaya Rajapaksa under mounting pressure.”It’s a Herculean task,” Finance Minister Ali Sabry said in his first interview since taking office this week, referring to finding $3 billion in bridge financing as the country readied for negotiations with the International Monetary Fund (IMF) this month.The South Asian island nation will look to restructure international sovereign bonds and seek a moratorium on payments, and is confident of negotiating with bondholders for an upcoming $1 billion payment in July.”The entire effort is not to go for a hard default,” Sabry said. “We understand the consequences of a hard default.”J.P. Morgan analysts estimated this week that Sri Lanka’s gross debt servicing would amount to $7 billion this year, with the current account deficit coming in around $3 billion.The country has $12.55 billion in outstanding international sovereign bonds, according to central bank data, and foreign reserves of $1.93 billion at the end of March.”The first priority is to see that we get back to the normal supply channel in terms of fuel, gas, drugs… and thereby electricity so that the people’s uprising can be addressed,” Sabry said.’SENSE OF CONFIDENCE’Anti-government protests have raged across the island for days, with at least one turning violent in the country’s commercial capital of Colombo, which have hurt the lucrative tourism industry that was ravaged by the COVID-19 pandemic.”We respect your right to protest, but no violence, because it is counterproductive,” Sabry said.”Our tourism, which was beautifully coming back in February with 140,000 tourists coming in, has been severely affected ever since the demonstrations.”Sabry said he will lead a delegation of Sri Lankan officials to Washington to start talks with the IMF on April 18 and that financial and legal advisers would be selected within 21 days to help the government restructure its international debt.”Once we go to them, first thing is there is a sense of confidence in the entire international monetary community that we are serious,” he said. “We are transparent, we are willing to engage.”On Friday, a new central bank governor raised interest rates by an unprecedented 700 basis points in a bid to tame rocketing inflation and stabilise the economy.Sri Lankan authorities will also reach out to rating agencies, Sabry said, as the country looks to regain access to international financial markets after being locked out due to multiple ratings downgrades since 2020.Sabry said the government will hike taxes and fuel prices within six months and seek to reform loss-making state-owned enterprises, in an effort to fix public finances.These measures were among key recommendations in an IMF review of Sri Lanka’s economy released in early March.”These are very unpopular measures, but these are things we need to do for the country to come out of this,” Sabry said. “But the choice is do you do that or do you go down the drain permanently?”‘FRIEND OF ALL’Sri Lanka will seek another $500 million credit line from India for fuel, which would suffice for about five weeks of requirements, Sabry said.The government would also look for support from the Asian Development Bank, the World Bank and bilateral partners including China, the United States, Britain and countries in the Middle East.”We know where we are, and the only thing is to fight back,” Sabry said, looking relaxed in a blue T-shirt and jeans. “We have no choice.”Discussions are ongoing with China on a $1.5 billion credit line, a syndicated loan of up to $1 billion dollars and a request from Sri Lanka’s president in January to restructure some debt.”Hopefully we will be able to get some relief and which would help to keep the Sri Lanka community and the country afloat until larger infusions come in,” Sabry said.Beijing and New Delhi have long jostled for influence over the strategically located island off India’s southern tip, with the country pulling closer to China under the powerful Rajapaksa family.But in recent weeks, as the economic crisis deepened, Sri Lanka has leaned heavily on assistance from India.”We are a neutral country. We are friend of all,” said Sabry, a lawyer who previously served as Sri Lanka’s justice minister. “So we think that goodwill will come in handy at this point in time.” More

Trust is in diminishing supply around the world. That is true among nations, business counterparts and securities traders. In the markets we can measure this distrust in the differing prices of similar financial assets ultimately backed by the US Federal Government. Take, for example, the interest rate paid by the Federal Reserve to banks who park their money nearly risk-free overnight in its “Reverse Repurchase Facility”. The Fed has engaged in reverse repos for years, under which it would receive cash overnight, secured by the highest quality short term securities, in exchange for “reserves”, a sort of non transferable asset for financial institutions. But institutions and investors have other low-risk options for their spare cash, such as short term Treasury bills. In fact, a curiously persistent gap has appeared between the interest rates on the shortest term T-bill rates and the periodically reset rates offered by the RRP.As an example, on March 23rd, the four week Treasury bill at one point yielded about 13 basis points (each one 100th of a percentage point), while the RRP offered 30 bps. In the past, markets have not priced in much difference between them.If this spread happened because of an oddball event — a massive one day computer failure perhaps — it might be considered just noise, not a signal. Yet this difference has persisted fairly consistently since June of last year. Both the RRP and the T-bills offer daily liquidity, and the full faith of the Federal Government sits behind both. So why these yield divergences? Part of the idea behind the RRP concept was to assure money market funds held by bank customers and corporations that they would always get a low-ish, but at least positive interest rate on the cash in these safe RRP accounts. Assuring this sense of safety for account holders was paramount. Without this protection public confidence in the system as a whole would be shaken.The underlying problem was that banks and other deposit-takers, such as the money market funds, had not found enough sound lending or investing opportunities for excess cash made available by the quantitative easing programmes. From the beginning of the pandemic in early 2020, US loan demand weakened so that deposits from the banks’ customers could not be put to work as in the normal banking model.The regular use of the “RRP” began only in 2014, and for a while the Fed (and its customers) only used it as required. But the repurchasing facility has grown in importance, especially in the last two years. On a daily basis, no participant in the RRP can bid for less than $1 million, or more than $160 billion.The facility has become more popular with institutions which daily end up with more cash than attractive, short term low-risk opportunities. On April 4 of this year, for example, overnight RRPs amounted to $1.73tn. So given the Fed’s backing of this type of account, why are people willing to pay up for short term T-bills (and get less yield) when they might earn twice as much using the RRP? The big reason, in my view, is that those T-bills can be more useful. An investor or a dealer-bank, after purchasing them, can lend and re-lend these securities several times each before they mature. This is a process sometimes known as “re-hypothecating”.

Each time an institution that holds the bills lends them out it can receive a “securities lending fee”. The flexibility of these T-bills to provide collateral security makes them popular instruments for use in typical fixed income market transactions. Interest rate swaps, where two parties exchange different income streams paid over different time periods, might have T-bills used as a collateral in the transaction. In contrast, while the RRP may offer a higher rate, unlike T-bills they are not instruments which can be re-lent. This “collateral market” is a vital, under-reported, aspect of the international financial system. Manmohan Singh, senior financial economist at the IMF, is the leading expert on the topic. His research has shown how use of collateral can give an indication of market health.When financial market participants have a great deal of confidence in each other, the “collateral re-use rate”, or the number of times T-bills (or perhaps short term German Bunds) are lent and re-lent, increases. In the easier days of 2007, a short term T-bill might be re-used as much as three times. By 2016, the re-use rate (a sort of inverse measure of trust) had dropped to 1.8 times. In recent years, collateral re-use has picked up again.Now, though, the continuing interest rate gap between the RRP and short term bills tells us there is a new scramble for access to the best collateral. That suggests financial counterparties trust each other and their asset quality less and less. More

Around the turn of the century, currency traders, hedge funds and heavy-hitting economists obsessed over central banks’ foreign exchange reserves.The euro was a baby, and backers faced a daunting task raising it as a currency with global impact, enmeshed in international trade and investment. Any data suggesting it was eating into the dollar’s dominance in global central banks’ coffers was taken as a sign of progress towards that aim, and produced abrupt shifts in the euro’s exchange rate. It was an obsession, not without foundation, that proved lasting. In the Greek debt crisis that peaked in 2012, one of the reasons behind shouty (and faulty) predictions that the euro would drop below parity against the dollar was that central bank reserve managers could lose faith in the legal and political framework behind the European currency, and eject it from their rainy-day reserves.Central bank reserve diversification became a go-to explanation for any hard-to-fathom intraday currency move. Euro picking up? Ask a trader and he (it was invariably “he”) would often tell you “Boris” (ie Russia) or another central bank was buying. Or maybe China was nixing dollars from its reserves.Russia’s invasion of Ukraine brings this market preoccupation, which had laid largely dormant for several years, back to the fore. The US, in its effort to punish Russia for the Ukraine conflict, has made spectacular use of its “exorbitant privilege”, as Valéry Giscard d’Estaing, the former French president and finance minister, controversially put it in the 1960s.As the dollar-baiters of two decades ago frequently observed, the global role of the dollar, its outsized share in world trade and its dominance of financial markets, confers enormous power on the US to use sanctions to bend geopolitics to its will. Now, you can argue over whether that is appropriate. What if a less predictable White House were in future to use this privilege in much more contentious cases? Should any country have this power to use money as a weapon?Decent questions. But in the market’s view, what matters is that sanctions by the US and its allies on Russia’s central bank will prompt other countries that are not geopolitically aligned with the US to rethink holding so many bucks on their books.Goldman Sachs’ currency analysts said “the result could be dollar depreciation”, adding that they had seen “lots of client interest” in this theme. It is one into which hedge funds could really sink their teeth.Then again, the US investment bank warns against getting overly excited. “We should stress that the structure of currency markets will not change overnight, and there are many interrelated reasons why the dollar maintains its dominant global role,” it said.

There’s another reason not to bet the farm on an imminent dollar collapse: the US did not freeze Russia’s reserves on its own. Officials involved in crafting the sanctions against Russia knew they would work best in conjunction with the EU, UK and other G7 nations. So, sure, Moscow, or another prickly regime, can in future shy away from dollars, but go where instead? Russia cannot shift to euros, sterling or yen given that payment sanctions extend to those as well. It could eschew them all, but then its funds for buying essentials or defending the rouble would all be in currencies with limited international use. In addition, opting for the renminbi to avoid politically motivated freezes seems rather naive.Still, the potential for this to diminish the dollar’s reserve status is real. The implications are potentially profound and could take years to become fully clear. Gita Gopinath, deputy managing director at the IMF, has spoken of the potential that the global financial system could “fragment”. Previous market fixations on this issue suggest that, despite the tectonic pace of change, traders will keenly spot short-term opportunities.An IMF study last month, addressing the “stealth erosion of dollar dominance”, offers clues to where those opportunities lie. The dollar’s place in international reserves has clearly shrunk since the turn of the century, from 71 per cent in 1999 to 59 per cent in 2021, the IMF said, reflecting “active portfolio diversification” by central banks.Intriguingly, the share of reserves in the other “Big Four” currencies — sterling, the yen and the euro — has not picked up the slack. “Rather, the shift out of dollars has been in two directions: a quarter into the Chinese renminbi, and three-quarters into the currencies of smaller countries that have played a more limited role as reserve currencies,” the IMF said.More availability of easy-to-trade assets and slicker trading technology have made it easier to snap up Australian and Canadian dollars, the Chinese renminbi and a clutch of Nordic currencies.“Reserve currency competition is usually framed as a battle of giants,” the IMF said. In fact, the issue is not whether the dollar will be replaced, but whether smaller currencies take a bigger slice of the pie. The next time a small currency jumps for no obvious reason, expect this to be offered as the explanation. More