Aurelia Butler

COLOMBO (Reuters) -Sri Lanka has sought an additional credit line of $1 billion from India to import essentials amid its worst economic crisis in decades, two sources said on Monday, as the Indian foreign minister held talks with the neighbouring island’s government.The country of 22 million people is struggling to pay for essential imports after a 70% drop in foreign exchange reserves in two years led to a currency devaluation and efforts to seek help from global lenders.Fuel is in short supply, food prices are rocketing and protests have broken out as Sri Lanka’s government prepares for talks with the International Monetary Fund (IMF) amid concerns over the country’s ability to pay back foreign debt.New Delhi has indicated it would meet the request for the new line, to be used for importing essential items such as rice, wheat flour, pulses, sugar and medicines, said one of the sources briefed on the matter.”Sri Lanka has requested an additional $1 billion credit line from India for imports of essentials,” the second source said. “This will be on top of the $1-billion credit line already pledged by India.”Both sources declined to be identified as the discussions were confidential.The finance and foreign ministries of Sri Lanka, as well as India’s foreign ministry, did not immediately respond to requests seeking comment.REGIONAL RIVALRYIndia’s support for the roiled Sri Lankan economy comes after previous administrations led by the powerful Rajapaksa family drew the island nation closer to China during the past decade, leading to unease in New Delhi.Sri Lanka-India ties have improved in recent months, and Sri Lankan Finance Minister Basil Rajapaksa travelled to New Delhi in March to sign the earlier credit line of $1 billion to help pay for critical imports.In Sri Lanka’s main city of Colombo for talks, Indian Foreign Minister Subrahmanyam Jaishankar met the finance minister and his brother, President Gotabaya Rajapaksa, on Monday.”Reviewed various dimensions of our close neighbourly relationship,” Jaishankar said in a tweet after meeting the president. “Assured him of India’s continued cooperation and understanding.”In addition to the credit lines, India extended a $400-million currency swap and a $500-million credit line for fuel purchases to Sri Lanka earlier this year.Sri Lanka’s imports stalled, causing shortages of many essential items, after foreign currency reserves fell to $2.31 billion by February.The nation just off India’s southern tip has to repay debt of about $4 billion in the rest of this year, including a $1-billion international sovereign bond that matures in July.Faced with a swiftly deepening crisis, President Rajapaksa has also sought help from Beijing, including a request to restructure debt payments. His government is negotiating $2.5 billion in credit support from China, with a decision expected in the next few weeks.Finance Minister Rajapaksa is set to fly to Washington, D.C. next month to start talks with the IMF for a rescue plan and also seek support from the World Bank. “India is also very supportive of Sri Lanka’s decision to seek an IMF programme and has given their fullest support,” one of the sources added.Sri Lanka’s government bonds fell on Monday after the IMF warned the country needed a “comprehensive strategy” to make its debt sustainable. More

Hello. I have an interview running in the FT news pages with Ngozi Okonjo-Iweala, who has clocked up just over a year as World Trade Organization director-general and, let’s face it, hasn’t exactly been presented with a sea of calm to navigate. In the interview she ranges over the vaccine patent waiver deal, on which subject she made an impassioned plea for WTO member governments to remember the value of compromise, the difficulties of containing geopolitical tension over the Ukraine war in the WTO and the likelihood that supply chain crunches will continue for longer than she’d expected. But her primary concern is the looming global food crisis.In today’s main piece I’m going to look at how food-importing countries cope with spiralling prices, apart from trying to persuade their trading partners not to put on export bans. Charted Waters this week focuses on a Dutch think-tank’s assessment of the UK’s post-Brexit trade performance.As usual, if you have any thoughts on the newsletter, or trade more generally, I want to hear them at [email protected] up buffersIt’s been nearly 15 years since the last major global food crisis began in 2007 and, as Okonjo-Iweala says in today’s FT interview, it’s not altogether clear we’ve learned a lot. On go the export bans and up go food and energy prices, with not much sign of international co-operation to stop the spiral. The EU is making a good show of trying to increase production in the short term and opposing export restrictions, but that’s relatively easy to say if you’re not likely to suffer food shortages anyway.It’s a bit harder if you’re, say, Egypt, a densely-populated country with limited farmland and irrigation and which imports more than half its staple food of wheat. Egypt called in the IMF last week to help it with the inevitable balance of payments problems caused when an irreplaceable import suddenly shoots up in price. They’ll no doubt get the money: it’s pretty much what the IMF is for. But if high food prices persist, Egypt will have to start regarding the issue as more than a short-term liquidity problem and do some serious long-term adjustment.Africa is in particular difficulties here because of its reliance on imported food in general and wheat from Russia and Ukraine in particular. Okonjo-Iweala notes that 35 African countries are dependent on wheat and 22 on fertiliser from the Black Sea region. Apart from aid — while she was at the World Bank, Okonjo-Iweala helped create an agricultural and food security fund as a response to the 2007-08 food crisis — the seemingly logical solution is for countries to hold enough buffer stocks to get through a crisis and, often relatedly, aim for more agricultural self-sufficiency. (Okonjo-Iweala also suggested Africans eat more food that can be grown locally, like maize or cassava, and less of the imported wheat that’s a legacy of colonialism, but I’m not sure whether her recommendation of “yams for breakfast” is official WTO policy.)At this point we enter a highly contentious subject in development and trade: whether it’s sensible to regard self-sufficiency and/or large buffer stocks as the route to food security. This has, to understate quantities considerably, created a modicum of academic and political debate.Development economists still recall the arguments that raged after a famine in Malawi in 2002 in which several hundred people at least died. Some development campaigners attempted to blame the IMF for telling the government to sell off its reserve grain stocks in the years before the famine. The IMF countered that the problem was that officials sold off far more than the experts (more than just the fund) had recommended.Reserve stocks aren’t free insurance. It’s costly to store grain and keep it safe from mould and rats. And as seems to have happened in Malawi, it’s also an invitation for corrupt officials to sell the stocks off and pocket the money when prices rise.It’s also often not really what’s needed. A global food crisis like the one we’re heading into is unusual. Most food shortages are localised, with produce available to be bought quite close by. (Relatedly, most shocks to production and bad harvests are also quite local, meaning that self-sufficiency creates its own risks.)It’s generally more efficient to have a crisis fund to purchase food quickly when needed rather than maintain expensive permanent stocks. It’s certainly more efficient than relying on painfully slow in-kind food aid to chug across the Atlantic from the US, which is the way America dumps its agricultural surpluses abroad in the guise of charity.And here we stumble into the fraught subject of “public stockholding”, a policy argument which has dragged on for years in the WTO. The issue is that India and some other developing countries want the right to buy up big reserves of food for safety buffers. Rich economies like the US (not averse to a bit of subsidising themselves), claim this is an excuse for shelling out trade-distorting government handouts by in effect setting a minimum price above market levels for domestic producers.As it happens, India is currently one of the countries with some wheat surpluses to export. (Look forward to a chorus of “told you so” from Delhi.) But if it starts to sell off its public holdings, it will count as trade-distorting subsidy and might breach WTO agreements.There’s a difficult balancing act here. Encouraging production and de facto subsidising exports might be what you need in a crisis. But dumping food abroad reduces the importing countries’ ability to produce for themselves. It’s hard to concentrate on the long term when the short term is so pressing, but it’s going to improve food security over time if countries do. If you’re a net importer of food, right now you’re likely to be grateful for any produce from anywhere, no matter how funded. But locking countries into a pattern of dependency is exactly how they became vulnerable in the first place.Charted watersThe Brexit debate is back — will it ever go away? — following a global trade report by Dutch think-tank the Netherlands Bureau for Economic Policy Analysis, known as the CPB.The analysis, which incorporated data from the UK’s Office for National Statistics, found that the UK was the only country in the study where goods exports remained below the 2010 average.Leaving the EU was pinned as a factor, but other issues are afoot. A couple of days before the CPB analysis was published, the UK’s Office for Budget Responsibility warned that UK trade “lagged behind the domestic economic recovery” and had “missed out on much of the recovery in global trade . . . suggesting that Brexit may have been a factor”.This means that the UK had become a less trade-intensive economy, which the OBR forecast would remove 4 per cent of the country’s productivity over the next 15 years. Whether or not the UK should have left the EU, what is undeniable is that it now needs more trade.Trade linksBig investors are betting that the Ukraine war will prompt a wave of companies onshoring production.Adam Posen of the Peterson Institute argues in Foreign Policy magazine that the Ukraine war will further corrode globalisation, already suffering from populist politicians and tension between China and the west.Russia’s software, media and online services links with the EU and US are degrading even where there are no formal sanctions, say researchers at the think-tank Bruegel.Germany announced plans to wean itself rapidly off Russian oil and gas and the US said it would step up LNG exports to Europe. More

TOKYO (Reuters) – Japan’s prime minister will order the government on Tuesday to put together a fresh relief package by the end of April to cushion the economic blow from rising fuel and food costs, fanned by the Ukraine crisis.The order will likely intensify debate within the government and the ruling coalition over the scale of spending and source of funding, with some lawmakers calling for a package of around 10 trillion yen ($80.61 billion).”We must respond flexibly to counter the impact on corporate activity and people’s livelihood” from the Ukraine war-driven spike in raw material prices, Prime Minister Fumio Kishida told parliament on Monday, announcing his plan to make the order.Kishida is under pressure, including from his party’s ruling coalition partner Komeito, to compile an extra budget, instead of relying solely on reserves set aside to cope with pandemic-related spending.”We haven’t told the prime minister the extra budget must pass through the current parliament session, though that is what we have in mind,” Komeito executive Keiichi Ishii told reporters after a meeting with Kishida.Kishida offered few clues on whether an extra budget would be considered, saying that the priority was to tap money from COVID-19 reserves.Komeito presented Kishida with a proposal on the package that called for expanding subsidies to industries hit by rising fuel costs, cutting the gasoline tax as well as steps to mitigate the impact of rising grain prices.Rising fuel and raw material prices have dealt an additional blow to Japan’s economy, which has lagged other countries in making a sustained recovery from the impact of the pandemic.While a weak yen has historically benefited the export-reliant economy, the Japanese currency’s plunge to six-year lows against the dollar is now seen as a risk to recovery by inflating rising import costs.Political pressure for big fiscal spending is expected to heighten ahead of an upper house election in the summer, which Kishida must win to solidify his grip of power within his ruling Liberal Democratic Party.($1 = 124.0500 yen) More

ISTANBUL (Reuters) – Since Russia’s invasion of Ukraine sparked a flurry of Western sanctions on Moscow, at least one oligarch and thousands of other Russians have arrived in Turkey, seen as a safe place to stay, invest and hold assets despite its NATO membership. Acting as a safe haven raises risks for Turkey’s government, banks and businesses that could face tough decisions and penalties if the United States and others ramp up pressure on Moscow with broader “secondary” sanctions. Here is what is at stake: WHY IS TURKEY ATTRACTIVE TO RUSSIANS?Turkey has said Russian President Vladimir Putin’s decision to invade Ukraine is unacceptable but opposes the sanctions on principle and is not enforcing them. Turkey’s economy, already battered by a currency crisis and soaring inflation, relies heavily on Russian oil, gas, trade and tourism. Some 14,000 Russians have reportedly arrived in Turkey since the war began on Feb. 24, many carrying wads of cash due to blocks on their U.S. credit cards and challenges in doing basic banking. Realtors say many are using cash and converted crypto currencies to buy property as a safe investment. Roman Abramovich, one of several Russian oligarchs blacklisted by the West, has also visited Turkey and two of his superyachts worth a combined $1.2 billion docked at Turkish resorts last week. Oligarchs could invest more, sources familiar with private talks have told Reuters. Turkish Foreign Minister Mevlut Cavusoglu said on Saturday Russian oligarchs and citizens were “of course” welcome and could do business in Turkey according to international law. CAN THE SAFE HAVEN LAST?Western governments have already seized some oligarchs’ assets, have frozen Russia’s reserves and ousted it from the SWIFT banking system, and they could press Ankara to tighten loop holes. Analysts say they could impose secondary sanctions on those doing business with the main target, Russia.”If the humanitarian tragedy persists and Putin has no intention of backing down, I think secondary sanctions are inevitable,” said Hakan Akbas, founding partner of Istanbul-based Strategic Advisory Services, which deals with sanctions.”The West will pay more attention to any potential loop-hole countries so they don’t become safe havens,” he said. “Ankara’s hands would be tied… and it would inevitably have to take a tougher stance against Russia.” This could send a chill through Turkish banks and companies dealing with Russian clients or doing business abroad. In 2020, the U.S. Treasury applied secondary sanctions on Turkey’s Defence Industry Directorate, its chief and others over Ankara’s purchase of Russian S-400 missiles.Yet given Turkey’s efforts to mediate between Moscow and Kyiv, it could avoid the sanctions crossfire. Another round of peace talks is due to take place in Istanbul this week.Dutch Prime Minister Mark Rutte has welcomed Ankara’s diplomatic role, while adding “we would very much like Turkey to implement all the sanctions”.HOW ARE BANKS AND COMPANIES PREPARING?Faced with a flood of new Russian customers, Turkish banks have resisted some deposit and transfer requests and ramped up compliance checks for fear of contravening sanctions. This has frustrated some Russians. But it reflects caution across the sector that seeks to avoid a repetition of the years-long U.S. prosecution of Turkish state lender Halkbank, which is accused of having helped Iran evade U.S. sanctions.The BDDK bank regulator said it has given no instruction to limit citizens of any country. But a senior banking source said the sanctions were nonetheless “perceived as a new risk” and firms had met several times to discuss it since the war began. Akbas said big Turkish companies and conglomerates have more than $10 billion in assets in Russia, and Moscow is now pressing them to continue operations and pay workers or risk bankruptcy. Many of them do far more business in the West and may have to make a “binary decision” whether to leave Russia as several big U.S. and European brands have done, he said.Any sanctions fallout could further bruise Turkey’s reputation among foreign investors after years of unorthodox monetary policy and outflows. That reputation took another hit last year when an international watchdog, the Financial Action Task Force, downgraded Turkey to a so-called grey list for failing to head off money laundering and terrorist financing. More

NEW YORK (Reuters) -Two measures of the U.S. Treasury yield curve that are widely watched for recession warnings have veered in opposite directions, raising questions as to what degree central bank bond buying and other technical factors may be distorting the signals on the economy’s path.The spread between the yield on 3-month Treasury bills and 10-year notes this month has been widening, which can be an indicator of an economic expansion. On Friday, that curve reached its steepest in more than five years at 196 basis points.The U.S. 2-year to 10-year curve, on the other hand, has flattened dramatically this year and is close to inverting, where the longer maturity would yield less than the shorter.Typically, yield curves slope upward as investors demand a higher return on longer-term debt as it carries greater risk because of the higher probability of inflation or default.A steepening curve typically signals expectations of stronger economic activity, higher inflation, and higher interest rates. A flattening curve suggests investors have lost confidence in the economy’s growth outlook.Inversions are considered a harbinger of eventual recession. But the signal right now is not clear.”There is a technical issue here,” said Ben Emons, managing director of global macro strategy at Medley Global Advisors. “The 3-month T-bill yield is still lower…because it doesn’t reflect rate hikes in the future. But it will rise, as the Fed hikes rates.” U.S. two-year yields, on the other hand, are a really good indicator of where Federal Reserve policy is headed over the next two years, Emons added, and it’s showing a much steeper path of rate hikes.The 2s/10s spread was last at 20.10 basis points, having on Monday compressed to 11.4 basis points, its tightest since March 9, 2020, before the onset of the coronavirus pandemic.The Fed raised short-term interest rates by 0.25 percentage point last week, the first hike since late 2018. U.S. rate futures on Friday priced in a roughly 75% chance of a half-percentage point tightening at its monetary policy meeting in May. For 2022, the futures market expects about 200 basis points of cumulative hikes by the Fed.”If policy unfolds as the market expects, the 3-month/10-year curve will begin to flatten as more rate hikes become priced into the 3-month tenor,” said Dan Belton, fixed income strategist, at BMO Capital.”The divergence in 3-month and 2-yr Treasury rates suggests that the market is pricing in an increasingly hawkish Fed over the next two years.”The last time the 3-month/10-year curve inverted was in February 2020. A month later, the Fed cut the benchmark overnight lending rate to near zero as the coronavirus pandemic wrought economic havoc around the world.The 2s-10s inversions, on the other hand, preceded the last eight recessions, including 10 of the last 13, according to BoFA Securities in a research note. The last time this curve inverted was in 2019. The following year, the United States entered a recession, though one caused by the global pandemic. U.S. 2s/10s CURVE HAS QUESTIONS TOOBut the 2-year/10-year yield curve also has its technical issues, and not everyone is convinced it’s telling the true story.”Something like 2s/10s, or 5s/30s, will definitely tell you that we’re a lot flatter than we’ve ever been at the start of a hiking cycle,” said Gennadiy Goldberg, senior rates strategist at TD Securities.”Part of that is just the sheer amount of Treasuries that the Fed bought during their COVID QE (quantitative easing) program.” Analysts said the Fed’s QE the last two years has resulted in an undervalued U.S. 10-year yield and could explain away the disparity in the two yield curves.Stan Shipley, fixed income strategist, at Evercore ISI in New York cited research which suggests the 10-year yield would be around 3.60% without that stimulus. When the Fed starts shrinking its balance sheet via quantitative tightening, Shipley said the 10-year yield will rise to fair value.The U.S. 10-year yield was last at 2.475% after hitting a peak of 2.5% on Friday, the highest since May 2019.”Without QE/balance sheet expansion, the 10-year and 2-year spread would be around 140 basis points, which is hardly threatening and consistent with the 10-year and 3-month spread,” Shipley said.The Evercore analyst thinks the 10-year yield should approach fair value in the first half of 2024, or about 120 basis points higher than the current level.The U.S. 2-year yield, on the other hand, is fairly priced and Shipley expects the 2s-10s curve to widen.What does it mean for the U.S. economy?”Some of the 2-10 shape is down to the fact this is a far more aggressively priced Fed cycle than usual, the notion of how quickly the Fed will move is very front-loaded,” said Timothy Graf, head of EMEA macro strategy, at State Street (NYSE:STT).”I suspect we will get a growth slowdown but will it lead to recession? It may be next year’s story. Households will want to see the fuel prices coming down but generally household balance sheets are in pretty good shape.” More

Picking up on the point that I ended on in our last Swamp Notes, I want to return to BlackRock chief executive Larry Fink’s proclamation last week that “the Russian invasion of Ukraine has put an end to the globalisation we have experienced over the last three decades”. As he put it, the war marks “a turning point in the world order of geopolitics, macroeconomic trends, and capital markets”.As Swamp readers will know, I have been arguing this for about four years now. But while I certainly agree with Fink that this round of globalisation (one of many that have been coming and going for centuries, if not longer, depending on how you define the term) is indeed over, I wouldn’t say that Ukraine was the turning point.I’d put the true pivot point as the day after Lehman Brothers fell way back in 2008. That’s when the Chinese began rolling out their fiscal stimulus programme in response to the great financial crisis (this according to a very high-level financial source who would know). And that’s when the calculus for Beijing about how fast and how far to go in terms of embracing Anglo-American style free-market capitalism really changed. The subprime crisis and the global recession that followed really underscored the limitations of hyper-financialised free markets, when left for too long to their own devices.Of course, at the time, the conventional wisdom was that globalisation had actually triumphed, because the world avoided the Great Depression-style protectionism and trade wars that many people thought would follow such a crisis. But it was only a matter of time before the disconnection between the global economy and national politics became manifest with the rise of populism on both sides of the Atlantic, as well as resurgent nationalism in many emerging markets.What happens now? I’d argue that we won’t see a 1930s-style meltdown but rather a new kind of regionalisation that will replace what came before. I’ve been arguing for some time that regional trading blocs are the only way forward given the mercantilist reality of China’s current system, which is simply incompatible with the rules of the World Trade Organization. I think the big question is whether we move towards a bipolar system, with the US and Europe (and whichever OECD nations decide to come along with them) creating some new structures, particularly for digital trade and platform regulation — or whether we will be in a tripolar world of US, European and Asian blocs.The past several weeks have made me think that the former is much more likely. The US has cut a deal to supply more liquefied natural gas to Europe in order to speed up the decoupling from Russian energy. America and Europe have reached a deal on transatlantic privacy standards, which doesn’t bring the new regions completely in alignment over how to deal with Big Tech, but is an important step. The idea of values, rather than simply market access, being at the centre of foreign policy seems relevant again. Certainly, the US, Europe and Asia will be producing more at home, or “local for local” as the business community puts it. But that’s different than a 1930s-style trade war.I don’t want to be at all sanguine about what’s happening. Supply chain shifts won’t be easy (though as I wrote in my column last week, I’m amazed at how quickly companies are adapting. The war in Ukraine may yet go in some even more horrible direction and cause further chaos. But, assuming that doesn’t happen, perhaps this crisis of the old order will actually help us redefine liberal values and reconnect markets and nation states in ways that make more sense — for labour, politics, and the planet.Ed, I suspect you’ll tell me I’m being way too optimistic? Either way, I’m curious where you’d put the marker for the end of this round of globalisation, and how you think this period of adaptation to whatever comes next will play out.Recommended readingI was interested to read in The New York Times about the launch of a “radical American journal” called Compact, dedicated to breaking out of political silos, and edited by a Marxist and two religious conservatives. This has gotta be worth a read . . . In the middle of so much hard and bad news, I find myself drawn to totally unexpected magazine features like this Rebecca Mead tale about who owns the property rights for leopard spots.On the same note — I grew up on Middle Eastern cuisine and loved the evocative photos and escapism of this lovely FT Weekend piece on the hunt for the world’s greatest saffron.Edward Luce respondsRana, as you say, globalisation has been in train for centuries (millennia, in fact) with sharp ebbs and flows. But I agree that the recent era of hyperglobalisation that began in the 1970s and reached its apogee in the early 2000s is now being replaced by a more fragmented world.We could debate about the degree to which the 2008 financial crisis and the populist backlash to modern capitalism has been driving this. I would suggest that it has principally been a western — and particularly American — reaction to the so-called great convergence. This is the process by which what we used to call the Third World is catching up with western incomes, which has been going on for half a century and has at least another half a century to run.In my view, the great convergence is a very positive thing for humanity. Moreover, there are far better ways of addressing the economic piece of the west’s populist backlash by shifting to more redistributive fiscal policy and effective public investments. But trade has been made the scapegoat and now the US is pulling up the drawbridge. As you know, I think this is a huge error — and the classic move of an ageing hegemon — for which all of us will pay a price.The question that most interests me is what impact Ukraine will have on this. My hunch is that it could be dramatic. The speed and ruthlessness with which the west has decoupled from Russia has been matched by the half-heartedness of most of the rest of the world. As the Peterson Institute’s excellent Chad Bown points out, very few others are following the west’s lead. Opters-out include most of the Middle East, Africa and Latin America, in addition to China and India. Even if the war came to a miraculous close in the next few weeks, the Ukraine demonstration effect will change all kinds of financial and economic behaviours around the world. Nobody wants to be that exposed to the US sanctions regime.Are you being too optimistic? The answer to that depends on whether you think more closed economies are a good thing or not. If so, then there are grounds for optimism. Alas, I don’t think they’re a good thing. The last two great periods of western disengagement from the world economy were 1914 to 1939, and before that, the long Christian Medieval night . ..Your feedbackAnd now a word from our Swampians . ..In response to ‘It may be impossible to settle with Putin’:“The difficulty is to identify anything that looks like ‘victory’ to Putin, and is actually sustainable. One could say, for instance, that bringing back pro-Russian regimes in Ukraine, the Baltics, maybe even central Europe, would look like victory, but these, even if the rest if the west ever agreed to it (a non-starter, to be clear), would not likely be stable as local populations would not accept it. Ukraine’s example has shown that it is possible to resist Russia’s army.So Putin has proven to the world (and most importantly, to the countries in question) that he cannot obtain what he craves (submission of Ukraine and other neighbours to Russia), and that’s kind of an irreversible fact on the ground. The worry then is that he will decide that everybody must lose if he loses himself.Which is why, personally, I don’t see how this will end without direct confrontation between Russia and the west, and I believe we should unfortunately get ready for it — starting by interrupting all imports from Russia, including oil, gas and other metals.” — FT commenter Jerome a Paris More