Aurelia Butler

LONDON (Reuters) – Countries are likely to default more frequently on their foreign currency debt in the coming decade than they did in the past due to higher debt and an increase in borrowing costs, agency S&P Global Ratings warned in a report on Monday. Sovereigns’ credit ratings overall have also weakened globally in the past decade.The report’s findings are a stark warning as the world exits a punishing round of sovereign debt defaults – even as wealthy creditor nations said earlier this year that the risk of debt crisis that has weighed on the world was beginning to recede.”These factors quickly create liquidity challenges as access to financing dries up and capital flight accelerates,” the report said. “In many cases, this constitutes the tipping point where liquidity and solvency constraints become problematic for a government.”The COVID-19 pandemic in 2020 strained state finances, and there were seven instances of countries defaulting on their foreign currency debt – Belize, Zambia, Ecuador, Argentina, Lebanon and Suriname twice. A spike in food and fuel prices after Russia’s February 2022 invasion of Ukraine piled on more pressure, and eight more countries defaulted in 2022 and 2023, including both Ukraine and Russia. The combined number of defaults since 2020 amounts to more than a third of the 45 sovereign foreign currency defaults since 2000.S&P Global Ratings analysed defaults over the past two decades and found that developing countries are now relying more heavily on government borrowing to ensure foreign capital inflows. But when that reliance was paired with unpredictable policies, a lack of central bank independence and shallow local capital markets, trouble repaying often followed. Higher government debt and fiscal imbalances prompted capital flight, which in turn intensified balance-of-payment pressures, depleted foreign exchange reserves and eventually cut off their ability to borrow – essentially a doom spiral that led to default.It also warned that debt restructurings are taking significantly longer now than in the 1980s – with big consequences.”We also found that the long-term macroeconomic consequences are more severe for sovereigns that remain in default for multiple years, increasing the probability of further defaults down the line,” it said. Interest payments in soon-to-default countries tended to approach or even exceed 20% of government revenue in the year before default, and the countries also typically entered recession, while inflation rose to double digits, making life tougher for people there.”Sovereign defaults have significant implications for economic growth, inflation, exchange rates, and the solvency of a sovereign’s financial sector,” the report said. More

This article is an on-site version of our Trade Secrets newsletter. Premium subscribers can sign up here to get the newsletter delivered every Monday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersWelcome to Trade Secrets. For the past few years, I’ve caveated my habitual sunny optimism about globalisation by accepting all bets are off if Donald Trump gets elected and starts a full-on trade war. Currently it feels a bit surreal. We’re three weeks away from a coin-toss election that will deliver either business as usual, a Harris administration balancing trade-distorting industrial policy with international alliances, or potentially cataclysmic destruction. Today’s pieces are on what might stand in Trump’s way (not much) and how trade is doing right now (not bad). Charted Waters is on China’s car exports. Question for you: what do you think Trump will actually do? Will his bite be as bad as his bark this time? Answers to [email protected] will stop Trump?Traditionally, trade reporters spend a lot of time explaining to non-trade civilians (including newsdesks) the importance of Capitol Hill. See, look, it’s right here in Article 1 of the US constitution: “The Congress shall have power . . . to regulate Commerce with foreign Nations”. No, the president very probably won’t be able to implement deals without Trade Promotion Authority, that thing we used to call fast-track. Yes, Congress has always knifed agreements it doesn’t like without regrets. No, the main blockage to a US bilateral with the UK wasn’t President Joe Biden’s conjectured Irish-American anglophobia: even if he’d wanted one, it would have choked in the toxic atmosphere for trade deals on Capitol Hill. And so on.But although Congress is still willing to block formal agreements it doesn’t like, such as the trade pillar of the Indo-Pacific Economic Framework, it and the courts have proved unwilling to provide checks and balances to Trump’s (and Biden’s) extraordinary use of executive powers.Now, as ever with Trump, we have no idea what he’s actually going to do. Scott Bessent, one of his top advisers, told the Financial Times this week that Trump’s threats of across-the-board tariffs were basically a negotiating tactic. However, Trump did enough in his first term to suggest that prediction might be rather too optimistic.The steel and aluminium tariffs Trump imposed on a range of countries (including foreign policy allies) used the Section 232 national security legislation, which is under the discretion of the president. He used Section 301 provisions against unfair trade to whack a big range of tariffs on China, and Biden added some more. The president has also used executive orders under various bits of legislation (the International Emergency Economic Powers Act, the National Emergencies Act, Section 301 again) to try to constrain China by restricting its access to US technology.As a new paper from the Cato Institute points out, there are even more emergency powers a president could still use and not much to stop them. Lawmakers occasionally moaned about the use of executive authority under Trump, but never got anywhere close to constraining it. And even if they passed new legislation to do so, a president could just veto it unless they got a two-thirds majority. (In practice the only way to do this would be to pass the legislation between election and inauguration and have Biden sign it as a lame-duck president.)As for the legal branch, federal courts have consistently sided with the administration, such as in a series of cases brought against Trump’s steel and aluminium tariffs. And both Trump and Biden have ignored WTO rulings against the US as you or I might ignore the buzzing of a fly banging its head against the other side of a window.Veteran trade lawyer and former WTO official Alan Wolff from the Peterson Institute puts the optimistic side. He argues that the Supreme Court would be bound by its own previous arguments about deferring to the authority of the executive branch only in the case of genuine ambiguity. But I have to say I’m in Camp Gloom with Cato here. On any major question, the Supreme Court has generally done whatever Trump wanted, including granting him criminal immunity for his actions while president. If the election ends up being litigated, as it will, the Supreme Court is quite likely to be the institution that puts him back in the White House.Domestic and international trade policy has always relied on a degree of self-restraint — an unspoken agreement to use national security loopholes only in compelling circumstances and comply with WTO rulings even if faced only with weak sanctions. Trump seems incapable of restraining himself in any of his actions, trade or not, and so does Congress, the courts and, most of all, the Republican party itself.Trump’s eagerness to trash every norm of governance or law that gets in his way is evident, along with threats against anyone or anything that tries to stop him. Frankly, if Trump is re-elected, imposing import tariffs without due congressional approval is not going to be chief among our concerns.Services trade is sparklingThis may of course simply be the calm before the catastrophe, but the World Trade Organization’s latest projections for world trade came out last week and, as usual, everything is basically fine. Its goods trade forecast is now for 2.7 per cent this year, slightly revised up from 2.6 per cent previously, and for next year revised down from 3.3 per cent to 3.0 per cent. The risks are greater on the downside, but aren’t they always?© WTOWithin those numbers the outlook for the EU doesn’t look great, and is the main cause of the overall downward revision for next year. Germany looks particularly bad: chemical and machinery imports are down, car exports are down. But as usual, this is basically cyclical and related to weak GDP. There isn’t much sign that the overall trading system is malfunctioning.Meanwhile, of course, while we’re all focusing on goods trade, it turns out that other bits of globalisation are fine. Services trade has held up well over the past few years and is growing well in 2024.© WTOIt’s not as if there’s nothing to worry about, but at least we can be pretty confident there hasn’t been a big lasting shock from either the Covid-19 pandemic or the Ukraine war, and for that we should be grateful.Charted watersWhatever’s happening to China’s economy and demand for cars at home, its auto exports are still roaring away.Trade linksLast week China said it would impose anti-dumping duties on brandy in what was a fairly clear retaliation for the EU anti-subsidy tariffs on electric vehicles, French President Emmanuel Macron’s attempts to negotiate an, ahem, sauve qui peut reprieve for cognac producers evidently having failed.Sarang Shidore from the Quincy Institute says in Foreign Policy magazine that China should not be counted a member of the so-called “global south”. Reasonable enough, but unfortunately for this argument it counts itself as such and no one will stop it, imho underlining the fundamental destructiveness of the term.My FT colleague Martin Sandbu asks whether Germany should seek a new economic model or continue with the one that has brought it past success. A paper by the Center for Global Development looks at how falls in oil prices will affect hydrocarbon-exporting African countries and whether the IMF and World Bank can help. India continues not to like the EU’s carbon border adjustment mechanism, though apart from sabre-rattling at the WTO they haven’t said what they’re going to do about it.Trade Secrets is edited by Jonathan MoulesRecommended newsletters for youChris Giles on Central Banks — Vital news and views on what central banks are thinking, inflation, interest rates and money. Sign up hereEurope Express — Your essential guide to what matters in Europe today. Sign up here More

ORLANDO, Florida (Reuters) -Foreign investors’ claims on Uncle Sam have been greater than U.S. investors’ claims overseas for decades, an imbalance that many analysts have long warned may spark a crisis of confidence in the dollar. That crisis has yet to arrive and there are good reasons to believe it never will, but the U.S. is now entering uncharted territory with regard to its net debtor status. Its negative net international investment position, or “NIIP”, is growing rapidly and is now the largest it has ever been, both nominally and as a share of GDP. This is raising new questions about how long this American exceptionalism can last.THE ONLY GAME IN TOWNA country’s NIIP is the difference in the value of its foreign-held assets including stocks, bonds, FDI and other investments, and its equivalent domestic total held by foreigners. The latter are claims by overseas entities, so are classed as liabilities.     According to the Bureau of Economic Analysis, the United States’ NIIP at the end of June was a negative $22.52 trillion, or 77.6% of annual GDP, an increase of $4.27 trillion and 11 percentage points in the last year.But it’s not just the volume of these liabilities that has changed dramatically in recent years; it’s also the composition. The U.S.’s “net debtor” status is increasingly driven by equity-based liabilities. Equity-related foreign direct investment into the U.S. stood at $14.77 trillion in June and claims on U.S. equity portfolio assets totaled $16.67 trillion, both up almost $2 trillion since December.The contribution of equity flows and valuation changes to NIIP since the pandemic has been roughly twice that of bond-related dynamics. “The role of the U.S. as banker to the world is changing,” says Chris Marsh, senior adviser to Exante Data and a former economist at the IMF. “The U.S. is now the global innovator and foreign appetite for claims on the U.S. is reshaping the U.S. external balance sheet.”    In fact, the U.S. is now a net debtor on all major measures of its external position: equity, debt, foreign direct and ‘other’ investments. Sounds worrying? Not necessarily. This lopsidedness mostly signals confidence in the relative strength and attractiveness of the U.S. economy and its assets, particularly those traded on Wall Street, compared to the global counterparts. Consequently, U.S. stocks now account for a record 72% of world stocks, according to MSCI market cap metrics. That’s up from around 63% before the pandemic and up 20 percentage points in little more than a decade.”U.S. companies are enormously profitable, the economy is strong. Why do I go anywhere else,” ponders Jan Loeys, managing director of global research at JP Morgan. “The price you’re paying for this U.S. strength ain’t cheap. But the trigger to go elsewhere isn’t there yet.” Of course, this deluge has only helped accelerate the positive trends in U.S. growth, corporate profits and asset prices. This has obviously been a boon to U.S. investors. U.S. households’ equity allocation as a share of total financial asset holdings has never been higher at almost 45%, according to JP Morgan.In this light, it looks like we’re seeing a virtuous circle. And if that’s why America’s external asset position is “deteriorating”, that may not be such a bad thing. WILL THE MUSIC STOP?    But can it last? To be sure, there’s no indication that foreign investors are about to dump U.S. stocks any time soon. Still, valuations are starting to get a bit rich by historical standards, especially for some of the mega-cap tech companies that have powered the two-year bull market. And it’s unclear how much juice is left in America’s economic boom or whether AI can deliver the returns that trillions of invested dollars are banking on. Also, if crowded trades have pushed up U.S. markets in recent years, it’s reasonable to assume that a genuine correction – if it lasts – could be painful.Then there’s America’s debt, which actually has to be paid back or rolled over. Foreigners’ net claim on U.S. debt is currently approaching $11 trillion. Granted, most of that is in Treasuries, the safest, most liquid and most sought-after asset in the world. But that doesn’t mean there’s nothing to worry about. “The increasing value of liabilities reflects the strength of the U.S. economy. But borrowing generates liabilities that will have to be stabilized eventually,” says Gian Maria Milesi Ferretti, senior fellow at the Hutchins Center on Fiscal and Monetary Policy, The Brookings Institution. So while this party may last for some time, if financial history has taught investors anything, it’s that no party lasts forever – especially one driven by large and widening imbalances.    (The opinions expressed here are those of the author, a columnist for Reuters.)(By Jamie McGeever; Editing by Lincoln Feast.) More

PANAMA CITY (Reuters) – Panama will stick to its economic forecasts for next year even though the government withdrew its budget proposal after pushback from Congress, Economy and Finance Minister Felipe Chapman told Reuters.”Our economic projections are not going to change,” Chapman said in an interview on Friday. “We’ll keep working on a budget based on an estimate of… real gross domestic product growth of 3%.” The previous proposal was to slash spending by some 15%. The minister said he did not yet know if the new budget would consider a similar cut.Chapman went back to the drawing board last week after Congress’ budget committee expressed concerns about the bill, particularly a forecast for a higher deficit than what is allowed under an existing framework.The ministry will submit a proposal to reform the framework – the fiscal and social responsibility law – on Monday, Chapman said. “That law does not take into account exogenous factors that could alter the ability to comply with it,” he said, citing examples such as the pandemic or a recent drought, which has impacted operations at the Panama Canal, one of the world’s busiest trade corridors.The reform will “take those elements of flexibility into account and raise the ceiling (on the deficit) with the idea that it would come down progressively,” Chapman said. The government will present a five-year fiscal plan by the end of the year targeting a “soft landing,” he said.BUY-IN FROM INVESTORSInvestors are starting to show confidence in Panama’s commitment to reducing its debt, Chapman said. The yield on one-year treasury bills auctioned this month yielded 6.07% on average, down 33 basis points from the August and September auctions, the finance ministry has said.Chapman said that during a recent trip to New York, he met with ratings agencies, bondholders and banks, who, unsolicited, offered credit lines “in the billions of dollars.” He declined to offer more detail.Fitch cut Panama’s sovereign rating to junk in March, but the minister said he felt “optimistic” as conversations were progressing with agencies. Chapman said external threats were his main concern for Panama’s economy, while he was “more worried about it not raining.”The minister said efforts were ongoing to account for future droughts hitting the Panama Canal, with a plan to dam the nearby Rio Indio as the surest long-term option.In the short term, the canal could pump water from the Bayano Lake, Chapman said, though he acknowledged it was “not ideal.”The government is close to signing a deal with independent experts who will present their recommendations on what to do with copper concentrate mined from the now-shuttered First Quantum (NASDAQ:QMCO) copper mine, by the end of this year or at the beginning of next year, Chapman said.Panama’s Supreme Court declared First Quantum’s contract with the country unconstitutional last year amid protests over its environmental impact and complaints about the amount of royalties coming in from the mine. The ruling forced the key mine to close down. Chapman said the government was open to letting the mine export what it had already mined but that no date had been set.Any agreement would have to take into account public sentiment, Chapman conceded, as a recent newspaper poll showed two in three Panamanians against restarting operations at the mine to later close it.Any future deal with First Quantum would likely require larger royalty fees to win over citizens, he said. More

BUDAPEST (Reuters) -Hungary’s economy ministry proposed on Monday that savings in private pension accounts can be used tax-free for housing purposes as a one-off measure next year as part of wider efforts to boost the economy ahead of a 2026 parliamentary election.In power since 2010, Prime Minister Viktor Orban has struggled to revive Hungary’s economy after last year’s downturn following a surge in inflation to more than 25% in the first quarter of 2023, the highest level in the European Union.Hungary’s budget deficit has also averaged nearly 7% of gross domestic product since the COVID-19 pandemic, above EU average levels, limiting the scope for the kind of largesse that helped Orban get re-elected in 2022.The economy ministry said the proposal would allow the full amount of savings to be used next year for renovations, equity for new mortgages or repayments for existing mortgages.”The government will eliminate bureaucratic hurdles to allow people to decide if they want to voluntarily use their savings for housing purposes,” the ministry said in a statement.The ministry said more than 1 million private pension fund members had savings worth 2 million forints ($5,457) on average, which could now be used tax-free for housing purposes.Previously Hungarian officials have signalled that the moves could channel 300 billion forints ($817.53 million) to the housing market, or 15% of total private pension savings at the end of the first half, based on central bank data.However, real estate website ingatlan.com has estimated that, combined with interest payments from inflation-linked government bonds to retail investors, the combined market impact could reach 1 trillion forints ($2.73 billion) next year.That could boost housing prices by some 10% to 15% in 2025, mostly in large cities and Budapest, which has seen one of the sharpest rises in housing prices in Europe in the past decade, fuelled in part by Orban’s subsidies for families.Soon after he was elected in 2010, Orban’s government eliminated mandatory private pension funds and nationalised most of the $12 billion contained in them to plug budget holes and boost the economy.($1 = 365.9800 forints)($1 = 0.7658 pounds) More