Economy

U.S. President Joe Biden met with Florida Governor Ron DeSantis on Wednesday to assess the devastation from Hurricane Ian, and stressed the need for a united federal and state effort for the lengthy recovery ahead.Search-and-rescue teams doubled back to examine tens of thousands of Gulf Coast homes and businesses after an initial sweep through areas ravaged by Ian, as the death toll topped 100 from one of the fiercest U.S. storms on record.Utilities have restored service to most customers after Ian knocked out power to more than 4 million in Florida and over 1.1 million in North Carolina and South Carolina.Florida Power & Light Co (FPL) said it expects restoration to be essentially complete by Friday night. But FPL noted that thousands of homes and businesses in Southwest Florida, where the storm hit with 150 mile (241 kilometer) per hour winds on Sept. 28, were so badly damaged that they may not be able to safely receive electrical service.FPL is a unit of Florida energy company NextEra Energy Inc (NYSE:NEE).Major outages by utility:Power Company State/Pro Out Now Customers Served vince Lee County Electric Co-op FL 101,800 238,000 NextEra – FPL FL 100,400 5,280,000 Total Out 202,200 Source: PowerOutage.us and power companies More

The union representing frontline staff at BT has launched a fresh round of strike action just as rival Virgin Media O2 announced a 10 per cent pay rise for its lowest-paid staff.About 40,000 BT staff represented by the Communication Workers Union are set to strike on four days this month beginning on Thursday and for the first time since the industrial action started, 999 emergency call handlers are joining the walkouts. “We’re never going to walk away from this,” said Dave Ward, general secretary of the Communication Workers Union, adding that the anger is not “going to dissipate”.The union is disputing a £1,500 pay rise offered to 58,000 frontline workers, including engineers, call centre staff and retail workers, across BT Group in April, which equated to an average 4.8 per cent pay rise at a time when inflation is around 10 per cent. The CWU has highlighted the discrepancy between frontline workers’ pay and that of senior management, given that the chief executive received a 32 per cent pay increase in the last financial year, to £3.5mn, because of previous share awards. On the same day as the CWU’s new wave of industrial action, Virgin Media O2 announced that it was planning to introduce a new £1,400 payment for employees earning £35,000 and under. Including a 3 per cent pay rise earlier in the year, and bonus payments, the new offer equates to a more than 10 per cent pay rise for the company’s lowest paid staff. Last month, Sky also announced that it would be offering 70 per cent of its staff a fresh £1,000 “winter payment”. Andy Kerr, deputy general secretary of the CWU, responsible for telecoms, said that the Virgin Media O2 offer is “the kind of thing we’d be willing to look at” for BT staff.The BT action comes amid a wave of public and private strikes across the UK, as staff struggle with the rising cost of living. About 115,000 staff at Royal Mail will be withholding their labour for several days across October and November, and British railway workers have continued their strike action throughout the week. BT said in a statement last month that it was “profoundly disappointed that the CWU is prepared to take this reckless course of action by including 999 services in strikes”.“We made the best pay award we could in April and we have held discussions with the CWU to find a way forward from here,” it said.Ward said that the union had received some criticism for its decision to include 999 call centre staff in the latest round of industrial action, and said that he was conscious of the fact that striking members will be suffering from loss of pay. “Taking strike action is very difficult during a cost of living crisis,” he said, adding that it was BT management, not the unions, that are being “the reckless ones”. More

WASHINGTON (Reuters) – The International Monetary Fund should issue $650 billion in new emergency reserves to help its member countries grapple with overlapping health, food, energy and inflation crises, 140 civil society groups said in a letter to the IMF’s board on Thursday.IMF officials in July said a fresh issuance of Special Drawing Rights (SDR) reserves was among the options for aiding countries struggling with spillovers from Russia’s war in Ukraine, but there were no active discussions on the matter.The World Bank warned last month of the growing risk of a global recession as a result of the war, and on Wednesday said nearly 600 million people would still be living in extreme poverty – with income of just $2.15 a day – by 2030.The groups’ plea for a second major SDR allocation in just over a year comes as global finance officials prepare to meet in Washington for the annual meetings of the IMF and World Bank.Similar calls have come from lawmakers and business groups in recent months, although critics say a new issuance would also deliver fresh assets to Russia, which remains an IMF member. Backers say in practice Russia would be hard pressed to find any country to swap its SDRs into hard currencies.The IMF in August 2021 created and issued $650 billion in SDR assets to member countries to aid their recovery from the COVID-19 pandemic, but poor countries are clamoring for more funds due to high inflation and a mounting debt crisis.The letter, signed by Action Corps, Arab Watch Coalition, Center for Economic and Policy Research and other groups from around the world said over 100 countries had used last year’s SDR allocation in the first year.Those countries needed more funds since they were struggling with the ongoing COVID-19 pandemic, soaring food and energy costs due to the war in Ukraine, climate disasters and high debt levels, the letter said.They said 42 countries had exchanged their SDRs for hard currencies valued at $16 billion, and 69 countries used SDRS worth $80 billion in their budgets or for other fiscal purposes. More

WASHINGTON (Reuters) – The Internal Revenue Service’s Criminal Investigation unit said on Thursday it has located 79 tax evasion fugitives in Mexico, Belize, El Salvador, Guatemala and Honduras in the first year of a new extradition initiative.The effort was made possible by a change in Mexico’s tax laws in 2020 that made tax evasion a felony offense as part of a crackdown to improve weak tax collection. The reclassification paved the way for tax fugitives to be extradited to the United States.Before this, tax crimes were non-extraditable offenses in Mexico, making it a haven for U.S. tax evaders. The IRS said that since June 2021, its Criminal Investigation (IRS-CI) branch in Mexico City has extradited eight of the 79 individuals identified for possible prosecution in the United States.It expects the number of extraditions to grow as the process can take up to a year to complete.”We are going after anyone who thinks they can cheat the government and simply flee to the south,” said IRS-CI Mexico City Attaché Jaushua Brewer. “Now with so much help from our host country partners, it is even harder for criminals to escape justice.”IRS-CI identified one of the extradited fugitives as Jose Echeverria, formerly of Chelan Falls, Washington, who the agency said underreported U.S. income by more than $500,000 between 2009 and 2012, funneling hundreds of thousands of dollars to purchase land and vacation homes in Mexico.IRS-CI said Thomas Johnson, formerly of Tampa, Florida, was arrested in Belize and faces U.S. charges of filing false tax returns on behalf of clients to claim large, fraudulent refunds.The program’s first year results were announced as the IRS is set to begin receiving some $80 billion in new funding to beef up compliance enforcement, taxpayer services and information technology. The agency plans to hire some 87,000 staff over the next decade, fueling claims from Republicans that they will constitute an “army” of new agents, many armed.The Treasury has said that most of the new hires will replace a wave of retirements over the decade and improve customer service, including answering more taxpayer phone calls and programming new computers. The agency does plan to add new revenue agents, but the Treasury has not specified how many and has called for the IRS comprehensive spending plan in less than six months.Currently, only about 2,100 IRS special agents in the Criminal Investigations unit are authorized to carry firearms. More

BRASILIA (Reuters) – Both of Brazil’s presidential candidates, President Jair Bolsonaro and former President Luiz Inacio Lula da Silva, have proposed changes to the constitutional spending limit that defined fiscal policy in Latin America’s biggest economy for the past six years.The following are some of their policy proposal differences.WHAT IS CURRENT POLICY?Brazil amended its constitution in 2016 to establish a fiscal ‘ceiling’ that only allows spending by the federal government to grow as much as inflation in the prior year.Financial markets have treated the constitutional spending cap as Brazil’s principal fiscal anchor in recent years, but politicians across the political spectrum criticize it as a budgetary straightjacket during economic crises.Congress has made exemptions and modifications to the spending cap a half dozen times under President Jair Bolsonaro, eroding the rule’s credibility, according to many economists.WHAT DOES BOLSONARO PROPOSE?The president has supported repeated exceptions to the current spending cap, and said his Economy Minister Paulo Guedes is working on alternatives to be implemented in a second term.”There are some changes you can make to the spending cap, as the team of Paulo Guedes has proposed. But we’ll leave that to discuss after the elections,” he said in a June interview.Guedes said last month that the spending cap should be modified to allow, for example, revenue from the privatization of state firms to fund expanded welfare programs.There are two main proposals under development in the Economy Ministry, according to officials who requested anonymity to discuss them. Both proposals would target public debt over gross domestic product (GDP) as a medium-term fiscal anchor to allow more short-term fiscal flexibility. Under a proposal developed by Treasury staff, public spending could grow a set amount above inflation as long as gross public debt remains below a certain share of GDP. The ministry’s Special Advisory of Economic Studies has put forth a more flexible alternative in which government spending could grow above inflation, depending on both the rate of economic growth and the gross-debt-to-GDP ratio. The rule would also open room for more spending in the event of a recession, regardless of public debt levels. WHAT DOES LULA PROPOSE?Lula, Bolsonaro’s leftist challenger, has been more explicit in his criticism of the current spending cap. But he has been coy when pressed for details of what new fiscal rules he would propose.”I’m against the spending cap,” he told a gathering of economists last month. “If you’re responsible, you don’t need a spending cap.”Economists from Lula’s Workers Party have argued that public spending should jumpstart economic growth, which in turn boosts tax revenue. Some suggest medium- and long-term commitments to stabilize public debt instead of an annual budget cap.In 2020, the Workers Party proposed an alternative fiscal regime that would treat public investments differently from other forms of government spending.Lula responds to questions about fiscal responsibility by pointing to his record as president. Brazil posted budget surpluses every year of his 2003-2010 presidency, due in part to strong prices for its commodity exports.However, public sector outlays eventually outpaced revenue under his Workers Party successor, former President Dilma Rousseff. A lending spree by state banks also damaged fiscal credibility, eventually contributing to a deep recession. Rousseff was impeached for breaking fiscal rules. Her replacement, former President Michel Temer, passed the country’s constitutional spending cap to re-anchor fiscal policy. More

JERUSALEM (Reuters) -Israel’s aggressive interest rate hiking cycle aimed at lowering inflation was at a “well advanced” stage, Bank of Israel Governor Amir Yaron said, with price pressures starting to ease and inflation hopefully moving back into its target range next year.Israel will likely avoid a recession, Yaron said, and growth will be stronger than the United States and Europe. Analysts increasingly think the euro zone economy will contract this winter.The central bank has raised its benchmark interest rate five times since April to a decade high of 2.75% from 0.1% — the last two moves in late August and this past Monday being 75 basis points.After hitting a 14-year high of 5.2% in July, Israel’s inflation rate eased to 4.6% in August but remained well above an official annual target of 1% to 3% and almost half the levels of the United States and in Europe.The rate “is in the range that is basically restrictive and it probably will need to go above three percent, or what I call three plus, in order to get inflation back towards the center of the target,” Yaron said in an interview with Reuters.Bank of Israel economists forecast 4.6% inflation in 2022 and moving to 2.5% in 2023. Yaron said most of the reduction will be in the second half of the second quarter and into the summer. “It takes a while for these things to take effect but we believe this is the right magnitude (of rates) for the Israeli economy right now,” he said.The central bank’s economists project the key rate reaching 3.5% in a year’s time.Yaron said that while “front-loading” interest rate rises is “painful” to mortgage holders and others it will avoid greater pain down the road, adding: “It will actually help avoid the need for higher interest rates.”DEMAND INFLATIONWhere the interest rate stops rising depends on a host of factors, including Israeli and global inflation, economic growth and real interest rates, he said. Yaron said he seeks positive interest rates across the bond yield curve but at the moment, shorter-term rates adjusted for inflation remain negative. “That’s why we believe you have to see three plus … How events unfold will determine to fast or how slow or how high we might go from here,” he said, noting not all inflation was due to external factors.Once rates peak, they likely will stay there as long as policymakers feel inflation is anchored to its target as well as other economic factors, Yaron said.While Israel’s economy is forecast to expand 6% in 2022 after topping 8% last year, growth is forecast to slow to 3% in 2023 mostly due to outside forces.”For almost every unemployed (person) there is a vacancy so it gives us comfort in doing this (policy) front loading,” he said, noting public sector wages probably will rise after the Nov. 1 election. “Israel’s economy has very high growth and a very tight labour market.”What we are seeing is inflation is seeping into a wider and wider set of CPI components … more and more to demand side components.” More

Expect the news from the IMF-World Bank annual meetings next week to highlight worsening economic projections for this winter and next year and the difficult decisions facing finance ministers over inflation, energy, the cost of living and Ukraine, against threats of economic and public finance crises in an increasing number of countries.But I find equally important the analytical work done by the IMF which, true to form, has started releasing it ahead of the meetings. It’s not that the fund is necessarily right. But its role as a guardian of global economic policy orthodoxy means that its thinking influences what passes for responsible policymaking — witness its unusual public concern with the UK’s tax-cutting “mini” Budget last week.Paying attention to the IMF’s research perspective becomes all the more important when the orthodoxy it expresses is evolving. And as I have written in the past, this is a time of just such an intellectual evolution — if not revolution: the return of the activist state is now the establishment’s house view.Reading the chapters released so far from this autumn’s World Economic Outlook and the Global Financial Stability Report, it looks to me like the fund’s paradigm shift is not being blown off course by current economic storms. The chapters I have looked at, which all have user-friendly blog versions for those short of time, are two from the WEO on climate policies and growth and on the risk of wage-price spirals (blog versions here and here), and one from the GFSR on the dangers of open-ended investment funds (blog version here).The IMF shows consistency: these chapters, in part, reflect longstanding themes (on climate) and fit with a greater willingness to shape markets and outcomes they produce than the old Washington Consensus did. Indeed, the chaos following the “mini” Budget could well mean that markets are more comfortable with the fund’s style of progressivism than the new UK government’s 1980s throwback views. I also detect a gentle pushback from the fund at some of the more unreconstructed voices in the economic policy debate.Here are my main takeaways:Bigger (and faster) is better (and cheaper)The fund estimates that the costs of cutting carbon emissions enough by 2030 to reach net zero by 2050 are trifling for the optimal policy, which consists of budget-neutral carbon taxes, set to increase gradually and combined with transfers to households, subsidies to low-carbon technologies, and lower labour taxes. Such a policy mix would achieve the required cuts at a cost to annual growth of 0.05 to 0.2 percentage points for four years in the US, the eurozone and China. Inflation would be 0.1 to 0.4 points higher in those years. This is in line with previous fund research, if slightly less optimistic, since it argued that spending on carbon-free infrastructure could add to growth over the next decade and a half. Presumably, this could offset the small cost from carbon taxation identified in the latest work. That growth cost is admittedly a little higher in the rest of the world, but that is mostly down to energy exporting countries that would obviously stand to lose significant export earnings as carbon consumption drops. Dithering is costlier: the near-term cost in growth and inflation only becomes worse by delaying action. There are two reasons for this. One is that the longer you wait, the more abrupt the structural changes have to be. Another is that if governments are credibly committed to decarbonisation, the private sector will adjust its behaviour in ways that make the process go smoother. In contrast, if governments are not thought to be serious about climate change, companies will invest in the wrong capital, at greater cost to the economy when the adjustment finally happens. Quite simply: committing now to a gradually rising path of carbon taxes sufficient enough to cut carbon use is better for growth than not doing so.Don’t panic about inflationThe other WEO chapter takes on an extremely topical debate on whether there is a risk that the current price rise drives up wage demands, in turn leading employers to raise their prices and so on as everyone expects high inflation to persist. Should we fear such wage-price spirals? The short answer is “no”. The fund’s economists looked at a set of historical inflationary episodes that resemble the current one — in particular in that price pressures don’t originate within the labour market (because real wages are flat or falling). These did not tend to lead to wage-price spirals, with nominal wages growth modest and price growth quickly peaking and returning to normal.The chapter on climate policies has a “keep calm and carry on” message on inflation too. There are worries about central bankers that making carbon-emitting activities more expensive, as net zero requires, makes monetary policy harder. But the fund’s modelling “shows this is not the case . . . When policies are gradual and credible, the output-inflation tradeoff is small. Central banks can choose to either stabilise a price index that includes [carbon] taxes or let the tax fully pass through prices.” Either way, inflation remains stable and growth impacts are limited.There is a cloud to this silver lining, as it were. The results rely on central banks keeping inflation expectations under control. So there is something here for the hawks as well.Financial intermediation is scary stuffSeptember’s flash crash in UK government bonds (gilts) can’t have been on IMF economists’ minds when they decided to include in the GFSR a chapter on how open-ended funds can “amplify shocks and destabilise asset prices”. It is exquisitely timely, even if the UK episode related to pension funds. The basic problem was the same as that identified by the IMF (and so was that behind the flash crash in US Treasuries at the start of the pandemic). When investment products that are to some extent illiquid by construction need urgent liquidity, they may have to liquidate what they can in little time, accelerating the market movements. These should worry us as central banks are bent on raising interest rates fast — could they be forced to put tightening on pause (like the Bank of England postponed its sale of bonds, temporarily buying them instead) by financial instability brought on by a rising interest rate?The IMF is willing to consider some quite interventionist solutions, “like limiting the frequency of investor redemptions” and forcing more trading into central clearing. That is sensible. It is also a far cry when, not so many years ago, financial deregulation was all the rage.Other readablesMy colleagues take a deep dive into the causes and consequences of China’s property crash.Talking about China, Noah Barkin’s newsletter on China-Europe relations is always worth a read — one nugget in the latest issue is how “Chinese diplomats have removed their talking points blaming Nato for the conflict in Ukraine and made clear that the use of nuclear weapons by Russia would be viewed as totally unacceptable in Beijing”.The gilt flash crash is just one symptom of a deeper disease in how financial markets work today, argues Eric Lonergan: “the volatility virus”.Today is the inaugural summit of the “European Political Community” — Franz Mayer, Jean Pisani-Ferry, Daniela Schwarzer and Shahin Vallée have a paper on how to give it substance.Do sign up to the FT’s Unhedged newsletter — I particularly liked my colleagues’ exchange with our great ex-colleague Matthew Klein on the pros and cons of the Bank of Japan’s policy to target the 10-year interest rate. For the record, I’m with Matt and see no reason it should stop doing this.Numbers newsThe Opec cartel has agreed a collective oil production cut of 2mn barrels a day. The FT’s explainer calls it “an aggressive attempt to raise oil prices”. More

Brad Setseris a senior fellow at the Council on Foreign Relations and a former Treasury Department official. A successful sovereign debt restructuring requires a host of creditors to agree to changes in the financial terms of a country’s debt. Yet as the recent debate on FTAV has shown, the “architecture” for getting creditors to agree on what changes are needed is currently unsettled. A surge in lending by Chinese state institutions has disrupted existing norms and institutions for co-operation. There is not full agreement on even basic questions like whether Chinese lenders are public or private. Moreover, the bond market also briefly opened up to a set of “frontier” markets that previously only borrowed from official institutions on concessional terms, adding another layer of complexity.Zambia’s slow restructuring is a direct consequence of the absence of functional agreement around the right process for working through debt problems in low income countries when concessional lenders, China policy banks and high coupon bonds all have overlapping financial claims. First, some background. The Highly Indebted Poor Countries initiative (HIPC) reduced Zambia’s public external debt from $6bn to under $2bn back in 2006. But Zambia then went on a borrowing spree, with three bond issues and a massive splurge on Chinese backed infrastructure projects jacking up its public external debt up to $20bn at the end of 2021. That is a very large stock of external debt for an economy that has had a reported GDP of $20-25bn over the past few years. By any realistic standard Zambia took on more debt than it can service — and in 2020 it finally defaulted.

The price of the $1bn eurobond due for repayment in 2024 © Refinitiv

And after years of no apparent progress in its talks with creditors, Zambia is now poised to set what could become the firsts real norms for a somewhat revised process for restructuring the debts of low-income countries now that Chinese institutions are among the most important global creditors. Ultimately, this means setting guidelines for the participation of big Chinese state lenders in globally co-ordinated restructurings. Of course, traditional bondholders also matter, but the restructuring of Zambia’s three bonds is technically straightforward compared to the restructuring of the debts owed to China’s state creditors.Organising China’s participation in a globally co-ordinated workoutThe good news is that it finally appears that Zambia, the IMF, the traditional “bilateral” creditors and China have finally agreed on a process for restructuring the lending of China’s state banks. That bad news is that it took two years to agree on how China’s banks should organise themselves to participate in an internationally supervised debt restructuring process — and there still isn’t agreement on the actual terms that individual Chinese lenders will take.Inside China, the line between the public sector and the private sector is infamously blurry. China’s outward lending also blurred any clean lines between public and private, and between policy and commercial lending. To the rest of the world, China’s ca $800bn lending spree looked like a co-ordinated push to increase the influence of China’s government. But many of the Chinese state institutions that participated in China’s “Go out” project and “Belt and Road Initiative” view themselves as commercial institutions making commercial loans with the expectation of a commercial return.This matters, as the traditional debt restructuring for poorer country is built around separate restructuring processes for “public” and “private” creditors. It was relatively easy for China to agree that the Export-Import Bank of China should be considered a public (ie an official bilateral) creditor. After all, other countries’ export credit agencies are also treated as public bilateral creditors. But China has maintained that its other large policy bank, the China Development Bank, and the main state commercial banks should be viewed as private, commercial lenders rather than as public bodies. Plus, one of Zambia’s largest individual loans — for the Kafue Gorge hydroelectric facility — was financed jointly by the (public) Export-Import Bank of China and a group of China’s (umm, private) state commercial banks.The key breakthrough that seems to have China’s creditors to organise themselves was revealed in a footnote in the documents setting out Zambia’s IMF program.

A number of China’s “commercial” loans were guaranteed by China’s export credit agency (Sinosure) and thus count as official bilateral debt. If this proves to be a broadly applicable rule it should make subsequent restructurings easier. The ambiguities of the G-20’s Common Framework have been ironed out for Zambia; vague commitments have been turned into an actual negotiating structure. About $6bn in Chinese policy and state bank lending is now considered part of the public sector restructuring and will be restructured alongside $2bn from other bilateral creditors, in a process that will be co-chaired by France and China’s government. Roughly $1.5bn in commercial bank loans (including some state commercial bank loans from China it seems) will be restructured alongside a similar amount of payment arrears and other mismatched claims. The $3bn in Zambian bonds (together with close to $500mn in interest arrears) will be restructured through three votes. A further $3bn in foreign held local market debt and almost $3bn in concessional multilateral development bank loans will be excluded from the restructuring.

Some possible new norms thus have been set even before any financial terms have been agreed. China won’t be part of the Paris Club, but it will negotiate alongside the Paris Club; all Export-Import Bank of China lending and all other Chinese bank lending that has an export credit agency guarantee will be “official bilateral” debt; the IMF will define public sector debt broadly and sweep in large state firms and the IMF won’t start lending until it gets financing assurances from both the Paris Club creditors and China.That still leaves a lot of grey zones that will have to be settled in future cases. It looks like most of China’s project lending, even project lending to off-budget state enterprises, will be part of the official bilateral debt restructuring process. However, the direct lending to the government or central bank will be part of the “private” restructuring process if that lending is done by the China Development Bank or the state commercial banks. That is a bit strange. What next?It is possible that the lengthy negotiations needed to set up a restructuring process for Zambia’s debt has created the conditions for rapid progress in the actual negotiations. Everything important could have been pre-negotiated. Maybe. But don’t count on it. The individual Chinese institutions involved in the process have not yet accepted new terms on their existing loans that are consistent with the IMF’s parameters. Zambia’s bondholders also haven’t agreed to anything either.The most important sign of progress is that the IMF has identified the technical parameter that it will use to judge the outcome of the restructuring negotiations. First, the sustainability of the restructuring will be assessed relative to Zambia’s exports, not the size of its economy. The IMF choose to focus on exports in part because Zambia’s GDP is expected to be revised — so this may not be a generally applicable precedent.Second, external debt service on local currency bonds and MDB debt count towards the external debt targets, even though both sets of debt are excluded from the restructuring. The treatment of foreign held, local currency bonds in the external sustainability assessment is likely to establish some new precedents, as this is one of the first low-income restructuring cases where foreign holdings of local market debt are material. Third, long-term sustainability is defined as getting the net present value (not the face value) of public external debt below 84 per cent of 2027 exports. Of course, 2027 exports aren’t explicitly estimated, but they are likely to be in the range of $15-16bn. Creditors have complained that the IMF’s proposed ratio of debt to exports is too low — but Zambia’s ratio of exports to GDP is pretty high, so this parameter is doing double work in the absence of an NPV to GDP target.Fourth, debt servicing in 2025 and in subsequent years needs to be under 10 per cent of exports and 14 per cent of revenues. The revenues ceiling appears more binding: it implies about $1bn of debt servicing capacity in 2025. As a share of GDP this is reasonably high, so it may be less binding that the debt to exports target.

The Kafue Gorge Lower hydropower station financed by China © Daily Nation/https://dailynationzambia.com/2021/05/kafue-gorge-lower-power-station-nears-completion/

The debt reduction implied by the IMF’s criteria is also bit hidden — it isn’t the $8.4bn in debt servicing due during the program period that needs to be deferred (or forgiven). The real debt reduction requirement comes from the need to cut the $20bn of external debt at the end of 2021 down to something well under $14bn in NPV terms by 2027 — with both the multilateral debt and the local currency bonds counting toward the $14bn target. The multilateral debt is already on concessional terms, and it consequently will not weigh heavily on the total. However, the details of the treatment of the local currency debt will matter. If the $3bn in local currency debt is all assumed to have rolled off by 2027, it will be easier to squeeze the current $17bn in foreign currency debt down to fit the target. If external investors are assumed to have a more or less permanent stock of local currency claims that constantly rolls over, there will be a bit less for other external creditors over time. The holders of Zambia’s foreign-currency bonds are understandably focused on these details.This debt math clearly implies that Chinese state institutions will need to agree to concessional interest rates to maintain the current face value of their claims. It equally implies that if bondholders want a 5 per cent coupon, they will need to accept an upfront reduction in face value. The technical details of course matter for the calculation of actual recoveries, but the broad terms of the outcome are already clear: Chinese state lenders and foreign currency bondholders won’t be wiped out, but they also won’t be made whole. if the bondholders don’t like the low level of debt to exports embedded in the IMF’s program, there might be a bit of flexibility. A “copper bond” should make the IMF less concerned about the absolute level of external debt even in a fragile country like Zambia — copper is almost three quarters of Zambia’s exports. Linking debt payments to the copper price (copper also generates substantial tax revenues) would be a true shock absorber. But that would have to be a part of the negotiations. Any hope for faster progress in future debt restructurings?The optimistic view is that Zambia will set enough precedents for the restructuring of different kinds of Chinese loan structures that it will make subsequent restructurings much faster. The big Chinese institutions will learn how to negotiate with each other and with their own government, so to speak. Each subsequently restructuring will be a bit easier, as there is a bigger body of precedent to fall back on and less need to contest every detail of the restructuring process.The pessimistic view is that all of Zambia’s difficulties in classifying the debts owed to different Chinese institutions will play out in future cases as well. Every case will involve a slightly different set of Chinese lenders with slightly different forms of exposure. Case by case really could mean case by case, with ongoing disputes over who is sitting at what negotiating table as well as inevitable haggling over the financial terms. Sri Lanka is clearly next in line, and it differs just enough from Zambia in some key respects that it isn’t totally clear yet what Zambian precedents will carry over.The only certainty: China’s two policy banks and a couple of China’s big state commercial banks have enough exposure to a broad enough set of distressed sovereigns to make this a repeated game, with new rules and expectations being set along the way. More