Richard Koo (2003) coined the term “balance sheet recession” to characterise the endless travail of Japan following the collapse of its real estate and stock market bubbles in 1990. The Japanese government did not act to repair the balance sheets of the private sector following the crash. Instead, it chose a policy of keeping bank rate near zero so as to reduce deposit rates and let the banks earn their way back into solvency. At the same time it supported the real sector by repeated large doses of Keynesian deficit spending. It took a decade and a half for these policies to bring the Japanese economy back to reasonable health.
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No ordinary recession: There is much to fear beyond fear itself | vox - 0 views
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At the time, a majority of forecasts predicted that the economy would slip back into depression once defence expenditures were terminated and the armed forces demobilised. The forecasts were wrong. This famous postwar “forecasting debacle” demonstrated how simple income-expenditure reasoning, ignoring the state of balance sheets, can lead one completely astray.
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The lesson to be drawn from these two cases is that deficit spending will be absorbed into the financial sinkholes in private sector balance sheets and will not become effective until those holes have been filled.
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The present administration, like the last, would like to recapitalise the banks at least partly by attracting private capital. That can hardly be accomplished as long as the value of large chunks of the banks’ assets remains anybody’s guess.
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When the entire private sector is bent on shortening its balance sheet and paying down debt, the public sector’s balance sheet must move in the opposite, offsetting direction. When the entire private sector is striving to save, the government must dis-save. The political obstacles to doing these things on a sufficient scale are formidable.
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The Swedish policy following the 1992 crisis has been often referred to in recent months. Sweden acted quickly and decisively to close insolvent banks, and to quarantine their bad assets into a special fund.2 Eventually, all the assets, good and bad, ended up in the private banking sector again. The stockholders in the failed banks lost all their equity while the loss to taxpayers of the bad assets was minimal in the end. The operation was necessary to the recovery but what actually got the economy out of a very sharp and deep recession was the 25-30% devaluation of the krona which produced a long period of strong export-led growth.
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Businesses will use depreciation charges and sell off inventories to do so. Households are trying once more to save. Less investment and more saving spell declining incomes.
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er self-imposed constitutional balanced budget requirements and are consequently acting as powerful amplifiers of recession with respect to both income and employment.
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Has the U.S. Economy Been Permanently Damaged? : The New Yorker - 0 views
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Although the study uses some sophisticated statistical methods, its basic point is straightforward: in the long term, economic output (G.D.P.) is constrained by the quantity and the quality of economic inputs (labor, capital, and technology). If the growth rate and quality of these inputs decline, the potential growth rate of G.D.P. will fall, too—it’s just a matter of arithmetic.
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With hiring rates down, many workers have given up searching for jobs and have dropped out of the labor force.
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With budgets tight, corporations and government departments have cut back on investments in new plants and machinery, computer hardware and software, and research and development.
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The authors come up with a variety of numbers, including one that has received a lot of attention: potential G.D.P.—broadly speaking, the level of G.D.P. consistent with stable inflation—“is currently about 7 percent below the trajectory it appeared to be on prior to 2007.” According to the latest figures from the Commerce Department, the G.D.P. is now close to seventeen trillion dollars, and seven per cent of that figure is $1.2 trillion. This is a lot of money to have gone missing, especially if it will never be recovered. Hence Krugman’s dire conclusion: “By tolerating high unemployment we have inflicted huge damage on our long-run prospects …. What passes these days for sound policy is in fact a form of economic self-mutilation, which will cripple America for many years to come.”
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As well as figuring out the current level of potential G.D.P., the authors estimate its growth rate. This is the more important figure, because it’s what determines living standards over the long term
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In the period from 2000 to 2007, the paper says the average potential growth rate of G.D.P. was 2.6 per cent.
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In the nineteen-eighties, Larry Summers and Olivier Blanchard, who is now the chief economist of the I.M.F., resurrected the idea and gave it a new name, which they borrowed from engineering: hysteresis. Blanchard and Summers examined hysteresis in Europe, where high rates of unemployment have long been a problem.
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The good news is that things aren’t quite as bad as the figures in the Fed paper might suggest. If we can get policy right and sharply increase the level of over-all demand in the economy, most of the damage done in the past five years is reversible.
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At the moment, sadly, there is no prospect of any more fiscal stimulus, let alone a war-sized one, and the onus is falling on the Fed to gee up the economy.
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Talking Troubled Turkey - NYTimes.com - 0 views
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probably because most countries placed restrictions on cross-border capital flows, so that international borrowing and lending were limited.
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a bigger version of the same story unfolded in Asia: Huge money inflows followed by a sudden stop and economic implosion.
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And the same forces that sent money sloshing into Turkey also make the world economy as a whole highly vulnerable.
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If this is a good description of our situation, and I believe it is, we now have a world economy destined to seesaw between bubbles and depression
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The tragedy of Argentina: A century of decline | The Economist - 0 views
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In the 43 years leading up to 1914, GDP had grown at an annual rate of 6%, the fastest recorded in the world.
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The country ranked among the ten richest in the world, after the likes of Australia, Britain and the United States, but ahead of France, Germany and Italy.
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Its income per head is now 43% of those same 16 rich economies; it trails Chile and Uruguay in its own back yard.
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The election of 1989 marked the first time in more than 60 years that a civilian president had handed power to an elected successor.
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the repeated recessions of the 1970s and 1980s, the hyperinflation of 1989-90, the economic crisis of 2001 and now the possibility of another crisis to come.
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But three deep-lying explanations help to illuminate the country’s diminishment. Firstly, Argentina may have been rich 100 years ago but it was not modern. That made adjustment hard when external shocks hit. The second theory stresses the role of trade policy. Third, when it needed to change, Argentina lacked the institutions to create successful policies.
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Railways transformed the economics of agriculture and refrigerated shipping made it possible to export meat on an unprecedented scale: between 1900 and 1916 Argentine exports of frozen beef rose from 26,000 tonnes to 411,000 tonnes a year. But Argentina mainly consumed technology from abroad rather than inventing its own.
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External shocks duly materialised, which leads to the second theory for Argentine decline: trade policy.
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Argentina raised import tariffs from an average of 16.7% in 1930 to 28.7% in 1933. Reliance on Britain, another country in decline, backfired as Argentina’s favoured export market signed preferential deals with Commonwealth countries.
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an existing policy of import substitution deepened; the share of trade as a percentage of GDP continued to fall.
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High food prices meant big profits for farmers but empty stomachs for ordinary Argentines. Open borders increased farmers’ takings but sharpened competition from abroad for domestic industry.
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“One-third of the country—the commodities industry, engineers and regional industries like wine and tourism—is ready to compete,” says Sergio Berensztein, a political analyst. “Two-thirds are not.”
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Statistics cannot be trusted: Argentina was due this week to unveil new inflation data in a bid to avoid censure from the IMF for its wildly undercooked previous estimates.
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“We have spent 50 years thinking about maintaining government spending, not about investing to grow,” says Fernando de la Rúa, a former president who resigned during the 2001 crisis.
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The country’s Vaca Muerta (“Dead Cow”) shale-oil and gasfield is estimated to be the world’s third-largest. If Argentina can attract foreign capital, the money could start flowing within a decade.
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The Quality of Jobs: The New Normal and the Old Normal - NYTimes.com - 0 views
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Despite 42 consecutive months of gains in private-sector employment, the unemployment rate is still at 7.3 percent; in December 2007 it was only 4.6 percent. The current unemployment rate is higher now than in 2007 across all age, education, occupation, gender and ethnic groups.
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That’s despite the fact that about four million workers have left the labor force, driving the labor force participation rate to a historic low
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Although the share of the long-term unemployed has fallen from its peak of 45 percent in 2011 to 38 percent today, it is still far above its 2001-7 average. And about eight million people are working part-time for “economic reasons,”
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60 percent of the net job losses occurred in middle-income occupations with median hourly wages of $13.84 to $21.13. In contrast, these occupations have accounted for less than a quarter of the net job gains in the recovery, while low-wage occupations with median hourly wages of $7.69 to $13.83 have accounted for more than half of these gains.
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Over the last year, more than 40 percent of job growth has been in low-paying sectors including retail, leisure/hospitality (hotels and restaurants) and temporary help agencies.
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Based on history, what’s distinctive about this recovery is its sluggish pace, not the composition of its jobs.
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The economy’s growth rate has been less than half the rate of previous recoveries and the employment losses in the Great Recession were more than twice as large as those in previous recessions.
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What is distinctive during this recovery relative to earlier ones is the growing disparity in wages across sectors, a trend that was apparent long before the Great Recession.
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Since then, however, wage growth has fallen far short of productivity growth, and that’s true for workers regardless of education, occupation, gender or race.
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But technological change and the globalization it has enabled have played major roles, and these driving forces have probably strengthened during the recovery.
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Jobs that are routine, that do not involve manual tasks and that do not need to be done near the customer are being replaced by computers and automation or are being outsourced to low-cost workers in other countries.
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According to another study, the top 1 percent of households captured 65 percent of real family income gains (including realized capital gains) between 2002 and 2007 and 95 percent of the gains between 2009 and 2012. In 2012, the top decile claimed more than 50 percent of income, the highest share ever.
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EZ crisis and historical trilemmas | vox - 0 views
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The big difference in the EZ is that nations cannot go off the euro as they went off the gold standard
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A major part of Lenin’s analysis, for instance, was devoted to the demonstration that Russia had become a quasi-colony as a result of the large scale capital imports, and that the foreign creditors in effect controlled Russia’s foreign policy.
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The move in Europe to monetary union for weaker countries was a credibility enhancing mechanism that would lower borrowing costs. For countries that had strong creditor positions, the attractions of monetary union lay in the depoliticizing of the adjustment process (James 2012). The Eurozone worked quite well as a disciplining mechanism before it entered into effect, but much less well afterwards.
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Banking expanded after the establishment of the euro (Shin 2012). No adequate provision on a European basis existed for banking supervision and regulation, which like fiscal policy, was left to rather diverse national authorities. An explosion of banking activity occurred simultaneously with the transition to monetary union and may well have been stimulated by the new single money.
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The implicit national government backstop was really only credible because of the international commitment to the European integration project. It was that commitment that led markets to believe that – in spite of the no bailout provisions of the Maastricht Treaty – there were almost no limits to the amount to which debt levels could accumulate both in the private and the public sector.
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When the democratic/popular backlash occurs, it takes the form of rejection of international/cross-border political commitment mechanism.
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Opinion poll data shows a major increase in hostility to the EU in peripheral countries, but with no corresponding unpopularity of the common currency.
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TARGET2 as a scapegoat for German errors | vox - 0 views
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This coincided with the bubble years in peripheral Eurozone countries (2003-07). The effect of this is that Germany accumulated large net claims on Eurozone countries, which at the end of 2011 amounted to €634 billion.
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These current account surpluses did not lead to TARGET2 claims during the bubble years because the counterpart of these surpluses were increasing claims held by (mainly) German banks against the other Eurozone countries.
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the German banking system was lending the money to other Eurozone countries to allow them to buy surplus German products – a highly risky affair.
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It should have been obvious that the debtor countries could get into payment difficulties as they were piling up debt made possible by the loans of German banks.
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If there is a breakup of the Eurozone, Germany will face the risk that some debtor countries default on their debt. But again this risk is not affected by the size of the TARGET2 claims of Germany.
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The risk that Germany faces as a result of its net exposure to other Eurozone countries is therefore entirely of the country’s own making.
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Since 2009, when the TARGET2 balances started to take off, current account deficits of the peripheral countries as a whole declined from 9.1% of their GDP to 4.5%. These declines were mainly due to deep recessions in these countries.
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Sinn (2012) argues that these deficits would have had to decline even faster had there been no financing through the TARGET2 mechanism. This is certainly true. But this is the same as saying that these countries should have pushed their economies into even deeper recessions.
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The main reason why German TARGET2 claims have increased so much since 2010 is capital flows. The flows have taken two forms.
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The first one came about when German banks unloaded their loans made to peripheral countries into the balance sheet of the Bundesbank.
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The second one was the result of non-residents shifting their deposits from their local banks into the German banking system out of fear of a breakup of the Eurozone.
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This led German banks to stop their credit lines to southern banks (and other northern EZ banks followed)
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Thus in the scenario of a breakup, with or without TARGET2 claims, the risk of large losses for the German taxpayer is very similar.
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the Bundesbank can eliminate the risk of such last minute accumulations of TARGET2 balances by converting euros into new German marks only for German residents.
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The euro crisis: Debtors' prison | The Economist - 0 views
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But the reforms often fail to work. The Spanish law is intended to promote restructuring of viable firms but in practice most insolvencies end in liquidation after lengthy court proceedings.
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High household debt helps explain why the Netherlands, along with Italy and Spain, remained in recession in the second quarter of 2013 even as the euro area in general embarked on recovery. Dutch GDP this year will be 2% lower than in 2011 and more than 3% below its previous peak, in 2008.
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One aim of the exercise is to identify the bad debts that are fouling up euro-zone banks and preventing the flow of new credit. This is important because parts of the single-currency area are crippled not just by public borrowing but by private debt, most of which is sitting on banking books.
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High private debt is more detrimental to growth than high public debt, according to recent research by the IMF.
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The malign effect of high private debt becomes apparent in the busts that follow credit-driven booms. Households that have borrowed too much in relation to their income trim their spending, the main component of GDP. Overleveraged firms avoid investing and concentrate on shrinking their balance-sheets by paying off loans. As bad debts erode their capital, banks become more reluctant to lend. These adverse trends reinforce each other, increasing the overall drag on growth.
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Other balance-sheet indicators also suggest that Italian business is in a bad way. For example, 30% of corporate debt is owed by firms whose pre-tax earnings are less than the interest payments they have to make. That share of frail companies is even higher in Spain and Portugal (40% and nearly 50% respectively).
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Little progress has been made to lighten the private-debt burden since the crisis began. Though it eased in Spain from 227% of GDP in 2009 to 215% in 2012, it rose over the same period in Cyprus, Ireland and Portugal. In Britain, by contrast, private debt fell from 207% of GDP in 2009 to 190% in 2012 thanks to improvements by both households and firms.
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There is an inherent contradiction between the need for debtor countries in the euro zone to regain competitiveness through lower prices and at the same time to ease excessive debt with a dose of inflation.
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Firms that have overborrowed are reluctant to embark on new ventures, and banks are in any case reluctant to lend because their balance-sheets are peppered with bad debts. This unhappy state of affairs prevails throughout southern Europe though its precise causes vary.
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Eurozone crisis: can the centre hold? | Nouriel Roubini | Business | theguardian.com - 0 views
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Several developments helped to restore calm. The European Central Bank (ECB) president, Mario Draghi, vowed to do "whatever it takes" to save the euro, and quickly institutionalised that pledge by establishing the ECB's "outright monetary transactions" programme to buy distressed eurozone members' sovereign bonds.
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And, even if such adjustment is not occurring as fast as Germany and other core eurozone countries would like, they remain willing to provide financing, and governments committed to adjustment are still in power.
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For starters, potential growth is still too low in most of the periphery, given ageing populations and low productivity growth, while actual growth – even once the periphery exits the recession, in 2014 – will remain below 1% for the next few years, implying that unemployment rates will remain very high.
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levels of private and public debt, domestic and foreign, are still too high, and continue to rise as a share of GDP, owing to slow or negative output growth. This means that the issue of medium-term sustainability remains unresolved.
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At the same time, the loss of competitiveness has been only partly reversed, with most of the improvement in external balances being cyclical rather than structural.
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The euro is still too strong, severely limiting the improvement in competitiveness that is needed to boost net exports in the face of weak domestic demand.
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a continuing credit crunch, as undercapitalised banks deleverage by selling assets and shrinking their loan portfolios.
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The larger problem, of course, is that progress toward banking, fiscal, economic and political union, all of which are essential to the eurozone's long-term viability, has been too slow.
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all imply that banks will have to focus on raising capital at the expense of providing the financing needed for economic growth.
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Moreover the ECB, in contrast to the Bank of England, is unwilling to be creative in pursuing policies that would ameliorate the credit crunch.
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Those Depressing Germans - NYTimes.com - 0 views
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Last year Germany, not China, ran the world’s biggest current account surplus. And measured as a share of G.D.P., Germany’s surplus was more than twice as large as China’s.
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Now, it’s true that Germany has been running big surpluses for almost a decade. At first, however, these surpluses were matched by large deficits in southern Europe, financed by large inflows of German capital. Europe as a whole continued to have roughly balanced trade.
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Instead, however, Germany failed to make any adjustment at all; deficits in Spain, Greece and elsewhere shrank, but Germany’s surplus didn’t.
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It shares a currency with its neighbors, greatly benefiting German exporters, who get to price their goods in a weak euro instead of what would surely have been a soaring Deutsche mark. Yet Germany has failed to deliver on its side of the bargain: To avoid a European depression, it needed to spend more as its neighbors were forced to spend less, and it hasn’t done that.
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They consider their country a shining role model, to be emulated by all, and the awkward fact that we can’t all run gigantic trade surpluses simply doesn’t register.
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Silicon Valley Tries to Remake the Idea Machine - NYTimes.com - 0 views
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The federal government now spends $126 billion a year on R. and D., according to the National Science Foundation. (It’s pocket change compared with the $267 billion that the private sector spends.) Asian economies now account for 34 percent of global spending; America’s share is 30 percent.
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“It’s the unique ingredient of the U.S. business model — not just smart scientists in universities, but a critical mass of very smart scientists working in the neighborhood of commercial businesses,
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Perhaps more crucial, the invention of much of the stuff that really created jobs and energized the economy — the Internet, the mouse, smartphones, among countless other ideas — was institutionalized. Old-fashioned innovation factories, like Xerox PARC and Bell Labs, were financed by large companies and operated under the premise that scientists should be given large budgets, a supercomputer or two and plenty of time to make discoveries and work out the kinks of their quixotic creations.
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Start-ups became so cheap to create — founders can just rent space in the cloud from Amazon instead of buying servers and buildings to house them — that it became easier and more efficient for big companies to simply buy new ideas rather than coming up with the framework for inventing them. Some of Google’s largest businesses, like Android and Maps, were acquired.
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All of their parent companies, however, are determined to learn from the mistakes that Xerox and AT&T made, namely failing to capitalize on their own research. It’s Valley lore, after all, that companies like Apple and Fairchild Semiconductor built their fame and fortune on research done at Xerox and Bell.
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Google X does the inverse: It picks products to make, then hires people specifically to build them: artists and philosophers and designers, many of whom don’t even know what they’ll be working on until they join.
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The word ‘basic’ implies ‘unguided,’ and ‘unguided’ is probably best put in government-funded universities rather than industry.”
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The third great wave | The Economist - 0 views
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A third great wave of invention and economic disruption, set off by advances in computing and information and communication technology (ICT) in the late 20th century, promises to deliver a similar mixture of social stress and economic transformation
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Powerful, ubiquitous computing was made possible by the development of the integrated circuit in the 1950s
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Evidence of this is all around. Until recently machines have found it difficult to “understand” written or spoken language, or to deal with complex visual images, but now they seem to be getting to grips with such things.
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concluded that 47% of employment in America is at high risk of being automated away over the next decade or two.
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Now technology is empowering talented individuals as never before and opening up yawning gaps between the earnings of the skilled and the unskilled, capital-owners and labour.
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The effect of technological change on trade is also changing the basis of tried-and-true methods of economic development in poorer economies.
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EU economic sanction on Russia won't affect gas - Rompey - RT Business - 0 views
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The first principle is that "the measures in the field of sensitive technologies will only affect the oil sector in view of the need to preserve EU energy security," an EU source familiar with the letter told Reuters.
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The second principle of “non-retroactivity will apply across all targeted sectors, notably in the field of arms trade and restrictions on access to capital markets,” Van Rompuy wrote.
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The third principle is that the ban on exports of dual-use technology, which applies to military and civilian products, will for now be limited to military end-users.
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Europe's banks are too feeble to spur growth - FT.com - 0 views
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It is essential not to make too much of these stress tests and asset quality review. Yes, they are real improvements. But they do not mean that eurozone banks will now drive growth. They still have too little capital for that. More important, the eurozone lacks a credible strategy for reigniting demand. If much of the German policy elite continues to deny this is even a problem, the crisis of the eurozone must remain unresolved. That is a disaster.
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Taiwan's information-technology industry: After the personal computer | The Economist - 0 views
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its companies make 89% of the world’s notebooks, as well as 46% of desktop PCs. These days they make them mainly with Chinese labour: 94% of their hardware, by value, is produced on the mainland.
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It is moving into retailing and wants to develop its own technology, for which it intends to hire another 5,000-10,000 engineers in Taiwan.
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The leading ODMs have realised that they cannot rely on the PC for ever. One option is to go where the growth is: mobile devices.
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Wistron spread into cloud computing, after-sales service (of which it already did plenty), medical equipment and recycling—which Patrick Lin now runs.
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Taiwanese companies can adapt in a very short time,” says Chris Hung, an analyst at MIC. They have done so before, such as when they moved production to China to take advantage of its big, cheap labour force. Up against Chinese capital as well as labour, not to mention the South Koreans, they must do so again.
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A Greek Morality Tale by Joseph E. Stiglitz - Project Syndicate - 0 views
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In fact, creditors arguably are more responsible: typically, they are sophisticated financial institutions, whereas borrowers frequently are far less attuned to market vicissitudes and the risks associated with different contractual arrangements. Indeed, we know that US banks actually preyed on their borrowers, taking advantage of their lack of financial sophistication.
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Every (advanced) country has realized that making capitalism work requires giving individuals a fresh start.
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There is a fear that if Greece is allowed to restructure its debt, it will simply get itself into trouble again, as will others.
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This is sheer nonsense. Does anyone in their right mind think that any country would willingly put itself through what Greece has gone through, just to get a free ride from its creditors? If there is a moral hazard, it is on the part of the lenders – especially in the private sector – who have been bailed out repeatedly.
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If Europe has allowed these debts to move from the private sector to the public sector – a well-established pattern over the past half-century – it is Europe, not Greece, that should bear the consequences.
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What makes Greece’s problems more difficult to address is the structure of the eurozone: monetary union implies that member states cannot devalue their way out of trouble, yet the modicum of European solidarity that must accompany this loss of policy flexibility simply is not there.
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Russia puts squeeze on Ukraine, jacks up natural gas prices 40 percent - CSMonitor.com - 0 views
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On Thursday, the International Monetary Fund threw a financial lifeline, agreeing to stump up $14-18 billion as part of a two-year bailout package in exchange for tough economic reforms.
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Russia accounts for 13 percent of Ukraine's iron and steel exports, and the political crisis has already hit shipments from Ukrainian steelmakers this year.
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Sales of rebar - a steel bar or mesh of steel wires used in reinforced concrete - to the Commonwealth of Independent States (CIS), a bloc of former Soviet states, fell 70 percent to 45,000 tonnes in January compared with the average monthly export figure in the first half of 2013.Russian steelmakers have aggressively lobbied their government to implement measures to defend domestic producers from Ukrainian imports.
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Tough competition on the international steel market makes the chance of (steelmakers) expanding their export market presence very low," Eavex Capital metals analyst Ivan Dzvinka said in Kiev
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Manufacturers of train carts and turbo engines, which together account for 2.5 percent of Ukraine's total exports, will be hit particularly hard.
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"The point of the FTA is not to make it possible for Ukraine to export Soviet-era tractors to Europe. That's not going to happen. But it could eventually lead to Ukraine becoming a producer of Peugeots, Volkswagens, fridges or Nokia telephones," the EUISS's Popescu said.
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The Economist explains: Why airlines make such meagre profits | The Economist - 0 views
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In those six decades passenger kilometres (the number of flyers multiplied by the distance they travel) have gone from almost zero to more than 5 trillion a year. But though the industry has done much to connect the world, it has done little to line the pockets of the airlines themselves. Despite incredible growth, airlines have not come close to returning the cost of capital, with profit margins of less than 1% on average over that period. In 2012 they made profits of only $4 for every passenger carried. Why has a booming business failed to prosper?
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Airlines were state-owned beasts in receipt of juicy handouts from state coffers. These “flag carriers” were regarded as important strategic businesses with monopoly powers that conferred national pride and international prestige. But they rapidly turned into bloated nationalised industries that regarded profit as a dirty word.
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Air travel was governed by inter-governmental deals that dictated which airlines could fly where, how many seats they could offer and, in many cases, what fares they could charge. The result was inefficiency and losses.
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Low-cost carriers, such as SouthWest and Ryanair, introduced cut-throat rivalry on short-haul routes. Former flag-carriers struggled with the legacy of older fleets, large networks, uppity unionised workforces and vast pension liabilities. Low-cost carriers devastated their model of feeding short-haul passengers onto more lucrative long-haul services.
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As well as stiff competition from their rivals, airlines face the problem that there is little competition in the industries that supply them. Two firms—Airbus and Boeing—provide the majority of the planes, and airports and air-traffic control are monopolies
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Sub-Saharan Africa's Subprime Borrowers by Joseph E. Stiglitz and Hamid Rashid - Projec... - 0 views
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Taking the lead in October 2007, when it issued a $750 million Eurobond with an 8.5% coupon rate, Ghana earned the distinction of being the first Sub-Saharan country – other than South Africa – to issue bonds in 30 years.
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Nine other countries – Gabon, the Democratic Republic of the Congo, Côte d’Ivoire, Senegal, Angola, Nigeria, Namibia, Zambia, and Tanzania – followed suit. By February 2013, these ten African economies had collectively raised $8.1 billion from their maiden sovereign-bond issues, with an average maturity of 11.2 years and an average coupon rate of 6.2%. These countries’ existing foreign debt, by contrast, carried an average interest rate of 1.6% with an average maturity of 28.7 years.
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So why are an increasing number of developing countries resorting to sovereign-bond issues? And why have lenders suddenly found these countries desirable?
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recent analyses, carried out in conjunction with the establishment of the new BRICS bank, have demonstrated the woeful inadequacy of official assistance and concessional lending for meeting Africa’s infrastructure needs, let alone for achieving the levels of sustained growth needed to reduce poverty significantly.
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the conditionality and close monitoring typically associated with the multilateral institutions make them less attractive sources of financing. What politician wouldn’t prefer money that gives him more freedom to do what he likes? It will be years before any problems become manifest – and, then, some future politician will have to resolve them.
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So, are shortsighted financial markets, working with shortsighted governments, laying the groundwork for the world’s next debt crisis?
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he risks will undoubtedly grow if sub-national authorities and private-sector entities gain similar access to the international capital markets, which could result in excessive borrowing.
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Nigerian commercial banks have already issued international bonds; in Zambia, the power utility, railway operator, and road builder are planning to issue as much as $4.5 billion in international bonds.
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Signs of default stress are already showing. In March 2009 – less than two years after the issue – Congolese bonds were trading for 20 cents on the dollar, pushing the yield to a record high. In January 2011, Côte d’Ivoire became the first country to default on its sovereign debt since Jamaica in January 2010.
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In June 2012, Gabon delayed the coupon payment on its $1 billion bond, pending the outcome of a legal dispute, and was on the verge of a default. Should oil and copper prices collapse, Angola, Gabon, Congo, and Zambia may encounter difficulties in servicing their sovereign bonds.
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They need not only to invest the proceeds in the right type of high-return projects, but also to ensure that they do not have to borrow further to service their debt.
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But borrowing money from international financial markets is a strategy with enormous downside risks, and only limited upside potential – except for the banks, which take their fees up front. Sub-Saharan Africa’s economies, one hopes, will not have to repeat the costly lessons that other developing countries have learned over the past three decades.