Ukraine has secured a debt restructuring deal with international creditors that includes a 20 per cent haircut on $18bn of debt and a new, GDP-linked security for investors.
The agreement follows months of talks between Kiev and a committee of international investors, including Franklin Templeton, who hold close to $9bn of the country’s debt, as the war-torn country attempts to meet the terms of its IMF bailout by reducing debt costs
Thursday’s deal, which is supported by the IMF, will give Ukraine upfront debt relief of up to $3.6bn and reduce the country’s debt to GDP ratio to 4.3 per cent by the end of this year, supporting its planned return to capital markets in 2017, according to the Ministry of Finance of Ukraine.
The deal will need to be voted on by a majority of investors for each bond, and as the plans includes the so-called Russia bond held by Moscow, which has so far not taken part in any debt negotiations, some holdouts are expected.
Emerging market debt is sidestepping a violent rout in global markets despite dire warnings about the risk posed by a surge in EM borrowing since the financial crisis.
A chain reaction triggered by China’s decision to devalue its currency has led to severe movements in emerging market equities and currencies that have yet to be matched by equivalent turbulence in debt markets.
“There is no chatter in trading rooms about a debt crisis,” said David Riley, head of credit strategy at BlueBay Asset Management. “EM bonds have held up relatively well considering the pressures they are already under.”
Although prices for hard currency debt sold by countries including Turkey, Mexico and Indonesia have fallen, sending yields up, year to date the total return on JPMorgan’s emerging market sovereign debt index is minus 0.3 per cent, compared to minus 15.86 per cent over the same period for MSCI’s EM equities index.
The difference reflects the fact that bond markets have long been flagging the risks of stalling global growth and low interest rates, Mr Riley said, while other markets have been more optimistic.
Steep falls in currencies such as the Turkish lira and Brazilian real against the US dollar have pushed down prices for local currency debt further, meaning the total return year to date for EM local currency debt is now minus 12.7 per cent, according to JPMorgan.
Anyone who follows China knows that the country faces a particularly vexing problem when it comes to debt. The way we explain it is simple: Beijing is attempting to deleverage and re-leverage simultaneously. Needless to say, this isn’t possible, but that hasn’t stopped China from trying, as is clear from the multitude of contradictory policies and directives that have emanated from Beijing over the course of the last nine months.
Nowhere is the confusion more apparent than in China’s handling of its local government debt problem. In an effort to skirt official limits on borrowing, the country’s provincial governments racked up an enormous amount of off-balance sheet liabilities. These loans carried higher interest rates than would traditional muni bonds and ultimately, servicing the debt became impossible. In order to help provinces deleverage, Beijing launched a program whereby high interest LGFV loans can be swapped for new local government bonds that carry substantially lower interest rates. In fact, yields on the new bonds are close to yields on general government bonds meaning provincial governments are saving somewhere on the order of 300 to 400 bps. But there’s a problem. Banks aren’t particularly keen on swapping a higher yielding asset for a lower yielding one. The PBoC’s solution was to allow the new bonds to be swapped for central bank cash which the banks could then re-lend into the real economy. The problem with this is that it transforms a deleveraging effort (the local government refi program) into a re-leveraging program (the LTRO component). Shortly after the program was launched, the PBoC effectively negated the entire effort when it moved to loosen restrictions on the very same LGVF loans that caused the problem in the first place.
Admittedly, lengthy discussions about fiscal mismanagement across China’s various provincial governments doesn’t make for the most exciting reading, but it’s hugely important from a big picture perspective. Why? Here’s why:
The Bhushan Steel debacle continues. After the promoter, Neeraj Singal was arrested in a bribery scandal, supposedly giving Rs. 50 lakh to Syndicate Bank CMD S.K. Jain, in a much publicised CBI arrest. The money was allegedly being given to get a loan extension which, given Bhushan Steel’s books, would not have otherwise been forthcoming.
The Massive Debt Overhang
It has debt of over Rs. 40,000 cr. and all of it continues to be “standard”, it seems. That means there isn’t a default of interest or principal on the facilities.
The first half of 2015 saw Japan’s national debt rise at its fastest pace in four years, hitting a new record high at ¥1.057 Quadrillion!! Have we reached Keynesian nirvana yet? Or is just a little more “what difference does it make” debt-fueled fallacy going to fix it all?
Even if they had been compiled by his own spin-doctors, Portugal’s latest unemployment figures could hardly have been better for Pedro Passos Coelho, the country’s centre-right prime minister.
The last batch of labour market numbers to be published before a general election in October showed the biggest quarterly drop in the country’s jobless rate for at least 17 years — falling by 1.8 percentage points in the second quarter to 11.9 per cent.
This is the lowest level since 2010, before painful austerity measures imposed under an international bailout saw unemployment soar to a record 17.5 per cent in 2013.
Mr Passos Coelho’s ruling coalition welcomed the figures as “historic” — trumpeting them as proof that punishing spending cuts and tax increases have turned around a struggling economy and put Portugal definitively on a path towards export-led growth and sustained debt-reduction.
But the day after the National Statistics Institute released the jobless figures last week, the euphoria was dashed by a series of sobering warnings from the International Monetary Fund over the country’s heavy debt burden and a slackening pace of reform.
Today’s visualization breaks down $59.7 trillion of world debt by country, as well as highlighting each country’s debt-to-GDP ratio using colour. The data comes from the IMF and only covers external government debt.
It excludes the debt of country’s citizens and businesses, as well as unfunded liabilities which are not yet technically incurred yet. All figures are based on USD.
Even with global financial markets finely tuned into the US Federal Reserve’s forthcoming actions, the Federal Open Market Committee (FOMC) did not give any indication of when it might raise interest rates after its two-day meeting last week. The FOMC simply said it would raise rates when there was further improvement in the labour market and inflation had moved back to its two per cent target level in the medium term. The majority in the markets believe that a September lift-off is likely although there is a vocal minority that insists the US monetary authorities will delay further.
The minority case rests on the notion that the inflation target would not be met any time soon and would remain below two per cent (for the core private consumption expenditure or PCE deflator) in the foreseeable future, with global commodity prices going into a fresh downturn. In July, the Standard & Poor’s Commodity Index fell below the 2008 bottom after the global financial crisis. It currently lies close to its February 2002 level when the commodity super-cycle was yet to begin.
Assuming that the Fed increases rates in September, what could the implications be? An interest rate hike in the US amidst a sea of deflation and soft monetary policy is bound to give the US dollar further fillip and overall dollar gains seem safe to forecast.
That said, there is an argument that the gains would be more against emerging market (EM) currencies than heavyweights such as the euro and yen. The heavyweights have been beaten down badly and conventional valuation models suggest they are grossly undervalued.
India is fourth in terms of absolute external debt from among 20 developing countries, even as per capita debt burden of the country increased by Rs2,966 to Rs44,095 in 2014-15, as per World Bank’s International Debt Statistics 2015.
This represents an increase of 7.21 per cent from the corresponding per capita debt level of Rs41,129 in 2013-14.
India’s external debt service payment stood at $3.72 million in 2014-15 against $3.89 million in 2013-14 and $3.66 million in fiscal 2012-13, according to the report.
Domestic debt service payment in the government account stood at Rs4,04,000 crore, Rs4,85,000 crore and Rs5,56,000 crore in 2012-13, 2013-14 and 2014-15, respectively.
The total outstanding liability (total debt yet to be paid) of the country as of 31 March 2015 stood at Rs68,95,000 crore.
The debt load comprised external and internal debt and other liabilities, government’s provisional accounts showed.
With all the talk of Greek debt unsustainability (and now, thanks to Jack Lew and the IMF, forgiveness), one would think that Greece – whose debt/GDP is set to rise to 238% according to Citi – is the only country in Europe which has debt problems. It’s not, and as the latest data from Eurostat confirms, as of Q1 2015, European debt rose to €9.4 trillion from €9.3 trillion, which is a new record high debt/GDP of 92.9%, up from 92.0% the previous quarter.
It wasn’t just the Euroarea of 19 EUR member nations that saw their debt increase: the broader European Union of 28 countries also saw its debt rise, and by a far more noticeable €300 billion, from €12.1 trillion to €12.4 trillion.