<?xml version="1.0" encoding="UTF-8"?><rss version="2.0" xmlns:content="http://purl.org/rss/1.0/modules/content/" xmlns:wfw="http://wellformedweb.org/CommentAPI/" xmlns:dc="http://purl.org/dc/elements/1.1/" xmlns:atom="http://www.w3.org/2005/Atom" xmlns:sy="http://purl.org/rss/1.0/modules/syndication/" xmlns:slash="http://purl.org/rss/1.0/modules/slash/" > <channel> <title>Debt Crisis – The Musings Of A Politics Junkie & Closet Economist</title> <atom:link href="https://kurtdavisjr.com/tag/debt-crisis/feed/" rel="self" type="application/rss+xml" /> <link>https://kurtdavisjr.com</link> <description></description> <lastBuildDate>Thu, 10 Feb 2022 08:41:53 +0000</lastBuildDate> <language>en-US</language> <sy:updatePeriod> hourly </sy:updatePeriod> <sy:updateFrequency> 1 </sy:updateFrequency> <generator>https://wordpress.org/?v=6.7.2</generator> <item> <title>The English Summer…We Await</title> <link>https://kurtdavisjr.com/the-english-summer-we-await-britian-uk-london-economic-reopening/?utm_source=rss&utm_medium=rss&utm_campaign=the-english-summer-we-await-britian-uk-london-economic-reopening</link> <dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator> <pubDate>Sun, 20 Jun 2021 07:13:03 +0000</pubDate> <category><![CDATA[Europe]]></category> <category><![CDATA[AstraZeneca]]></category> <category><![CDATA[Boris Johnson]]></category> <category><![CDATA[Britian]]></category> <category><![CDATA[Covid-19]]></category> <category><![CDATA[Debt]]></category> <category><![CDATA[Debt Crisis]]></category> <category><![CDATA[EU]]></category> <category><![CDATA[European Union]]></category> <category><![CDATA[Eurozone]]></category> <category><![CDATA[Financial Crisis]]></category> <category><![CDATA[Greece]]></category> <category><![CDATA[Johnson & Johnson]]></category> <category><![CDATA[London]]></category> <category><![CDATA[Pfizer]]></category> <category><![CDATA[Reopening]]></category> <category><![CDATA[UK]]></category> <category><![CDATA[Vaccine]]></category> <guid isPermaLink="false">https://kurtdavisjr.com/?p=463</guid> <description><![CDATA[Prime Minister Boris Johnson delayed plans to lift the remaining covid-19 restrictions by a month last week with the infectious delta variant rapidly spreading throughout the country. Now, the full reopening of pubs and restaurants among other places will have to wait AGAIN. The British (and the rest of the world) are stuck speculating on whether and when London and the country will return to some sense of normalcy. Today, absent packed streets and offices both with locals and non-locals, the UK’s exit from the EU somehow feels like a permanent exit from the world’s ecosystem (at least for now)...]]></description> <content:encoded><![CDATA[ <div class="wp-block-image"><figure class="aligncenter size-large"><img fetchpriority="high" decoding="async" width="700" height="394" src="https://kurtdavisjr.com/wp-content/uploads/2021/06/Boris-Johnson-Photo-Credit-Andrew-Parsons-Downing-Street.jpg" alt="" class="wp-image-465" srcset="https://kurtdavisjr.com/wp-content/uploads/2021/06/Boris-Johnson-Photo-Credit-Andrew-Parsons-Downing-Street.jpg 700w, https://kurtdavisjr.com/wp-content/uploads/2021/06/Boris-Johnson-Photo-Credit-Andrew-Parsons-Downing-Street-300x169.jpg 300w" sizes="(max-width: 700px) 100vw, 700px" /><figcaption>(Photo Credit: Andrew Parsons/10 Downing Street)</figcaption></figure></div> <hr class="wp-block-separator"/> <h4 class="has-text-align-center wp-block-heading"><strong><em><em>Waiting on the Return of London, the UK, and Normalcy (as Redefined)</em></em></strong></h4> <hr class="wp-block-separator"/> <div style="height:20px" aria-hidden="true" class="wp-block-spacer"></div> <p>The summer starts on the 21<sup>st</sup> of June…well…not for the England. Some observers first labeled this summer as the “<a href="https://kurtdavisjr.com/the-summer-of-the-vaccine-greece-economy-tourism-pfizer-astrazeneca-johnson/">Summer of the Vaccine</a>” but maybe it is the “English Summer…We Await”</p> <p>Prime Minister Boris Johnson delayed plans to lift the remaining covid-19 restrictions by a month last week with the infectious delta variant rapidly spreading throughout the country. Now, the full reopening of pubs and restaurants among other places will have to wait AGAIN.</p> <p>But it is not the socializing and half-empty venues that is annoying the British. It is the lack of a defined pathway to full reopening within the borders and at the borders of the country.</p> <p>“I think it is sensible to wait just a little longer,” Johnson told the press. The messaging from the Prime Minister’s office is centered on the belief that the UK could quicken its vaccination program, which is already one of fastest programs globally with more than 70% of over-11s with one dose and 48% of over-11s with their second dose, according to The Economist.</p> <p>According to the Prime Minister’s office, the situation will be reviewed again on the 28<sup>th</sup> of June. Waiting for that review will be hard with all the recent news.</p> <p>The UK recorded its most covid cases in a day on Thursday (17<sup>th</sup> June) since mid-February. Johnson has generally said let us see the data before making a decision…but all the data says the highly infectious delta variant and future variants may be hard to control in the short term, especially considering that spread is most prevalent among those aged 20 to 29.</p> <p>British citizens consequently are imagining a summer where they are either stuck inside or outside their beloved UK. This may not be too bad for summer holiday planning (for those, at least, outside the UK)…the UK was not necessarily at the top of the beach holiday destination list. EasyJet, for example, said roughly 85% of its operations are now focused on Europe and 15% in the UK. Nevertheless, there were many British citizens and non-citizens who expected to spend some time in London this summer reconnecting with friends and family they may have not seen in nearly 2 years.</p> <p>Yet the lack of summer holiday unsurprisingly is not the biggest concern amongst the British…and the rest of Europe. The British (and the rest of the world) are stuck speculating on whether and when London and the country will return to some sense of normalcy. The rise in European equity markets alongside American equity markets is not that consoling and reaffirming to observers inside and outside the country.</p> <p>The UK suffered its biggest GDP decline in 300 years in 2020 with the economy shrinking by nearly 10%. The latest CBI Economic Forecast still estimates the UK. to return to pre-pandemic levels towards the end of 2021 despite the delay with lifting covid-19 restrictions. The CBI forecasts GDP growth of 8.2% this year, and 6.1% in 2022 (compared to 6.0% and 5.2% in CBI’s previous forecast).</p> <p>The recovery numbers significantly depend on household spending, which account for more than 25% of the growth for 2021, underwritten by increased real incomes and households spending the excess saving from the last 12-18 months. Yet the absence of ‘normal’ life in London does not suggest a UK on track for a hefty rebound in spending. The easing of restrictions and the quickening of return to offices, pubs, and restaurants is an obvious vital step in that process. The April growth numbers in the UK with British people beginning to visit nonessential restaurants and stores looked optimistic as a starting point. But again, that was before the recent news on delayed reopenings. </p> <p>Beyond the numbers, the lingering uncertainty surrounding London’s social and economic return remains an issue. Again, the remote nature of work and soaring equity markets provide some comfort. But a true return of normalcy must include the flow of international foot traffic and business to the country…the latest delay in reopening suggests that getting to that next step of ‘international openness’ may be easier said than done. Absent packed streets and offices both with locals and non-locals, the UK’s exit from the EU somehow feels like a permanent exit from the world’s ecosystem (at least for now).</p> <hr class="wp-block-separator"/> ]]></content:encoded> </item> <item> <title>The Summer Of The Vaccine</title> <link>https://kurtdavisjr.com/the-summer-of-the-vaccine-greece-economy-tourism-pfizer-astrazeneca-johnson/?utm_source=rss&utm_medium=rss&utm_campaign=the-summer-of-the-vaccine-greece-economy-tourism-pfizer-astrazeneca-johnson</link> <dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator> <pubDate>Mon, 19 Apr 2021 16:04:45 +0000</pubDate> <category><![CDATA[Europe]]></category> <category><![CDATA[AstraZeneca]]></category> <category><![CDATA[Covid-19]]></category> <category><![CDATA[Debt]]></category> <category><![CDATA[Debt Crisis]]></category> <category><![CDATA[EU]]></category> <category><![CDATA[European Union]]></category> <category><![CDATA[Eurozone]]></category> <category><![CDATA[Financial Crisis]]></category> <category><![CDATA[Greece]]></category> <category><![CDATA[Johnson & Johnson]]></category> <category><![CDATA[Pfizer]]></category> <category><![CDATA[Portugal]]></category> <category><![CDATA[Spain]]></category> <category><![CDATA[Vaccine]]></category> <guid isPermaLink="false">https://kurtdavisjr.com/?p=452</guid> <description><![CDATA[If governments cannot avoid stoking further worry and sidestep validating conspiracy theories while also showing empathy and concern for its citizens, then vaccine rollout, which clearly is an issue of both an individual’s perspective on the vaccine’s necessity and its safety, will remain in doubt and the economic fall-out will accordingly be palpable in some parts of Europe...]]></description> <content:encoded><![CDATA[ <div class="wp-block-image"><figure class="aligncenter size-large"><img decoding="async" width="724" height="483" src="https://kurtdavisjr.com/wp-content/uploads/2021/04/Covid19-Vaccine-Europe.jpg" alt="" class="wp-image-453" srcset="https://kurtdavisjr.com/wp-content/uploads/2021/04/Covid19-Vaccine-Europe.jpg 724w, https://kurtdavisjr.com/wp-content/uploads/2021/04/Covid19-Vaccine-Europe-300x200.jpg 300w" sizes="(max-width: 724px) 100vw, 724px" /><figcaption>Photo Credit: Getty Images</figcaption></figure></div> <hr class="wp-block-separator"/> <h4 class="has-text-align-center wp-block-heading"><strong><em><em>Vaccine Rollout Is Vital To Greece And Other European Economies</em></em></strong></h4> <hr class="wp-block-separator"/> <div style="height:20px" aria-hidden="true" class="wp-block-spacer"></div> <p>We are the middle of spring and the summer appears to be around the corner…or more so, that is the feeling for those individuals anxious to see if international travel will return for the summer as well as the feeling for the many economies dependent on international tourism for its growth.</p> <p class="has-medium-font-size"><strong>Greek Plea for Tourism</strong></p> <p>Greece’s announcement to scrap quarantine requirements for tourists from 32 countries who are vaccinated or test negative says everything about how the country wants to tap into the pent-up travel angst across the globe. Starting this week, tourists from across the European Union (EU) plus Israel, the U.K., the U.S., Serbia, and the United Arab Emirates can come to Greece without being placed in isolation on arrival – provided they meet the aforementioned conditions. The decision unsurprisingly comes right before Americans and British citizens make holiday plans for the summer and before the Eid holidays (in May and July) in the UAE.</p> <p>Only Cyprus depends on tourism as an engine of its economy more than Greece. Tourism generally accounted for one-fifth to one-fourth of Greece’s pre-covid GDP, while accounting for nearly half of economic growth in 2018 and 2019 for Greece while tourism nonexistence in 2020 significantly contributed to the near-10% economic decline in Greek GDP in 2020. If anything, covid exposed Greek over-dependence on tourism. That said, economic reliance on international travel to the country cannot be changed before the summer of 2021.</p> <p>The Greek announcement also highlights the important role vaccines will play in the economic future of numerous economies, particularly through the remainder of 2021. Numerous economies require a world where people feel safe to travel and interact with other individuals. Vaccination programs will either underwrite growth for some economies, especially in Europe—Italy, Portugal, and Spain will be as anxious as Greece and Cyprus—or leave some countries as collateral damage in the war against covid-19.</p> <p class="has-medium-font-size"><strong>European Vaccine Rollout</strong></p> <p>The rollout of vaccines in Europe today struggles to find its way amid disagreements on which vaccines to procure and the high skepticism of the vaccine within the general public (clearly fueled by the public discussions by leaders on which vaccine to use). A decision by the U.S. Food and Drug Administration (FDA) to pause the roll-out of the Johnson & Johnson covid-19 vaccine coupled with the European pause with (and public deliberation between European authorities on the future use of) the AstraZeneca covid-19 vaccine (albeit short) are major hurdles in pushing forward with vaccinations and re-introducing international travel.</p> <p>It does not help that the Johnson & Johnson issue arose only after it was asked to help examine the blood clotting issues with the AstraZeneca vaccine. Secondly, any pause by one country obviously means other countries will follow, i.e. South Africa and Europe paused roll-out of the Johnson & Johnson vaccine. Lastly, Pfizer officials’ best estimates for production and distribution of the Pfizer vaccine cannot fill the gap created by delays and periodic suspensions of distribution for AstraZeneca and Johnson & Johnson. The Russian vaccine Sputnik V and the Chinese vaccine Sinopharm sadly still do not have buy-in across Europe and the U.S.</p> <p>These challenges will fuel the anti-vaxxer sentiment across Europe (and the U.S.). Some polls and estimations suggest that one-third to half of the French population may be reluctant to take the covid-19 vaccine. Such statistics juxtaposed with “anti-vax” websites and platforms in the country demonstrate the uphill battle toward herd immunity via vaccination.</p> <p>Persuading everyone to take a jab and then travel accordingly sounds daunting today. A successful effort may have to start first with reducing the conflation of public debates and politicking. Establish a threshold necessary for pausing distribution and follow it…the subjective nature of what is too much blood clotting has only confused people. The “stop and go” nature of distribution creates more fear than solving for it. Targeted campaigns and messaging coordinated across the E.U., the U.S. and the U.K. would go far as global take-up of the vaccine is key to the WORLD returning to some normality regarding international travel. </p> <p>The truth of the matter is if governments cannot avoid stoking further worry and sidestep validating conspiracy theories while also showing empathy and concern for its citizens, then vaccine rollout, which clearly is an issue of both an individual’s perspective on the vaccine’s necessity and its safety, will remain in doubt and the economic fall-out will accordingly be palpable in some parts of Europe. The Greek announcement, at least, says it is confident in vaccinations…or is it simply an economic decision? Avoiding skepticism is not easy (as you can see).</p> <hr class="wp-block-separator"/> ]]></content:encoded> </item> <item> <title>Higher Oil Prices Come At The Right Time for the Middle East…</title> <link>https://kurtdavisjr.com/higher-oil-prices-come-at-the-right-timehopefully-they-will-stay-oman-qatar-saudiarabia-kuwait/?utm_source=rss&utm_medium=rss&utm_campaign=higher-oil-prices-come-at-the-right-timehopefully-they-will-stay-oman-qatar-saudiarabia-kuwait</link> <dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator> <pubDate>Wed, 07 Apr 2021 11:11:03 +0000</pubDate> <category><![CDATA[Middle East / Asia]]></category> <category><![CDATA[Covid-19]]></category> <category><![CDATA[Debt]]></category> <category><![CDATA[Debt Crisis]]></category> <category><![CDATA[Kuwait]]></category> <category><![CDATA[Middle East]]></category> <category><![CDATA[Oil]]></category> <category><![CDATA[Oman]]></category> <category><![CDATA[Qatar]]></category> <category><![CDATA[Saudi Arabia]]></category> <category><![CDATA[UAE]]></category> <guid isPermaLink="false">https://kurtdavisjr.com/?p=444</guid> <description><![CDATA[Oil recently touched above $70 and continues to hover above $60 today. The uptick is a welcome breath of fresh air into the Middle East (financial) ecosystem. The new cash inflow is and will continue to allow the regional states to underwrite new financing in their banking sectors and evade the 2009-esque fallout as banks today effectively bridge finance regional corporates to 2022 (…or potentially 2023)...]]></description> <content:encoded><![CDATA[ <div class="wp-block-image"><figure class="aligncenter size-large"><img decoding="async" width="750" height="422" src="https://kurtdavisjr.com/wp-content/uploads/2021/04/Oil-Middle-East.jpg" alt="" class="wp-image-445" srcset="https://kurtdavisjr.com/wp-content/uploads/2021/04/Oil-Middle-East.jpg 750w, https://kurtdavisjr.com/wp-content/uploads/2021/04/Oil-Middle-East-300x169.jpg 300w" sizes="(max-width: 750px) 100vw, 750px" /><figcaption>(Photo Credit: Anadolu Agency)</figcaption></figure></div> <hr class="wp-block-separator"/> <h4 class="has-text-align-center wp-block-heading"><em><strong><em><em><em>Above $60 Oil Provides Balance Sheet Relief for the Middle East</em></em></em></strong></em></h4> <hr class="wp-block-separator"/> <div style="height:20px" aria-hidden="true" class="wp-block-spacer"></div> <p>Oil recently touched above $70 and continues to hover above $60 today. The uptick is a welcome breathe of fresh air into the Middle East (financial) ecosystem. The price surge is generating more cash than expected for regional governments that heavily borrowed with a long view on recovery and economic revival.</p> <p>If oil prices can hold in the $60 range for the year (or at least most of it), many Middle East governments will be able to reduce their borrowing and external financial needs. More importantly, the new cash inflow is and will continue to allow the regional states to underwrite new financing, particularly in their banking sector, and evade the 2009-esque fallout as banks today are theoretically bridge financing regional corporates to 2022 (…or potentially 2023) via debt deferrals or inexpensive new loans.</p> <p class="has-medium-font-size"><strong>This is not 2008 / 2009</strong></p> <p class="has-normal-font-size"><em>Remembering 2008-2009</em></p> <p>The 2008 financial crash first crushed the U.S. markets before permeating the markets in Europe, Asia, and the Middle East. A mortgage crisis and credit crisis lost the markets more than 30% of their value with the biggest drop coming on September 29, 2008. The Dow Jones Industrial crashed nearly 778 points in intraday trading…ironically the biggest drop until the tumbling in 2020 caused by the covid-19 pandemic and subsequent lockdowns. The Middle East, apart from the UAE, had rather limited direct exposure to the mortgage crisis and global financial market crash.</p> <p>The trickle-down effect, however, would be the cause of detriment for the Middle East. Global consumer demand would contract with global trade activity accordingly declining. Secondly, oil prices would plunge from $147 per barrel in July 2008 to around $60 per barrel by mid-2009. Lastly, international credit markets would tighten, which would squeeze the liquidity out of the system.</p> <p class="has-normal-font-size"><em>The Reality of 2020-2021</em></p> <p>The 2020 market crash would be short-lived with the Dow Jones Industrial plunging to 19,173.98 on March 20, 2020 and back near 29,000 by late-summer. Yet, with 2009 as the best comparison, Middle East governments focused on liquidity by calling for corporate debt deferrals (to ease pressure on corporate balance sheets), tapping sovereign debt markets for cash, and pushing the cash into banks to ensure continuity in the financial system.</p> <p>By the time it was clear that liquidity would not be the issue, the money was already in the ecosystem. As a result, many regional banks were lending to government-related entities (GREs) at pre-covid rates by the fall of 2020 simply to get the money out of their coffers. The squashing of the Saudi-Russia oil price war from early 2020 also aided the rebound with countries agreeing significant cuts to oil production which consequently helped to push the oil price back up.</p> <p class="has-medium-font-size"><strong>Oil and an Abundance of Cash</strong></p> <p>High oil prices may become the “get out of [financial] jail free card” for many Middle Eastern governments. Or, at least, it will be a packet of “day pass[es]” that officials will be happy to use to partially unwind the expensive part of their balance sheet and gear up where possible at a cheap cost.</p> <p>According to Moody’s, a $20 per barrel increase in the average oil price could boost revenues for regional governments by about 5-10% of forecasted GDPs. Oman, Qatar, and Saudi Arabia are the most likely countries to see the biggest benefit from today’s price uptick. All three countries budgeted on oil prices at $50 or less in their budget: Oman at $45, Qatar at $40, and Saudi Arabia at $50</p> <p>Oman is already tapping bond markets to ensure it has cash reserves as the pandemic endures in the county (the Omani borders remain open to only Omani citizens and residents). According to the Omani Ministry of Finance, the Omani government has already raised nearly $6.2 billion, including about $1.6 billion borrowed from the Oman Investment Authority, of the estimated $10.9 billion external financing required for its budget.</p> <p>In Qatar, oil accounts for more than 60% of GDP and the officials have already began discussions about issuing new bonds in the coming months. Saudi Arabia, which expects a fiscal deficit of 4.9% of GDP in 2021, depends on oil for 45% of its GDP…the kingdom with its ambitious transformation and development plans happily welcomes this financial relief from higher oil prices. The Saudi sovereign wealth fund, the Public Investment Fund (PIF), arranged a $15 billion credit facility last month with a group of international banks as it continues to play a big financial role in the kingdom’s economic plans.</p> <p>The US Federal Reserve’s decision to hold rates steady this past month and signal that rates could stay low for the next three years also helps the situation as emerging markets can stay the path of recovery with less concern for rising borrowing rates. Thus, although the Fed may have a growing crowd of U.S. critics for its dovish economic stance, Middle East borrowers will likely not join the group of critics…at least for now.</p> <p>Large corporates in the region also benefit from the oversupply of money in the system. Many governments have maintained debt deferrals and other support programs since lockdowns begin back in March 2020. There are numerous corporates who have not paid interest or rent since early last year. If anything, as 2020 (and now 2021) demonstrate, a mix of regulatory restrictions on debt collection and foreclosure coupled with vigorous debt and equity markets can shift the timeframe for critical financial decisions. In the eyes of some critics, today’s mechanisms are only a sexier version of “amend and extend” from the last financial crash that pushes out the day of reckoning. </p> <p>The most notable outcome of cash in the ecosystem unsurprisingly is the lack of financial restructurings and liquidations amongst large corporates, especially compared to the 2009 fallout. Still, there will be day when everything must be addressed on corporate and sovereign balance sheets. So far, Oman will start implementation of a 5% value added tax (VAT) this month. Saudi Arabia increased its VAT to 15% in 2020. Decisions on those taxes were nevertheless made before oil prices recovered. Thus, per the usual, markets do not expect any drastic policy changes today as it looks like the world’s addiction for oil may again provide additional runway for the region, at least, in the short term or until the day of debt reckoning(?) comes.</p> <hr class="wp-block-separator"/> <p></p> ]]></content:encoded> </item> <item> <title>France, State Guaranteed Loans, (and Grants): Deferring the Bigger Problem</title> <link>https://kurtdavisjr.com/france-state-loans-and-grants-deferring-the-bigger-problem/?utm_source=rss&utm_medium=rss&utm_campaign=france-state-loans-and-grants-deferring-the-bigger-problem</link> <dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator> <pubDate>Mon, 01 Feb 2021 15:29:36 +0000</pubDate> <category><![CDATA[Europe]]></category> <category><![CDATA[Covid-19]]></category> <category><![CDATA[Debt]]></category> <category><![CDATA[Debt Crisis]]></category> <category><![CDATA[EU]]></category> <category><![CDATA[European Union]]></category> <category><![CDATA[Eurozone]]></category> <category><![CDATA[Financial Crisis]]></category> <category><![CDATA[France]]></category> <category><![CDATA[PGE]]></category> <category><![CDATA[prêt garanti par l’état]]></category> <guid isPermaLink="false">https://kurtdavisjr.com/?p=406</guid> <description><![CDATA[France’s discussion on the transformation of state loans to grants signifies a greater problem for European economies. Many governments underwrote their economies with increased liquidity either through loans or deferment of debt. But the wall of insolvency cannot be avoided…]]></description> <content:encoded><![CDATA[ <div class="wp-block-image"><figure class="aligncenter size-large"><img loading="lazy" decoding="async" width="800" height="533" src="https://kurtdavisjr.com/wp-content/uploads/2021/01/France-Bruno-Le-Blair.jpg" alt="" class="wp-image-407" srcset="https://kurtdavisjr.com/wp-content/uploads/2021/01/France-Bruno-Le-Blair.jpg 800w, https://kurtdavisjr.com/wp-content/uploads/2021/01/France-Bruno-Le-Blair-300x200.jpg 300w, https://kurtdavisjr.com/wp-content/uploads/2021/01/France-Bruno-Le-Blair-768x512.jpg 768w, https://kurtdavisjr.com/wp-content/uploads/2021/01/France-Bruno-Le-Blair-750x500.jpg 750w" sizes="auto, (max-width: 800px) 100vw, 800px" /><figcaption>French Finance Minister Bruno Le Maire, wearing a protective face mask, leaves following the weekly cabinet meeting at the Elysee Palace. (Photo Credit REUTERS/Gonzalo Fuentes)</figcaption></figure></div> <hr class="wp-block-separator"/> <h4 class="has-text-align-center wp-block-heading" id="whether-loans-or-grants-the-bill-will-be-hefty-and-still-may-not-prevent-economic-catastrophe"><strong><em><em><em>Whether loans or grants, the bill will be hefty and still may not prevent economic catastrophe</em></em></em></strong></h4> <hr class="wp-block-separator"/> <div style="height:20px" aria-hidden="true" class="wp-block-spacer"></div> <p>When the fireworks went off (social distance permitting) in many countries to celebrate the New Year, the sentiment in many countries was that 2021 would be different. The feelings made sense. Vaccines had been approved with distribution around the corner. Equity markets were rising, and businesses were planning office re-openings. And politicians were talking the next phase and post-covid life.</p> <p>The New Year’s optimism has sadly tampered like the usual gym attendance resolutions. The new waves of different covid-19 variants from South Africa to the U.K. and complications with vaccine distribution are largely to blame for the growing despair in many countries. And economic fallout looks more deferred than avoided.</p> <p class="has-normal-font-size"><strong>France and State Guaranteed Loans</strong></p> <p>France is debating the conversion of some state-guaranteed loans to grants to help the hardest hit companies in the country. French Finance Minister Bruno Le Maire thinks the alteration of the debt for some companies is a necessary step to avoid the impending debt cliff that could undercut French growth and recovery. </p> <p>The state has issued about 130 billion euros ($157 billion) of state-guaranteed loans under <em>prêt garanti par l’état</em> (PGE), mainly to help small companies through the pandemic. There are numerous French giants in that group too. For example, France will provide a 500 million euro state-guaranteed loan to French hotel property group, AccorInvest, to ward off the impact of the pandemic on the hotel industry with remote meetings and little-to-none tourism.</p> <p>The French loan program has help to stave off insolvencies with the rate 40% below 2019 levels, according to UBS. Now, as the pandemic continues, there is rightfully a growing belief that the pandemic’s current runway is longer than the runway of the loan program with job losses growing thus French leadership’s push to consider more aggressive measures to avoid a major economic catastrophe. The grant route, however, may be more symbolic than actual solution. Either companies will assume the bill by repaying the debt or the government will assume the bill by taxing citizens more to cover the money it borrowed to fund the PGE.</p> <p>When the pandemic started, the PGE was eye-catching with the 300 billion euros pledged by the French government to fill the expected liquidity crisis. France wanted to avoid the 2008/2009 crisis where markets crashed and there was little cash in the ecosystem. Yet, liquidity never exactly became the problem as financial markets remained open. It is more a question of solvency today as the French economy is expected to have contracted 9% in 2020 and 2021 projections are incomplete but economic growth is estimated at a very fragile 6%. Localized lockdowns and slow commerce suggest that 6% may be optimistic for France and that the number of insolvency cases will rise in the near term.</p> <p>The French banking sector is a manifestation of the problem. While cash has been targeted to companies (and corporate debt has steadily grown each quarter during the pandemic), there is no certainty that companies will survive. Banks consequently must prepare to absorb the unavoidable insolvencies that will come during the pandemic (or also post-pandemic when it is obvious which bailed-out companies are not viable in a post-covid world). A weakened banking sector would only amplify economic angst because if the government aid becomes limited and banks cut lending, more small and medium sized companies will fail, which makes money spent in 2020 (via the PGE) to prop those companies up look wasted. </p> <p class="has-normal-font-size"><strong>The Macron Election Factor</strong></p> <p>Macron will run for reelection in 2022 and will face a French public frustrated by unemployment and a lack of economic opportunity if things do not change this year. The 9% decline in 2020 GDP implies that Macron will walk into the April 2022 presidential election—absence a big economic growth spurt in 2021 (i.e., beyond the estimated 6%) and the first quarter of 2022—with an economy that is below pre-crisis level. Public debt will hover around 120% of GDP. All this will be after the state’s PGE program will have spent about 200-250 billion euro to support the French economy.</p> <p>Macron must also look across the Atlantic at the U.S. and appreciate that business leaders may be comparing the French economy to the American economy when they are at the polls. Before the pandemic, France was the #1 tourist destination with 89.4 million visitors in 2018 but there is little tourism today (and likely a subpar amount by the end of 2021). Domestic and intra-European ground travel will likely still be down too by election time which hurts the national railway company, SNCF, and its investment in Eurostar, an operator in trains between France, the U.K., Belgium, and the Netherlands. France is also home to one of the world’s two major aircraft manufacturers, Airbus, which has had major layoffs. However, the layoffs, to the benefit of Airbus, have been overshadowed by Boeing’s manufacturing mistakes. That said, if the French economy cannot create some sense of normalcy in 2021 and the U.S. (or U.K., however less likely) have a strong economic rebound, French pride and frustration could become a toxic mix for a politician campaigning during what many French citizens may start to view as the never-ending pandemic.</p> <p>Given the backdrop and likely competitive race, Macron will be under pressure to succumb to political expediency. Such expediency, however, can only backfire with business leaders wanting more economic assistance and the ‘yellow vests’ wanting more economic justice. To be fair, Macron did not receive the same covid-19 boost in the polls afforded leaders in Germany, the U.K., and Italy at the start of the pandemic. Having said that, Giuseppe Conte recently resigned as prime minister in Italy and Prime Minister Boris Johnson has a growing contingent of critics at home and abroad, emphasizing how hard it is to govern and maintain high approval numbers in the current state of the world.</p> <p class="has-normal-font-size"><strong>Who Will Pay the Bill?</strong></p> <p>France’s discussion on the transformation of state loans to grants signifies a greater problem for European economies. Many governments underwrote their economies with increased liquidity either through loans or deferment of debt. But the wall of insolvency (or, at least, stalled growth) cannot be avoided. Le Maire’s (and Macron’s) ability to steer the ship beyond the liquidity rainfall period will be closely watched by other leaders. It is easy to appreciate the French initiative on addressing the growing economic problem. Still, it is not clear how grants do not simply massage the problem without facing the reality that no one ever agreed on who was paying the economic bill for the economic problems avoided. Sorry if that last line is so confusing…it is confusing when you choose to run-up a bill with no plan for paying it.</p> <hr class="wp-block-separator"/> ]]></content:encoded> </item> <item> <title>Italy, Covid-19, and Debt: A Concoction Cocktail for a (European) Financial Crisis</title> <link>https://kurtdavisjr.com/italy-covid-19-and-debt-a-concoction-cocktail-for-a-financial-crisis/?utm_source=rss&utm_medium=rss&utm_campaign=italy-covid-19-and-debt-a-concoction-cocktail-for-a-financial-crisis</link> <dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator> <pubDate>Wed, 28 Oct 2020 09:39:16 +0000</pubDate> <category><![CDATA[Europe]]></category> <category><![CDATA[Covid-19]]></category> <category><![CDATA[Debt]]></category> <category><![CDATA[Debt Crisis]]></category> <category><![CDATA[EU]]></category> <category><![CDATA[European Union]]></category> <category><![CDATA[Eurozone]]></category> <category><![CDATA[Financial Crisis]]></category> <category><![CDATA[Italy]]></category> <category><![CDATA[Recovery Fund]]></category> <guid isPermaLink="false">https://kurtdavisjr.com/?p=335</guid> <description><![CDATA[As the second wave of cases hits Europe, including Italy, there is not much convincing required on the seriousness of the virus. The same cannot be said about the growing challenges in the Italian economy. Debt is flowing into an economy that already has its share of bad loans in the financial ecosystem but there is little concern. It is the covid-19 pandemic thus why worry about a European financial crisis, right?]]></description> <content:encoded><![CDATA[ <div class="wp-block-image"><figure class="aligncenter size-large is-resized"><img loading="lazy" decoding="async" src="https://kurtdavisjr.com/wp-content/uploads/2020/10/Italy-Debt-ATA-Financial-Research.jpeg" alt="" class="wp-image-336" width="462" height="347" srcset="https://kurtdavisjr.com/wp-content/uploads/2020/10/Italy-Debt-ATA-Financial-Research.jpeg 1024w, https://kurtdavisjr.com/wp-content/uploads/2020/10/Italy-Debt-ATA-Financial-Research-300x225.jpeg 300w, https://kurtdavisjr.com/wp-content/uploads/2020/10/Italy-Debt-ATA-Financial-Research-768x576.jpeg 768w, https://kurtdavisjr.com/wp-content/uploads/2020/10/Italy-Debt-ATA-Financial-Research-750x563.jpeg 750w, https://kurtdavisjr.com/wp-content/uploads/2020/10/Italy-Debt-ATA-Financial-Research-480x360.jpeg 480w" sizes="auto, (max-width: 462px) 100vw, 462px" /><figcaption>(Photo Credit: ATA Financial Research)</figcaption></figure></div> <hr class="wp-block-separator"/> <h4 class="has-text-align-center wp-block-heading" id="hoping-for-a-different-epilogue-to-this-italian-drama"><strong><em><em>Hoping for a different epilogue to this Italian drama</em></em></strong></h4> <hr class="wp-block-separator"/> <div style="height:20px" aria-hidden="true" class="wp-block-spacer"></div> <p>Back in March when covid-19 hit Italy (and the world was still coming up the learning curve on the virus), Italians (and many non-Italians) were first convinced of the seriousness of the disease by the images of patients hooked up to ventilators and later the videos of Italians doctors in personal protective equipment (PPE) and patient’s relatives talking of losing loved ones. The lockdown became real, as some Italians describe it, and the world seemingly followed their lead into lockdown.</p> <p>The Italians had already passed through all the stages of understanding the virus—to be clear, not stages of denial. Their myriad of reactions very much characterized what has been seen in other countries—many Italians did not want a lockdown, others blamed the virus on China, and numerous politicians were saying the virus was an exaggerated flu. These responses were late January when Italy declared a state of emergency and was one of the first countries to block flights from China. The first confirmed case in Italy was on February 21, a 38-year-old man hospitalized at Codogno Hospital in northern Italy. On March 9, Italy would commence a countrywide lockdown.</p> <p>As the second wave of cases hits Europe, there is not much convincing required on the seriousness of the virus. The same cannot be said about the growing challenges in the Italian economy. Debt is flowing into an economy that already has its share of bad loans in the financial ecosystem but there is little concern. It is the covid-19 pandemic thus why worry about a financial crisis, right?</p> <p class="has-normal-font-size"><strong>How has covid-19 affected the Italian economy?</strong></p> <p>The entire country was in a strict lockdown for nearly three months from early March to late May. To no surprise, the lockdown significantly impacted the Italian economy with GDP crashing 5.4% and 12.4% in the first quarter and second quarter of 2020. The Italian economy is expected to contract 11.2% for the entire fiscal year of 2020, according to a report from the European Commission, which is a bigger contraction than expected in France (10.6%), Greece (9%), and Spain (10.9%). </p> <p>All the numbers suggest the V-shaped recovery imagined in the early months of the pandemic is not happening, especially as there is no vaccine. Italy has recorded more than 543,000 covid-19 cases with more than 37,000 deaths. And the daily cases of about 18,000 to 20,000 is 3x higher than the peak days of March with a new increase in hospitalization levels. </p> <p>The pandemic accordingly continues to suppress economic activity with strict localized lockdowns and some economists suggesting things will get worse before they get better. Even if Italy (and the rest of Europe) escapes these lockdowns, economic activity will be constrained by consumer fear and national restrictions and likely international restrictions on entertainment, travel, and tourism (including hospitality).</p> <p>Tourism, for example, which is roughly 13% of Italian GDP, remains hampered by the spread of the virus with international tourists arriving in the country plummeting nearly 60%, according to the Italian national tourism agency (ENIT). Other sectors that have been dramatically impacted by covid-19 include manufacturing (-22.1%), energy (-15.9%), fashion (-14.1%), and automotive (-9.1%), according to Italian bank, Mediobanca. The only sectors spared in the economic recession are pharmaceuticals and food distribution.</p> <p class="has-normal-font-size"><strong>Saving the Italian economy but at a cost…</strong></p> <p>The Italian government has tried to help the economy through a series of regulations, largely at the start of the pandemic, including non-repayable loans, tax credits and exemptions, and payment support for furloughed employees. </p> <p>Italy will receive an estimated 209 billion euros from European Union’s 750 billion euro Recovery Fund – in other words, the country will receive roughly 28% of the fund, which will be divided into grants (63.7 billion euros), loans (127.6 billion euros), and other contributions (17.6 billion euros). Early messaging from the government suggests a significant portion of the funds will be poured into hospitals (and the larger healthcare sector) and transport coupled with some tax reform. </p> <p>Prime Minister Giusepe Conte described the funds as a “historic opportunity and a huge responsibility” – such words already have critics of Italian officials on high alert. Those critics – a mix of economists and investors soured by previous European debt crises – struggle to see how the country escapes its internal bureaucratic system and targets investment towards profitable projects, i.e. those that reduce the north-south divide, diversify the economy, boost transport and digital infrastructure, and increase the birth rate.</p> <p>Furthermore, this support comes at a cost, particularly as the government has borrowed significantly to underwrite these economic measures. Italian public debt is projected at about 160% of GDP by year’s end, compared to 135% of GDP last year, again with negative economic growth in 2020. Only Greece will have a higher debt to GDP ratio in the E.U. </p> <p>As the data shows, economic growth will not return soon…thus the lack of a V-shaped (or L-shaped recovery) suggests the Italian government will struggle to bring debt-to-GDP in line with other E.U. countries. Economic growth is expected to return in 2021 (projected at 6.1%) but that estimate assumes a return to a sense of normalcy which is not exactly obvious to the market today. For example, Conte summoning the Italian supreme defense council to discuss potential deployment of military staff to contain rioting and carry out covid-19 swab tests does indicate the covid-19 is in the rearview mirror.</p> <p>Italy (alongside Greece) sadly is viewed as the weakest link in the E.U. Austerity plans helped debt levels in the past, but debt overhang will remain an issue that budget cuts cannot fix. Not to add that austerity is not palatable in today’s pandemic let alone significant budget cuts. Adding to the challenges is the fragile banking system which was hampered by bad loans prior to the pandemic. The economic downturn and increased missed payments and defaults will surely weaken bank balance sheets, which, to be fair to Italy, will be the norm across the E.U. </p> <p>That said, it is worth remembering that the risk and instability being discussed is related to the third-largest economy in the euro zone (i.e., excluding the U.K.) after Germany and France. Thus, the risk to the E.U. financial ecosystem is hard to ignore. Brussels will want to use the recovery funds to dictate some <em>better</em> behavior by Italian officials and bankers. But Italy has long resisted demands for unpopular reforms handed down from E.U. officials as part of funding and economic support. </p> <p>The recovery funds (and the excited Italian response) suggest that the grand European bargain from the last European sovereign debt crisis may still be the norm. But Italian Mario Draghi is not running the show anymore and it is not clear that the E.U. could underwrite another crisis with euros (or patience). For example, how can the stable Germany maintain its support and patience for Italy (and Greece)? </p> <p>Italy continues to be at the center of many E.U. financial crises yet also considered key to the solutions in the E.U…solve economic challenges in Italy and you could potentially unlock the unimaginable growth and prosperity for the country and the eurozone. This is sadly the story of hope every time when bankers talk Italy amid a crisis (or pandemic). Hopefully, the epilogue to this story will be different – absent the economic despair and disappointment of previous times.</p> <hr class="wp-block-separator"/> ]]></content:encoded> </item> <item> <title>Argentina: Nothing is Certain but Death and Taxes</title> <link>https://kurtdavisjr.com/argentina-nothing-is-certain-but-death-and-taxes/?utm_source=rss&utm_medium=rss&utm_campaign=argentina-nothing-is-certain-but-death-and-taxes</link> <dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator> <pubDate>Mon, 19 Oct 2020 07:13:14 +0000</pubDate> <category><![CDATA[Latin America]]></category> <category><![CDATA[Argentina]]></category> <category><![CDATA[Covid-19]]></category> <category><![CDATA[Debt]]></category> <category><![CDATA[Debt Crisis]]></category> <category><![CDATA[Inflation]]></category> <category><![CDATA[President Alberto Fernández]]></category> <category><![CDATA[Solidarity Tax]]></category> <category><![CDATA[Taxation]]></category> <guid isPermaLink="false">https://kurtdavisjr.com/?p=320</guid> <description><![CDATA[Argentines are struggling with covid-19 and a three-year recession. The government currently completed a $65 billion restructuring and now wants to tax its way out of a recession...]]></description> <content:encoded><![CDATA[ <figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="630" height="332" src="https://kurtdavisjr.com/wp-content/uploads/2020/10/crisis-argentina.jpg" alt="" class="wp-image-321" srcset="https://kurtdavisjr.com/wp-content/uploads/2020/10/crisis-argentina.jpg 630w, https://kurtdavisjr.com/wp-content/uploads/2020/10/crisis-argentina-300x158.jpg 300w" sizes="auto, (max-width: 630px) 100vw, 630px" /><figcaption>A pedestrian walks past posters on the street that read ‘No to the payment of the debt. Break with the IMF’, in Buenos Aires, Argentina May 27, 2020. (Phoo Credit: REUTERS / Agustin Marcarian)</figcaption></figure> <hr class="wp-block-separator"/> <h4 class="has-text-align-center wp-block-heading" id="life-in-argentina-is-not-becoming-easier"><em><strong><em><em>Life in Argentina is not becoming easier…</em></em></strong></em></h4> <hr class="wp-block-separator"/> <div style="height:20px" aria-hidden="true" class="wp-block-spacer"></div> <div style="height:28px" aria-hidden="true" class="wp-block-spacer"></div> <div class="wp-block-group"><div class="wp-block-group__inner-container is-layout-flow wp-block-group-is-layout-flow"> <p><strong><em>“Nothing can be said to be certain, except death and taxes.”</em></strong> </p> <p><strong>– Benjamin Franklin</strong></p> </div></div> <div style="height:37px" aria-hidden="true" class="wp-block-spacer"></div> <p>The quote is usually attributed to Benjamin Franklin though others have also attributed the quote to two earlier writers: Daniel Defoe in “The Political History of the Devil” (1726) wrote “Things as certain as death and taxes, can be more firmly believed,” while in Christopher Bullock’s “The Cobbler of Preston” (1716) there appears the line, “Tis impossible to be sure of anything but Death and Taxes.” </p> <p>This is not a discussion of who said it first…but rather an appreciation for the truth in those words, particularly in Argentina.</p> <p><strong>Physical death by way of covid-19</strong></p> <p>The Argentinian government, to its credit or demise, took decisive actions to confront covid-19 in its early stages. The first positive covid-19 case was registered in the country’s capital, Buenos Aires, on 3<sup>rd</sup> March. The infected individual—returning from Milan, Italy—would be the first covid-19 case confirmed in South America. A little more than two weeks later, President Alberto Fernández imposed one of the strictest lockdowns in the Latin America with residents only permitted to leave their homes for groceries and medicine. At that time, Argentina only had 128 cases of covid-19 with three deaths. </p> <p>Argentines largely commended the Fernández administration for taking aggressive actions. But with the lockdown still in place seven months later, the sentiment is starting to change. The numbers of cases and deaths continue to rise with Argentina registering nearly 1 million cases and more than 26,000 deaths. Attempts by Argentina to gradually reopen Buenos Aires—the area most affected by covid-19 and home to more than 13 million people—in July was not successful as cases rapidly rose in the following days and the government was forced to re-implement restrictions. As a result of Buenos Aires’ lockdown, more than 30 percent of the country’s populations remains in strict quarantine with officials not having a clear path to controlling the mounting number of cases and deaths.</p> <p><strong>Economic death by way of lockdown</strong></p> <p>The Fernández administration has found relative success in reducing restrictions in other areas of the country. But this relative success still does not necessarily help prevent the other growing concern: the death of the Argentinian economy. Buenos Aires metropolitan area accounts for roughly 45% of the country’s GDP with only essential services being provided in the capital. Thus, until Buenos Aires returns to normal business activity levels, the country’s overall economic numbers have little chance of rebounding. To be fair, the government had critics at the beginning that warned about the potential economic damage of its strict lockdown.</p> <p>Secondly, Argentina is in the third year of a recession, with the economy already having contracted about 17% in the second quarter of 2020 and expected to contract 12% by year end on year-over-year basis. Unemployment is high at 13% (as of June 2020) with poverty rising in the country (some estimates place the actual poverty level north of 50% today). In September, the Fernández administration was able to negotiate a deal with its creditors to restructure the country’s $65 billion in foreign debt. Yet, the central bank is printing pesos in order to pay for economic support measures amid the pandemic with locals wanting to exchange pesos for dollars (to escape the skyrocketing inflation) and the government, as a counter, implementing tougher capital controls. </p> <p>In the eyes of many investors and locals, the recent restructuring deal is a perfect example of the country’s natural ability to fight through its economic challenges Still, many Argentines are asking how many lives the Argentinian economy has…the country has defaulted nine times since its independence in 1816. The Argentinian leadership appears to be equally concerned. Yet their strategy for avoiding economic (and physical) death is already too much a certainty of Argentinian life with not much flexibility: taxes.</p> <div style="height:21px" aria-hidden="true" class="wp-block-spacer"></div> <div class="wp-block-group"><div class="wp-block-group__inner-container is-layout-flow wp-block-group-is-layout-flow"> <p><strong><em>“The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.” </em></strong></p> <p><strong>– Jean Baptist Colbert</strong></p> </div></div> <div class="wp-block-group"><div class="wp-block-group__inner-container is-layout-flow wp-block-group-is-layout-flow"></div></div> <div style="height:37px" aria-hidden="true" class="wp-block-spacer"></div> <p>Cue the introduction of the Solidarity tax. Argentinian politicians want to apply a tax to approximately 12,000 Argentines that have more than 200 million pesos ($2.6 million) in assets. The tax would be progressive with the wealthiest citizens paying 5.25% for holding assets outside the country. This tax is sadly the result of a belief that the country can tax itself out of its problems yet again. In 2001, the country imposed additional taxes on income and exports, including agriculture. A similar attempt in 2008 to increase export taxes led to significant protests. This time, officials are clearly struggling to find a party willing or even capable of paying higher taxes thus the sole focus on taxing wealthy Argentines.</p> <p>The sad reality for this situation is that Argentina already has high levels of taxation compared to other developing countries across the globe. The country, however, has a significantly large informal sector from which the tax officials cannot fully collect tax revenue. The economy is also semi-industrialized with a large part of that industry centered on the export of commodities. There is not too much in between the informal sector and the exporters of commodities thus, in the words of some economists, the country is a mix of a poor informal labor force and a rather wealthy upper class. Not surprisingly, Argentinian officials desire to increase the tax on the top income bracket from 35% to 41%. Locals sadly will tell you that they do not expect improved services for any additional revenue.</p> <p>Officials already introduced other tax increases this year, including a 30% surcharge on foreign currency purchases and card expenses abroad, again to target wealthy Argentines. This tax was previously called the ‘solidarity’ tax in the “pre-restructuring” days (i.e., before this year’s restructuring was completed). It became a burden for those stranded overseas when the covid-19 pandemic restricted travel…as a result, the wealthy and non-wealthy were both afflicted by the tax. </p> <p>The new ‘solidarity’ tax is simply the next attempt (likely in a series) at capturing revenue by taxing assets that some politicians believe are wrongly being held outside the country or not being used productively to grow the Argentinian economy. Some Argentines fear a worldwide U.S.-style tax system, but the Argentinian system currently lacks the resources to fully enforce a national tax system within its borders. Though, it is easy to imagine Argentinian officials already debating how to maintain some tax oversight (or control) on Argentines fleeing the country for Uruguay, which has made it significantly easier for foreigners to settle in the country, for example, by reducing the value of property required to qualify for residency.</p> <p>Today, the Fernández administration is left with few options to support the economy, particularly as they want to avoid the swelling political and social tension in the country. An expansive monetary process, in particular printing money, has been the chosen option since the start of the covid-19 pandemic. That said, the country is already facing double digit inflation thus there is an increased chance of inflation spiraling out of control. No one is publicly discussing a potential restructuring again in the near term (i.e., one to three years) but it is a point of discussion in smaller investor circles and among local Argentines. </p> <p>The nature of Argentinian economics is to focus on raising tax revenue…i.e., do not expect a big cut in spending from this left-leaning government. To be fair, there is an argument that increased tax revenue correlates with paying debts. Yet, the reduction of foreign investment in the country highlights shrinking confidence in the Argentinian economy as well as growing investor concerns around government interference and economic intervention in the next 6-12 months…little suggests that the covid-19 pandemic (and its effects) will be gone before then (i.e., with business activity and travel back to pre-2020 levels). As result, Argentines and their leaders must have a more serious discussion on the economy and Argentinian life. If not, the three certainties in Argentinian life may sadly become death (by covid-19), taxes (by the Argentinian government), and inflation…the economic pessimists may say you can also include sovereign restructurings. That would be a sad life.</p> <hr class="wp-block-separator"/> ]]></content:encoded> </item> <item> <title>Middle East Sovereign Debt Levels Are Rising, But So What?</title> <link>https://kurtdavisjr.com/middle-east-sovereign-debt-levels-are-rising-but-so-what/?utm_source=rss&utm_medium=rss&utm_campaign=middle-east-sovereign-debt-levels-are-rising-but-so-what</link> <dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator> <pubDate>Mon, 05 Oct 2020 07:08:26 +0000</pubDate> <category><![CDATA[Middle East / Asia]]></category> <category><![CDATA[Bahrain]]></category> <category><![CDATA[Covid-19]]></category> <category><![CDATA[Debt]]></category> <category><![CDATA[Debt Crisis]]></category> <category><![CDATA[Europe]]></category> <category><![CDATA[Middle East]]></category> <category><![CDATA[Oman]]></category> <category><![CDATA[Saudi Arabia]]></category> <category><![CDATA[UAE]]></category> <guid isPermaLink="false">https://kurtdavisjr.com/?p=304</guid> <description><![CDATA[Middle East sovereign debt levels are rising, but so what? The question of whether the debt levels are sustainable is hard to answer...]]></description> <content:encoded><![CDATA[ <div class="wp-block-image"><figure class="aligncenter size-large"><img loading="lazy" decoding="async" width="926" height="799" src="https://kurtdavisjr.com/wp-content/uploads/2020/10/Debt.jpg" alt="" class="wp-image-305" srcset="https://kurtdavisjr.com/wp-content/uploads/2020/10/Debt.jpg 926w, https://kurtdavisjr.com/wp-content/uploads/2020/10/Debt-300x259.jpg 300w, https://kurtdavisjr.com/wp-content/uploads/2020/10/Debt-768x663.jpg 768w, https://kurtdavisjr.com/wp-content/uploads/2020/10/Debt-750x647.jpg 750w" sizes="auto, (max-width: 926px) 100vw, 926px" /><figcaption>(Photo Credit: Image sourced from www.shutterstock.com)</figcaption></figure></div> <hr class="wp-block-separator"/> <h4 class="has-text-align-center wp-block-heading" id="the-question-of-whether-the-debt-levels-are-sustainable-is-hard-to-answer"><em><strong><em><em>The question of whether the debt levels are sustainable is hard to answer</em></em></strong></em></h4> <hr class="wp-block-separator"/> <div style="height:20px" aria-hidden="true" class="wp-block-spacer"></div> <p>Global economies are struggling in the covid-19 pandemic. That is not surprising. But are we underestimating the challenges?</p> <p>Tens of millions have lost their jobs and many businesses have lost trillion of dollars. But the losses have been massaged by the government money poured into the financial systems across the globe generally underwritten by debt capital markets. While the increase in borrowing is a solution today, it may be the problem tomorrow.</p> <p>It goes without saying that another global debt crisis would further destabilize a world that is likely to be combating the effects of covid-19 pandemic beyond 2020. Despite an extraordinary global effort to quickly develop a vaccine, the reality is that there is still no vaccine and, if there was one, it would take time to develop a sufficient global supply and convince the global public to return to their pre-covid-19 lifestyle. </p> <p>When markets tumbled in 2008 and the financial crash devastated the globe, the aftershock was a sovereign debt crisis in Europe from 2010 to 2012. The European Union’s (EU) so-called weakest members (Greece, Italy, Ireland, Portugal, and Spain) struggled to escape default on their government debt and the collapse of their economic systems.</p> <p>Now, as borrowing has quickly soared in the Middle East, investors are quietly taking notice. Downgrades by rating agencies to a few of the countries due to increased “liquidity risks” only further stirs the concerns and rumor mills.</p> <p class="has-normal-font-size"><strong><strong>The Middle East has many lenders content to provide more capital</strong></strong></p> <p>The Middle East has been highly active in debt capital market this year. The region’s more economically risky countries—Bahrain and Oman—have tapped international capital markets this year at opportunistic times. Bahrain raised $2 billion from the bond markets in May and received an additional $1.8 billon from the $10 billion Gulf Cooperation Council (GCC) support package agreed in 2018 primarily with Kuwait, Saudi Arabia, and the United Arab Emirates (UAE). The country also increased its debt ceiling 2 billion dinars ($5.3 billion) in 2020 which clearly signals to the market a plan to raise additional debt in the future. Oman received a one-year $2 billion bridge loan from a group of international and regional banks, which lenders expect will be repaid through money raised from a future bond offering (likely in 2021)</p> <p>Although Bahrain and Oman pose greater risk to the regional financial system, let us be clear: everyone is watching Saudi Arabia and the UAE. Back in April, Saudi Arabia sold $7 billions of bonds to strengthen its finances when the world was in strict lockdown and energy prices had nosedived due to the oil price war (and rapidly falling demand). The offer raised eyebrows back then because it was the second time in five months that the world’s largest oil exporter tapped international capital markets. In December, the country sold a $29 billion stake in energy behemoth Saudi Aramco through the largest IPO in history. </p> <p>Saudi Arabia has also introduced various cost-saving measures to stabilize its balance sheet. Back in 2018, the government introduced a VAT and reduced fuel subsidies which created the local version of a public stir. But the government tampered public complaints by introducing a cost of living allowance for the nearly one million public employees at the time, budgeted at 1,000 Riyals (c. $267) per month. With the tripling of the VAT to 15% back in May and the scrapping of the cost of living allowance, the low tax nature of the kingdom has surely changed. </p> <p>On top of the $7 billion raised from bonds in April, the kingdom has raised roughly an additional $20 billion through various government entities. Nothing suggests the borrowing will slow as the country also increased its debt ceiling back in March from 30% to 50% percent of GDP from 2022 on. The question for Saudi Arabia will be how it manages foreign reserves and cash amid $40 oil and global financial uncertainty. Some analysts assume more cost-management measures (i.e., austerity) will come. Yet, it is hard to speculate on any potential crisis because the Crown Prince Mohammed bin Salman may simply be borrowing to pay for his 2030 Vision for the country.</p> <p>The same optimism may be hard to conjure for the UAE. A report from the S&P last month raised eyebrows when it estimated Dubai’s debt at nearly 290 billion dirhams ($79 billion), which included Dubai’s local bank borrowings in the calculation. The debt burden may amount to roughly 77% of GDP, which places the emirate in the territory of South Africa and Oman (based on estimations by the International Monetary Fund (IMF)). The latter comparison by analysts is more for shock value as South Africa and Oman are countries facing <em>known</em> issues with their debt loads. </p> <p>Still, if we are to focus on the Moody’s and S&P calculations, then the estimated additional 167 billion dirhams ($45.4 billion) of debt (a figure largely attributable to the government related entities (GREs) of Dubai) is the real point of discussion. (As a reference, the prospectus for Dubai’s $2 billion bond offering in September placed the emirate’s debt at 123.5 billion dirhams ($33.6 billion)). The approach by the rating agencies is notably conservative with their analysts highlighting the reality that investors cannot assess the complete financial picture of GREs because they are generally private and unrated by agencies. </p> <p>That said, the overarching question, as it relates to sovereign debt for <em>all</em> of the Middle East, is whether the combination of the ‘standalone’ sovereign debt—that debt which is directly held by the state—and the sovereign debt related to GREs should be a concern. The GRE discussion generally focuses on the sectors in which the GREs are most active. </p> <p>For example, aviation has suffered during the covid-19 pandemic. Many Middle Eastern countries has national airlines that, while heavily supported by local travelers who should be there in the long run, have lost significant money this year. For those airlines dependent on long-haul international travel (i.e., Qatar Airways, Emirates Airlines), there is increased concern based on the negative impact of covid-19 on global travel. That said, both Qatar Airways and Emirates Airlines have quickly adjusted to the current environment. Emirates Airlines, for example, does not expect to resume services to all its 157 pre-lockdown destinations until the summer of 2021. Real Estate and shipping / logistics, all of which have faced challenges in the current environment, are also major exposures for many Middle Eastern GREs.</p> <p class="has-normal-font-size"><strong>This is not Europe but there are similarities</strong></p> <p>The Middle East will rightfully say this is not Europe. The systemic risk to Europe caused by the troubles of multiple struggling countries in 2010 is forever woven into the EU political and economic discussions. It is hard to forget when Greece was allowed to restructure its debts and then-head of the European Central Bank (ECB), Mario Draghi, vowed in July 2012 that the ECB would “do whatever it takes” to ensure other countries in the EU would not default. Draghi’s words bought some time with borrowing nations trimming deficits as the ECB theoretically guaranteed the debt for the struggling countries. It was good deal as confidence grew and financial risk decreased…but that unexpected deal between EU nations has always been fragile and dependent on steady economic growth across the region. The jury is still out on whether this grand bargain will hold up during the aftermath of the covid-19 pandemic. GDP, according to a study by Capital Economics, is expected to contract 10% in France, 15% in Greece, 18% in Italy, and 15% in Spain.</p> <p>Although not the same European storyline from start to finish, investors will remember February 2009 when Abu Dhabi came to the rescue of Dubai. The central bank of the UAE bought $10 billion worth of Dubai’s five-year bonds which confirmed the worst-held secret in the region that Abu Dhabi would support its neighboring emirate. Investors will also remember 2018 when Kuwait, Saudi Arabia, and the UAE deposited $1 billion into the central bank of Jordan and pledged $10 billion to support Bahrain as both countries faced financial troubles. These deals may not have the feel of European bargains, but they had the similar effect of Draghi’s words in 2012. The deals were reached on conditions that included both countries reaching balanced budgets by 2022 and reducing public debt ratios. Covid-19 clearly has made this a challenge in the Middle East (for many countries) as it has in Europe.</p> <p class="has-normal-font-size"><strong>There remains the question if the debt levels are sustainable</strong></p> <p>Budget deficits are increasingly a challenge for some Middle East countries in the covid-19 environment (as expected). Low growth in 2020 is the norm as contracting economies are the financial storylines of the covid-19 pandemic. Budget deficits are consequently the byproduct of shrinking economies.</p> <p>Yet, for many Middle East countries, this is not the first budget deficit, i.e. the previous examples of financial support by Middle East partners. Bahrain spending exceeded revenue in the first half of 2020 at a level that exceeded its deficit in all of 2019. Oman’s pre-covid budget already assumed a deficit of 7-8% of GDP with oil at $58 per barrel. The Omani deficit skyrockets with prices in the $30 range and the pandemic undercutting demand. </p> <p>Sovereign debt levels accordingly have trended upwards for many countries in the Middle East prior to 2020. It is this combination of successive budget deficits and growing levels of government debt that will raise investor concern in the short term. But is this a problem? Sovereign debt levels are trending up everywhere yet there is little discussion on sustainability. Questions of sustainability are circumvented by many political leaders with speeches and messaging focused on doing what is necessary to combat the pandemic or get people back to work.</p> <p>If the question could not be avoided, there still would not be a clear-cut answer on sustainability of debt levels for most countries today. Capital markets continue to lend to the Middle East and beyond. Most investors assume 2021 will be an improved year and that borrowing countries can always refinance their debt in the future…Oman’s bridge loan this year is a perfect example of this base assumption in capital markets. The bridge loan assumes Oman will be able to go to bond markets in 2021 to repay the bridge loan.</p> <p>Financial support (or rescue depending on who you ask) is built into the formula too. If Italy struggles today, the market will expect support to come from other EU countries. In its rating report, Fitch argued that Bahrain will require further financial backing from the GCC countries (likely Kuwait, Saudi Arabia, and the UAE again) which “it will receive given the country’s small size and strategic importance.” It is hard to be concerned when rating agencies naturally assume financial support from neighboring countries.</p> <p>The true reality of assessing the debt levels in the Middle East is that the process is both clouded by (a) limited visibility into GREs and (b) an inability to navigate and comb through the financial interconnectedness of countries. The assumed inherent brotherhood of the GCC states usually makes analysts get comfortable around point (b). Despite private bickering between regional countries on security and sovereignty, the relationships between the Middle East countries are stronger than many western analysts may appreciate. Thus, although the debt numbers may raise fair questions on the sustainability of oil dependency and the welfare state, the situation looks viable in the short-term and there is little to suggest that the region will let any state fall on its face (maybe except for Iran). That is an assuring thought until it is not true.</p> <hr class="wp-block-separator"/> <p></p> ]]></content:encoded> </item> </channel> </rss>