Reuters blog archive
By Neil Unmack
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Ukraine bondholders haven’t seen the end of their suffering. The country’s bonds have sunk in spite of talks of an imminent bailout by the International Monetary Fund. The country’s creditors may face either a soft debt rescheduling or more radical haircuts. The risks of austerity, devaluation and continued political uncertainty all point to the latter.
The recent political turmoil has already cost bondholders. Ukraine’s 2016 dollar-denominated bonds traded as low as 85 percent of par on March 3, with a yield of 15 percent. With such borrowing costs, Ukraine needs support from the IMF and the European Union to fund its deficit, repay debt and bolster its melting foreign currency reserves. The country has asked for at least $15 billion.
As nearly 60 percent of Ukraine’s bonds mature by the end of 2017, according to Thomson Reuters’ data, official lenders should insist that local and international creditors accept a maturity extension, or roll over their debt. The question is whether a more severe restructuring is needed.
Geopolitical situations are difficult ones to interpret from a markets perspective. For the time being, markets are responding to the escalation of hostilities in Ukraine - where Russia has bloodlessly taken control of the Crimea region and is threatening more action in the eastern part of the country - with a bit of negativity. The action is notable in U.S. equity futures, down more than one percent, and some buying in the safe haven that is U.S. Treasuries, along with bond markets around the globe.
Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management, said it well enough in describing the market views so far, that "the fallout for the equity markets may be minor over the medium-term. The short-term is more of a gamble. It should serve as a reminder that you don’t put grocery money for the next month in risky assets."
To most people, the idea of falling prices sounds like a good thing. But it poses serious economic and financial risks - just ask the Japanese, who only now finally have the upper hand in a 20-year battle to drag their economy out of deflation.
That front is shifting westward, to the euro zone.
Deflation tempts consumers to postpone spending and businesses to delay investment because they expect prices to be lower in the future. This slows growth and puts upward pressure on unemployment. It also increases the real debt burden of debtors, from consumers to companies to governments.
from Edward Hadas:
A massive sovereign debt reduction is the right way to reduce the ridiculously high indebtedness of governments. The idea might sound crazy, but it makes economic sense, and could be done, albeit after some serious preparatory work.
Many rich country governments have been borrowing excessively in recent years. In 1991, when the calculations from the International Monetary Fund started, gross government debt of advanced economies was 60 percent of GDP. This year it is expected to be 108 percent of GDP, or about $51 trillion.
from Global Investing:
Is it all over? Is the emerging market turmoil no longer a concern among investors, economists and academics? Measured at least in the last week, the market is recovering some lost ground. Maybe January's sell-off was enough and in the last week all boats seem to be rising once again. After all, there's a new Fed Chair in Janet Yellen who has now officially taken over and the likelihood of easy monetary policy, tapering of asset purchases notwithstanding, isn't expected to change.
MSCI's emerging market benchmark stock index has rebounded 3.5 percent from a Feb. 4 low. The U.S. benchmark S&P 500 stock index has risen slightly more over the same period.
An odd jobs report sets the tone for what’s likely to be another choppy day in the markets – stock futures plunged, briefly, after the Labor Department said nonfarm payrolls grew by just 113,000, but the household survey saw a drop (again) in the unemployment rate to 6.6 percent on a big gain in jobs in that survey. An odd decline of 29,000 in government payrolls offset the overall about-at-trend-but-let’s-not-kid-ourselves-about-this-being-awesome 140,000 or so gains in the private jobs market, so there’s a little bit to like, some to shake one’s head at, and still more to wonder about how many people didn’t get to work because their feet froze to the ground when they tried to get into their cars.
(More seriously on that point – the establishment survey doesn’t get some kind of massive job loss just because of a storm on a particular day of surveying, so it’s not as if a snowstorm destroys job growth, so let’s not overstate the weather issue here. It’s a factor, but don’t look for a revision to +300,000 or something.)
Amid the euphoria surrounding Ireland's removal from junk credit rating status, it's easy to get swept along by the consensus tide of opinion that the Emerald Isle is the "poster child" for euro zone austerity.
But were another country to find itself in Ireland's unfortunate financial predicament now, few would suggest it follow the path Dublin took.
With all signs showing the Canadian economic miracle is fading, the Bank of Canada is understandably starting to sound more dovish. The Canadian dollar has got a whiff of that, down about 10 percent from where it was this time last year.
But that doesn't mean Governor Stephen Poloz is ready to signal on Wednesday that his rate shears are about to get hauled out of the shed.
from Global Investing:
Felipe Larrain, Chile's finance minister is facing a new job come March when incoming center-left government of President-elect Michelle Bachelet takes over. An academic by profession, he intends to either make his way back into the cloistered lecture halls of a university, not necessarily in Chile, or work for some kind of international organization that is outside of the corporate or financial world.
Chile's economy, one of the best run in Latin America, with the highest investment grade credit rating in the region, is however experiencing a soggy point in its economic cycle. Inflation has picked up. There is continued weak economic output and domestic demand is cooling down. The central bank is holding its benchmark interest rate at 4.5 percent and suggests more stimulus is to come in the months ahead. The currency has depreciated but that's not a concern, Larrain said. He was more concerned when the peso was trading in the 430 per U.S. dollar range versus today's 3-1/2 year low of 545, an area he describes as providing equilibrium.
Francois Hollande managed to bat off questions about his private life (how successful he is in holding that line depends on the attitude of the French media which yesterday was nothing but respectful) and focus instead on a blizzard of economic reforms.
Skating past the French president's call for an Airbus-style Franco-German energy company which left everyone including the Germans bemused, there was some real meat.