Global Investing

Do capital controls work?  After years of telling us that they do not, the IMF and World Bank reluctantly conceded last year they may not be all that bad and indeed in some cases they may actually help keep away some of the speculators who have in recent years been pouring into emerging markets.

Developing countries for the most part like foreign capital, indeed they rely on it for development. What they don’t like is hot money — short-term speculative flows which are widely blamed for causing past emerging market crises. So starting from October last year several of them slapped controls on some of this cash. There are signs these may be working.

Take the experience of two large emerging markets, Brazil and Indonesia. Brazil shocked foreign investors last October with a 2 percent tax on all flows to stocks and bonds. Nine months on, investors are still putting their cash there and Brazil has raked in millions of dollars thanks to the tax. But many fund managers, like HSBC’s Jose Cuervo, who runs a $6 billion portfolio of Brazilian stocks, are buying American Depositary Receipts (ADRS) of Brazilian firms rather than stocks listed in Sao Paulo.  Because ADRs are in dollars and listed in New York, investors are getting exposure to Brazil but sidestepping the tax.  Brazilian firms continue to receive investment but Brazil’s currency is not appreciating  like it was last year. A win-win all around.

Indonesia’s measures, introduced in June, are relatively mild in comparison — as part of its aim to push speculators out of  short bonds and into less volatile longer-dated debt, it now requires foreigners to hold these bonds for a minimum 28 days. That is bad news for hot-money investors who like to move in and out of a market quickly. The result — by mid-July there had been a 37 percent surge in foreign ownership of longer debt and yields on the short bonds rose as foreigners pulled out. So most foreign fund managers haven’t been scared off at all — foreign holdings of Indonesian bonds recently hit record highs.

Indeed emerging markets have been lacklustre this year. Not really due to the capital controls but because people are worried about state of the U.S. and euro zone economies and prefer to keep their cash closer to home. But the Institute for International Finance says the fear of more capital controls is one reason  investment flows to emerging economies are likely to be lower this year than originally forecast.

It suffered the collapse of its currency, economy and banking system so being invoked in a version of the notorious Nigerian email scam is one of the smaller humiliations endured by Iceland.

The confidence trick, which has roots in the 18th century, usually involves an email from someone claiming to be either a deposed African dictator or a Nigerian lawyer, promising a sum of money in return for help to access a substantial fortune.

But the latest spam email making its rounds purports to be from Iceland, one of the highest profile sovereign casualties of the global financial crisis. This version of the email is supposedly from a "devoted christian (sic)" from Iceland", a widow seeking help to access $6 million in a Canadian bank left to her by her husband who worked for an oil giant for 19 years.

Just when you thought it was all over, Iceland looks like it’s in trouble again.  The cost of insuring Iceland’s debt against restructuring or default has risen this week to 720 basis points in the five-year credit default swap market, its highest since mid-2009.  That means it costs 720,000 euros a year for five years to insure 10 million euros of Icelandic debt against default.

Icelanders are to vote by March 6 on a deal to repay $5 billion lost in online Icesave bank accounts in Britain and the Netherlands. Those governments compensated savers when the bank collapsed and now want their money back from Reykjavik, but opinion polls show voters are likely to reject what are seen as the harsh terms of the agreement.

The uncertainty has driven debt insurance costs back up towards the levels seen just before the country’s banking system and government collapsed in Oct 2008.

It took some time, and a lot of downward corrections to IMF GDP forecasts, before the current global economic downturn won the title of 'worst since the Great Depression'.

Why settle for second worst though?

This one is in at least three ways just as bad if not even worse than 1929-30, economists Barry Eichengreen (University of California, Berkeley) and Kevin O'Rourke (Trinity College,
Dublin) argue. 

Look at global industrial output, world stock markets, and global trade volumes. Map the nine months after April 2008 against the period following June 1929 and the story you see is the following:

Analysts are starting to wonder if the International Monetary Fund will issue bonds denominated in its currency, Special Drawing Rights (SDRs), to boost the international lender’s capital. 

G20 leaders meeting today are said to be ready to agree a tripling of the IMF’s resources, to $750 billion. One source at the summit said the IMF might also tap international capital markets. 

BNP Paribas analysts like the idea of SDR bonds that could be bought by central banks reallocating portfolios away from the dollar. “Increased IMF firepower and the IMF likely to issue SDR-denominated bonds later this year will allow equities to move significantly higher,” they say in a client note.

If there’s one thing you don’t want to be, it’s the next Iceland.

Since its currency, colossally indebted banking sector and economy collapsed in spectacular fashion in October, the country has become a byword for an economy that has truly hit the rocks.

Within weeks, banking problems and currency falls meant Hungary was being hyped as a “second Iceland”, at least until a joint International Monetary Fund and European Union rescue package restored some stability.

If you lived on an archipelago that defined paradise with palm-fringed white sand beaches and emerald green waters, you would expect a relaxed, lazy pace of life.

Lazy would be a generous description of the Seychellois soldier’s wave at the entrance to State House as I arrived with my local colleague George Thande - who is admittedly a regular visitor here.

The Seychelles were ruled by the French before the British and State House in the capital Victoria is every bit the luxurious colonial mansion: a lush garden exploding with tropical colours; an oil painting of Britain's Queen Victoria hangs in the wood-panelled reception room close to a portrait of Castor, a runaway slave from the 19th century with a fearsome reputation; a Daimler and Rolls Royce are parked on the forecourt.

Pakistan has agreed with the International Monetary Fund (IMF) on a $7.6 billion emergency loan to stave off a balance of payments crisis. 

Shaukat Tarin, economic adviser to the prime minister, said the IMF had endorsed Pakistan's own strategy to bring about structural adjustments. The agreement is expected to encourage other potential donors, who are gathering in Abu Dhabi on Monday for a "Friends of Pakistan" conference.

The government had long delayed announcing its plans to turn to the IMF for help and President Asif Ali Zardari said in September the country did not want to seek IMF assistance. Tarin said in October that going to the IMF was "Plan C" if other lenders failed to come through.  "If we want to go to the IMF, we can ... but only as a backup," he said.