By now you’re likely to have already seen the bashing of Britain’s balance sheet by press – citing the latest IMF Fiscal Monitor Paper. Indeed a minus two trillion pound net worth (3tn in assets minus 5tn of liabilities) is a great headline and a terrifying prospect for those likely to bear this future tax burden. It’s also an embarrassment for many governments (including the UK’s) that have weakened their country’s long-term financial health significantly since the Global Financial Crisis: privatising illiquid assets to create the illusion of lowering public debt and assuming corporate liabilities (UK by 189% of GDP from 2007-08).
Are we safer a decade after the Global Financial Crisis? This is the heading and theme of this month’s IMF Global Financial Stability Report which marks 10 years since the GFC. The very fact that question needs addressing seems troubling in itself after a decade of financial engineering and regulatory reform.
The hundred pages of useful charts, data and commentary are focused on two key themes.
Last week the EU signed the world’s largest bilateral trade pact with Japan – reducing friction in the eastward flow of wine and cheese and the westward shipment of vehicles and parts – five years in the making. However, this week is another story and the EU faces the further undoing of such Trans-Atlantic trade relations as its diplomats stand-up or stand-down to Trump’s escalating trade demands. According to Donald Trump yesterday, “Tariffs are the greatest!” – unless of course they are levied against the US like the EU’s £3bn retaliatory tariffs on bourbon and bikes.
Last week the International Monetary Fund (IMF) warned that the sustained and escalating global trade conflicts initiated by the Trump Administration threaten to derail the economic recovery and depress medium-term growth prospects. The IMF believes that the global economy as a whole could lose about 0.5% of growth or about USD 430bn in lost GDP by 2020, with the possibility of the US being hit especially hard.
Southern Copper 7.5% 2035 was one of the star performers of 2017 gaining over 20 points and and has now tightened to less than 2 credit notches cheap on a best rating basis. Clearly, 2017 was a great year for copper prices with LME copper up close to 28% since the start of 2017.
While fundamentals are still supportive of copper we see more value in owning the 100% government owned Chilean producer Codelco: for example, Codelco 6.15% 2036 issue trades 3.7 notches cheap according to our models. Not only is this Codelco issue more attractive from a valuation perspective but it also offers the added attraction of being a higher rated credit, A3/A+/A versus Baa2/BBB/BBB+ for Southern Copper by Moody’s/S&P/Fitch respectively.
‘Whatever it takes’ - Three words that may have saved the Eurozone… for at least 5 years.
‘All the leaders of the 27 countries of Europe… said that the only way out of this present crisis is to have more Europe, not less Europe. A Europe that is founded on four building blocks: a fiscal union, a financial union, an economic union and a political union… there is more progress than it has been acknowledged… [people] underestimate the amount of political capital that is being invested in the euro… we think the euro is irreversible… Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.’
Earlier this week the International Monetary Fund revised up its forecast for UK growth. This is the second time in 3 months that the IMF has upgraded its forecast for the UK economy after conceding that its performance since the vote to leave the EU has been much stronger-than-expected. The upgraded outlook now suggests the UK will grow by 2% in 2017, second only to the US as the fastest growing advanced economy. In a note after the upgrade the IMF stated that growth ‘remained solid in the UK, where spending proved resilient in the aftermath of the June 2016 referendum in favour of leaving the European Union’.
Greek 2 year bonds touched yields of 9.5% yesterday on the back of a disenchanting report from the IMF which has revived a dispute between the IMF and EU creditors. Europe and markets generally have continued to assume that the IMF would eventually join the third bailout programme for Greece which for the last three years has fallen solely to the European Stability Mechanism (ESM). The IMF was meant to have decided on their participation by end 2016 but continue to abstain whilst arguing for a 1.5% primary surplus – rather than an “unrealistic” 3.5% target by 2018 as demanded by the European Commission – which would necessitate significant debt relief from other Eurozone countries.
According to a draft report issued by the International Monetary Fund (IMF), Greece’s government debt could soar to 275% of its gross domestic product (GDP) by 2060, at which time its financing needs will be a massive 62% of GDP, although these figures are disputed by the Greek government's own estimates. Greece believes debt at present is a mere 180% of GDP.
The IMF reports that Greece’s debt and financing needs will be ‘explosive’ in the coming decades unless they can renegotiate the bailout programme with the EU to lighten the load.
A couple of recent papers from the IMF have detailed the palpable problem of aging populations and specifically aging workforces across Europe and Japan; highlighting the current and expected accelerating impact these will have on productivity and economic growth. Whereas an increase in the dependency ratio is an obvious drag to economic growth - the effects of an aging workforce itself is not obviously a hindrance to productivity. For an older workforce may make up for in experience what they may have lost in vigour and entrepreneurialism associated with youth; particularly in technologically advanced economies where the considered elderly may easily be just as effective in many fields of employment.
Yesterday, the IMF warned in its latest fiscal monitor report of economic stagnation as global debt has hit a record USD152tn, a staggering 225% of world GDP; with private sector borrowing accountable for two-thirds (USD100tn) of the total. The organisation went on to highlight its concerns that non-financial corporations’ debt and private debt is rising rapidly; ‘when private debt is on an unsustainable path it is important to intervene early on in the process t make sure financial crises and recessions can be prevented.’
"Cautiously optimistic" still seems to be the overall position of the latest IMF review on the Chinese economy and its reform towards a sustainable growth path. Typically annually, the IMF holds bilateral discussions with its members under Article IV and last Friday they published this 123 page report covering reforms, concerns, expectations and suggestions - summarising the ongoing top-level dialogue and three and a half week intense discussions that took place during May-June.
The IMF’s 19 July economic update contained yet another downward revision to their global growth estimates: now running at 3.1 percent for 2016 and 3.4 percent for 2017. The report noted “The Brexit vote implies a substantial increase in economic, political, and institutional uncertainty, which is projected to have negative macroeconomic consequences, especially in advanced European economies.” The growth forecasts for the UK saw a modest downgrade to 1.7 percent in 2016 but the 2017 estimate was slashed by 0.9 percent to 1.3 percent.
Greece is again in the headlines after international creditors agreed on another bailout package, without which the indebted and struggling economy would have soon seen another default. Yesterday’s 11 hour negotiations have been heralded as another “breakthrough” amidst an impasse of 6 years and counting; as the champions of debt relief (IMF) conceded enough to reach a deal with the restructuring opponents (personified by Germany’s Finance Minister Wolfgang Schauble). Even so the IMF will still have to substantiate that the new arrangements allow Greece to meet its normal lending standards before it participates on further lending alongside the Eurozone.
The German word ‘schuld’ means ‘debt’ but it also translates to ‘guilt’ and ‘shame’ and perhaps goes some way to explaining Germany’s more rigid austerity driven approach to Greece and its debt.
Pierre Moscovici, the European Economic Affairs Commissioner, has made it clear that IMF involvement is viewed as essential to the Greek bailout stating “The commission is convinced that we must not do, will not do, without the Fund.” However, the IMF is insistent that for their involvement there has to be a realistic plan making Greece’s liabilities sustainable. The IMF takes issue with the primary budget surplus target (as a percentage of GDP before interest payments) and the lack so far of any form of debt relief. Christine Lagarde stated, “The 3.5% in the short term might be achievable by some heroic, and I really mean heroic, efforts on the part of Greece and the Greek people.” Moreover, “what we find highly unrealistic, on the other hand, is the assumption that this primary surplus of 3.5% can be maintained over decades. That just will not happen.”
The International Monetary Fund (IMF) has again warned governments around the world that they cannot rely on low or negative interest rates alone to avert recession and drive growth. Sighting factors such as low productivity, the lack of firepower from monetary policy and persistently low inflation the IMF is worried that there are still a number of factors that could blow global growth off course. Also, in a statement from the G20 there was a grave warning, “Growth remains modest and uneven, and downside risks and uncertainties to the global outlook persist against the backdrop of continued financial volatility, challenges faced by commodity exporters and low inflation.”
Over the weekend, the International Monetary Fund (IMF) warned that if governments and central banks rely on negative interest rates alone to boost demand and growth, they could fuel a dangerous ‘boom and bust’ cycle, adding that if there was a prolonged period of below zero interest rates which meant that banks started to charge customers for holding cash there could be a public backlash.
Last week the International Monetary Fund (IMF) cut its forecast for global growth to 3.4% for 2016; from 3.6% it projected in October 2015. In the Fund’s quarterly World Economic Outlook, released on January 19, it also cut the forecast for growth in 2017 from 3.8% to 3.6%. Growth in 2015 was just 3.1%, the weakest since 2009, according to IMF data.
Olivier Blanchard’s latest publication resonates more with emerging market policymakers than standard models; expounding on evidence that capital inflows and currency appreciation can often boost output.
Since retiring as Chief Economist of the International Monetary Fund last month, the esteemed Olivier Blanchard is not expected to fall into obscurity. Now a senior fellow at the Peterson Institute for International Economics (PIIE), an ever more influential Washington think tank, he will now be able, “to sit down and take the time” to focus on honed research which he had, “too little time” to accomplish during his 8 years of firefighting at the IMF, which he joined the month Lehman Brothers went bankrupt.