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Economic

Is it time to cancel the “funding guarantees”?

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Lee Bouchett is Professor of Law (Honours) at the University of Edinburgh.

accident Sovereign debt restructuring It is expected to unfold more or less as follows:

• The debtor country is approaching the International Monetary Fund to obtain a programme.

• Fund staff prepares a Debt Sustainability Analysis (DSA).

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• If a country’s debt is declared “unsustainable” by the Public Debt Law, IMF staff will insist on their promise to restructure its financial obligations in order to meet specified “debt sustainability targets” (eg average annual total financing needs; target debt relative to gross output domestic; cumulative debt service reduction target, etc.).

• The IMF staff and the country then negotiate the terms of the IMF Adjustment Program, with the terms stated in a Staff Level Agreement (SLA).

• But IMF staff will not take the draft program to the IMF’s Executive Board for approval unless and until the country’s bilateral and commercial creditors provide assurances to the Fund that they will restructure their debt in a manner consistent with the programme. In IMF talk, these are called “Financing guarantees.

but why?

The ostensible justification for the IMF’s insistence on receiving financing guarantees from the country’s existing creditors is found in the Fund’s Articles of Agreement. FTAV focus below:

Section 3. Terms of use of the general resources of the Fund

(a) The Fund shall adopt policies regarding the use of its general resources, including policies relating to stand-by or similar arrangements, and may adopt special policies for special balance of payments problems, which will assist Members to resolve their own balance of payments problems in a manner consistent with the provisions of this Agreement and which will establish Adequate guarantees for the temporary use of the general resources of the Fund.

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As an institution that lends new money in clearly distressed situations, it is quite understandable that the IMF would want the debtor country’s existing lenders to agree to settle their claims against the borrower before disbursing the new money. After all, the IMF should not want to see its money hemorrhaged to pay existing creditors in full.

Equally important, the Fund wants to ensure that its programs will have reasonable change for success. When a country is assessed as having an unsustainable debt load, that success will require an adjustment to existing liabilities.

The dilemma of the pig in the goose

The problem is not that the fund is seeking financing guarantees from existing lenders. No commercial lender in a distressed company situation would do otherwise. The problem is when and how to request these financing guarantees.

Let’s start with when. International Monetary Fund staff is asking bilateral and commercial creditors to provide financing guarantees Before Staff will submit the proposed program to the Fund’s Executive Board for approval. The IMF’s financing guarantee policy took shape in the early 1980s at the onset of the Latin American debt crisis.

In that era, the bilateral sovereign creditors were members of the Paris Club Commercial bank lenders were represented by an advisory committee to the bank. At the time, it was relatively easy to seek assurances from both groups that they would provide the debt relief needed to fill any projected funding gaps in the country’s IMF adjustment programme. But by 1989 it had become clear that commercial banks were using the Fund’s financing guarantee requirements as leverage to obtain concessions from sovereign debtors.

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With respect to trade creditors, the fund has considerably relaxed its financing guarantee policy. Funding guarantees from commercial creditors are now met if the sovereign borrower commits to negotiating in good faith with the commercial creditors. In other words, the debtor promised to negotiate With Its private lenders consider it collateral From These creditors that they will accept the outcome of those negotiations, whatever they may be. However, the fund continues to insist on receiving positive financing assurances from bilateral creditors.

Over the past 12 years, the Paris Club’s share of bilateral lending has dwindled compared to non-Paris Club bilateral lenders, particularly China. Funding guarantees must now be sought from two groups of bilateral creditors – the Paris Club and non-Paris Club bilateral countries such as China. and if receipt of funding guarantees is a precondition for consideration by the Executive Board of the programme, a Bilateral creditor like China that may not relish the prospect of debt restructuring could prevent this event – largely indefinitely – simply by Withhold their financing guarantees staff of the International Monetary Fund.

Now how

Lenders who have been asked to provide these financing guarantees have not been told exactly what they are, in principle, signing up for. The debt sustainability targets contained in the debt sustainability analysis will be expressed as applicable to the entire stock of a country’s debt. The sensitivities of the Fund prevent him from indicating in the DSA or in the Program how much debt relief is required to be charged by each class of lenders; The fund insists that this is a matter to be resolved between the state and its various creditors.

Sentence “Financing guaranteesIt may indicate that each creditor group is required to confirm that it will contribute an amount of prescribed debt relief proportionate to its share of the total debt stock. But this is merely an implication. Funding guarantees could just as easily refer to a promise to provide debt relief proportionate to With the share of the creditors group in the debt balance And the Sufficient to cover any shortfall in debt relief provided by other creditors.

Furthermore, some lenders may feel that other creditors should offer a disproportionate share of debt relief. Scratch a Paris Club creditor, for example, and you’ll likely discover beneath the surface a deep belief that bilateral creditors — lending at below-market interest rates — should be given preferential treatment in any debt restructuring with the lion’s share of any debt relief needed. Coming from those incorrigibly greedy commercial lenders. What does a bilateral creditor say when the IMF is assured it will provide adequate debt relief?

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Finally, what does “guarantee funding” mean in the context of a country such as Sri Lanka or Ghana, where almost half of the debt stock is made up of domestic liabilities (in local currency)? Everyone knows that great care must be taken when seeking debt relief from local creditors for fear of destabilizing local financial institutions, pension funds and insurance companies.

In a country with a large amount of domestic debt, does “financing guarantees” thus mean debt relief in proportion to each external creditor group’s share of the foreign currency debt stock Plus Portion – how much? – From the balance of the domestic debt?

deadlock

There is an obvious solution. Instead of requiring lenders to provide financing guarantees as a condition of taking a program to the IMF’s executive board, have the board approve the program but withhold any large cash payments until existing lenders agree to provide the required debt relief.

This would (1) adequately protect the fund’s resources, (2) put pressure on the debtor and existing lenders to come to specific terms on debt restructuring or risk canceling the program and (3) deny any creditor or large creditor group the ability to thwart the process by Withhold their financing guarantees.

Moreover, the IMF has Established policies (called “lending to arrears”) that addresses the problem of recalcitrant creditors After, after The council approves a program for the country.

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The potential time delay inherent in the Fund’s current practice of financing guarantees is more than an inconvenience.

At the time of signing the Staff Level Agreement, the debtor country’s authorities are often required to implement “prior actions” before the program goes to the IMF’s board for approval. Some of these prior actions, such as raising taxes, can be politically harmful.

So it could leave the authorities in an uncomfortably exposed position if the state swallows some bitter medicine but finds that in practice a creditor can still delay the program indefinitely by withholding financing guarantees.

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Economic

We need to pay more attention to skewed economic signals

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The writer is chair of Queen’s College, Cambridge and advisor to Allianz and Gramercy

Inflation was the dominant economic and financial issue of 2022 for most countries around the world, especially for advanced economies that have a consequential impact on the global economy and markets.

The effects have been seen in declining living standards, increasing inequality, increasing borrowing costs, stock and bond market losses, and occasional financial mishaps (fortunately small and so far contained).

In this new year, recession, both actual and feared, has joined inflation in the driving seat of the global economy and is likely to replace it. It’s a development that makes the global economy and investment portfolios subject to a wide range of possible outcomes — something that a growing number of bond investors seem to be aware of more than their equity counterparts.

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International Monetary Fund iYou will likely review soon Her economic growth forecasts again, predicting that “a third of the world will be hit by recession this year”. What is particularly notable to me about these worsening global prospects is not only that the world’s three major economic regions – China, the European Union and the United States – are slowing down together, but also that this is happening for different reasons.

In China, a chaotic exit from the wrong Covid-19 policy is undermining demand and causing more supply disruptions. Such headwinds to domestic and global economic well-being will continue as long as China fails to improve the coverage and effectiveness of its vaccination efforts. The strength and sustainability of the subsequent recovery will also require that the country more vigorously renew a growth model that can no longer rely on greater globalization.

The European Union continues to deal with energy supply disruptions as the Russian invasion of Ukraine continues. Strengthening inventory management and reorientation of energy supplies is well advanced in many countries. However, it is not yet sufficient to lift immediate constraints on growth, let alone resolve long-term structural headwinds.

The United States has the least problematic view. The headwinds to growth are due to the Fed’s struggle to contain inflation after mischaracterizing rate increases as fleeting and then initially being too timid to adjust monetary policy.

The Fed’s shift to an aggressive front-load of interest rate hikes came too late to prevent the spread of inflation in the services sector and wages. As such, inflation is likely to remain stubborn at around 4 percent, be less sensitive to interest rate policies and expose the economy to greater risk for accidents from additional policy errors that undermine growth.

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The uncertainties facing each of these three economic areas suggest that analysts should be more careful in reassuring us that recessionary pressures will be “short and shallow”. They need to be open, if only to avoid repeating the mistake of prematurely dismissing inflation as transient.

This is especially important because these diverse drivers of recessionary risk make financial fragility more threatening and policy shifts more difficult, including potentially Japan. Get out of interest rate control Policy. The range of possible outcomes is extraordinarily large.

On the one hand, a better policy response, including improving the supply response and protecting the most vulnerable populations, can counteract the global economic slowdown and, in the case of the United States, avert a recession.

On the other hand, additional policy errors and market turmoil can lead to self-reinforcing vicious cycles with rising inflation and rising interest rates, weakening credit and compressed earnings, and stressing market performance.

Judging by market prices, more bond investors are better understanding this, including by refusing to follow the Fed’s interest rate guidance this year. Instead of a sustainable path to higher rates for 2023, they believe recessionary pressures will lead to cuts later this year. If true, government bonds would provide the yield and potential for badly missed portfolio risk mitigation in 2022.

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However, parts of the stock market is still weakly bearish pricing. Reconciling these different scenarios is more important than investors. Without better alignment within markets and with policy signals, the positive economic and financial outcomes we all desire will be no less likely. They will also be challenged by the risk of more unpleasant outcomes at a time of less economic and human resilience.

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Economic

Macro hedge funds end 2022 higher, investors say, while many others take big losses By Reuters

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© Reuters. FILE PHOTO: Traders work on the trading floor of the New York Stock Exchange (NYSE) in New York City, US, January 5, 2023. REUTERS/Andrew Kelly

By Svea Herbst Baylis

NEW YORK (Reuters) – Some hedge funds betting on macroeconomic trends have boasted of double and even triple-digit gains for 2022, while other high-profile companies that have long been on technology stocks have suffered heavy losses in volatile markets, investors said.

Rokos Capital, run by Chris Rokos and one of a handful of so-called global macro companies, gained 51% last year. Fund investors this week, who asked not to be identified, said Brevan Howard Asset Management, the company where Rokos once worked, posted a gain of 20.14% and Caxton Associates returned 16.73%.

Haider Capital Management’s Haider Jupiter Fund rose 193%, an investor said.

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Data from hedge fund research showed that many macro managers have avoided crumbling stock markets that have been rocked by rapid interest rate increases and geopolitical turmoil, including the war in Ukraine, to rank among the best performers in the hedge fund industry. The company’s macro index rose 14.2% while the general index of hedge funds fell 4.25%, its first loss since 2018.

Equity hedge funds, where the bulk of the industry’s roughly $3.7 trillion in assets are invested, fared worse with a loss of 10.4%, according to HFR data. And while that beat the broader stock market’s loss of 19.4%, some high-profile funds posted even bigger losses.

Tiger Global Management lost 56% while Whale Rock Capital Management ended the year with a 43% loss and Maverick Capital lost 23%. Coatue Management ended 2022 with a loss of 19%.

But not all companies that bet on technology stocks suffered. John Thaler JAT Capital finished the year with a 3.7% gain after fees after a 33% increase in 2021 and a 46% gain in 2020.

Sculptor Capital Management (NYSE::), where founder Dan Och is fighting the company’s current CEO in court over his salary increase, posted a 13% drop.

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David Einhorn’s Greenlight Capital, which bet that Elon Musk would be forced to buy Twitter, ended the year up 37% while Rick Sandler’s Eminence Capital rose 7%.

A number of so-called multi-manager companies where teams of portfolio managers bet on a variety of sectors also boast positive returns and have been able to deliver on their promise that hedge funds can deliver better returns in distressed markets.

Balyasny’s Atlas Fund (NYSE: Enhanced) gained 9.7%, while Point72 Asset Management gained 10%. Millennium Management gained 12% while Carlson Capital ended the year with a 7% gain.

Representatives for the companies either did not respond to requests for comment or declined to comment.

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Economic

German automakers point to easing supply chain problems

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Sales at BMW and Mercedes-Benz jumped in the final months of 2022 as the German premium auto brands indicated supply chain problems plaguing the industry were abating.

Automakers around the world have experienced parts shortages since the pandemic, especially semiconductors, leaving many of them with large fleets of incomplete vehicles that can’t be delivered to customers.

BMW and Mercedes each said their full-year vehicle deliveries fell last year by 4.8 percent and 1 percent, respectively, due to Suppliers Bottlenecks as well as lockdowns in China and the war in Ukraine.

But supply pressures eased in the last quarter of the year, as BMW recorded a 10.6 percent jump in sales, with 651,798 vehicles delivered, and Mercedes fulfilling 540,800 orders, up 17 percent from the same period in 2022.

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BMW He said the main effects of supply chain bottlenecks and continued lockdowns were felt in the first six months of the year, adding that “sales were steadily picking up in the second half.”

Mercedes boss Ula Kallenius told the Financial Times last week that the list of problems in the auto supply chain was declining, but added that long waits for cars would continue into 2023.

“One chip is enough to be vital [ . . .] Missing, and then you can’t finish the car, even if you have everything else.

Both brands recorded strong sales growth electric car. Mercedes, which last week announced a plan to build 10,000 charging docks, said EV shipments grew 124 percent to 117,800 last year compared with its predecessor.

Similarly, BMW reported strong growth in electric vehicle sales, with deliveries of fully electric vehicles doubling last year to 215,755.

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Analysts at Bank of America said that sales of electric vehicles, including hybrid cars, reached a historic peak last November, with 1.1 million units sold. They attributed this largely to the upcoming phase-out of customer subsidies in Germany.

Participate in Mercedes BMW and BMW prices held steady Tuesday morning as investors priced in an image of an improving showing.

Rolls-Royce, a subsidiary of BMW, announced Monday that sales have hit a 119-year record, driven by strong demand in the United States, its largest market.

The luxury brand has been largely unaffected by the semiconductor pressure, mainly because it makes relatively few compounds and therefore needs fewer chips.

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