Page 34 - BNE_magazine_05_2020

34 I Cover story bne May 2020
the IMF created an additional SDR183bn ($290bn) in order to boost global liquidity and central banks’ reserves.
But this time round the amount of money that is needed is truly mindboggling, and could run into the trillions.
For example, total global debt has grown by $78 trillion since 2008 and topped $250 trillion as of the first half of 2019, according to IIF. China alone accounts for 40% of this global debt increase as the country’s non-financial corporates (notably SOEs) and households have cranked up their leverage. Turkey’s external debt alone is now around
a European Central Bank (ECB) study in 2017 that suggested in a major shock the IMF’s finances would be stretched. The problem is many emerging markets are likely to have problems rolling over their short-term external debts, which could ultimately lead to a run-down of FX reserves and so increase their need for funding.
But maybe the biggest hurdle to clear is simply the sheer size of the problem in some of the bigger countries. IIF calculates that the IMF could afford
to lend five times their SDR quota to every country (the official cap on a SBA programme is a cumulative debt of
International Rescue F. A. B.
If the lender of last resort for countries hasn't got the money, what can be done? A lively discussion has begun over creating some sort of mega “shared Eurobond” that can be issued by a body like the EU as a whole.
As things stand, the EU charter does not allow for this sort of instrument
and an entirely new mechanism would have to be created. Talks have already begun, but the idea is proving to be very controversial. At this point it seems that the crisis would have to deepen significantly, with, say, a second
wave of the pandemic, to rally the EU member states to the idea of a pan- European bond.
But the appeal of such an instrument is obvious, as it would allow EU members to share the cost of the COVID-19 crisis, helping member states to borrow at very long maturities at very low interest rates, and allow countries to re-launch their economies after the crisis is
over in a co-ordinated fashion. The basic argument is: pandemics are by definition borderless, so the rescue plan should be too.
Who is not asking?
Things could be worse. A lot worse. Happily there are many big countries that don't need the IMF’s help and have already braced themselves for the storm.
Russia
Russia is an outlier, as it has spent most of the last five years getting ready for the economic shock of harsh US sanctions. But a shock, is a shock, is a shock and
so Russia is actually very well prepared for this one. Both the government and companies paid down most of their debts following the last oil shock in
2014 and the government has built
up a massive RUB12 trillion ($157bn) reserve fund that can finance the expected budget deficits for at least three years and as long as a decade, according to Finance Minister Anton Siluanov.
“The amount of money that is needed is trulymindboggling, and could run into the trillions”
$190bn. The extra $290bn the IMF created in 2008 could be entirely swallowed by these two countries alone and even that would not be enough to help them.
On the face of it a lot of money is already being created. The IMF’s Georgieva
has said the IMF can mobilise around
$1 trillion. In practice, however, the amount it can actually lend out (at least immediately) is a lot smaller, according to Ribakova.
“Around a fifth of this $1 trillion
figure reflects pre-existing lending commitments (credit outstanding as well as undrawn). And about half reflects “inactivated borrowed resources” from member countries, which need to be periodically renewed and are subject to more uncertainty than funding from the standard country quotas (which stand
at $480bn). The IMF itself notes that its Forward Commitment Capacity (FCC), which is 'a measure of the resources available for new financial commitments', is $270bn,” says Ribakova.
The concern that the IMF does not have enough money was backed by
www.bne.eu
435% of the quota) with a GDP of $100bn or less – about the current size of the Ukrainian economy – before it runs out of money.
Happily in this crisis none of the five biggest emerging markets – China, Brazil, India, Russia and Korea, which account for two-thirds of emerging markets GDP – are in trouble.
All of them have large reserves and
low external debt. They all also have their own domestic bonds markets,
so governments can source a lot of funds domestically to finance stimulus programmes and budget deficits before they have to go cap in hand to the IMF.
But stepping down just one tier to the likes of Turkey and South Africa, which are in difficulties, and even the size of these smaller countries is still too big for the IMF to cope with on its own.
“Their gross external financing requirements (GXFRs) are large as
a share of FX reserves. And both will probably struggle to roll over maturing external debts in current market conditions,” says IIF.