IMF faces China debt dilemma as low income nations seek help

Many participants in Beijing’s Belt and Road Initiative are not financially secure

Delphine Strauss in London

© FT montage; AFP/Getty

The IMF has warned for more than a year of rising debt levels in low income countries. Now, bailout talks with Pakistan and requests for help from Angola, Zambia and others are forcing the fund to confront a pressing question: how far is debt distress in the developing world due to lending by China?

The trouble is, no one has the information needed to answer this question — and so ensure that Beijing plays its part in any writedowns of debt to official creditors.

In the past decade, China has stepped into the gap left by western donors, offering no-strings finance for political allies and for projects advancing its commercial and geopolitical interests.

In the absence of official data, it is hard to assess even the scale of lending. Researchers at Johns Hopkins University — who say their task is “more akin . . . to detective work than accounting” — estimate that the Chinese government, banks and contractors loaned some $143bn to African governments and state-owned enterprises between 2000 and 2017. Information on the maturity, cost and terms of loans is next to non-existent.

This is a huge challenge for the IMF. “Assessing debt sustainability is at the heart of IMF competence. If you get it wrong or go about it without the information, it hurts your credibility,” said a former senior official at the fund.

The first big test of the IMF’s resolve to tackle the issue is Pakistan’s bailout request: talks will resume in January, after a staff visit this week ended without agreement .

The fund’s reputation is on the line: it must explain why a repeat customer whose last bailout programme ended only in 2016 is already in difficulties. But the opaque nature of Chinese lending makes it hard to judge whether the country’s debt is sustainable.

Pakistan’s sovereign debt is high for an emerging market, at around 70 per cent of GDP. As much as half of this could be owed to China, which has pledged to fund projects worth some $60bn and has made Pakistan a cornerstone of the Belt and Road Initiative, its scheme to fund and build infrastructure in more than 80 countries.

The former IMF official said Pakistan’s finances might be sustainable without debt relief — but only if there were no large hidden liabilities, such as guarantees on loans to state-owned enterprises. It would also be essential to establish the terms of Chinese loans, which analysts say are often extended at top-end commercial rates, not the concessionary rates usual for bilateral development aid.

When asked about Pakistan last month, Christine Lagarde, the fund’s managing director, insisted the IMF would demand “absolute transparency” on the nature, size and terms of its debt. This demand was one of the sticking points in the latest talks.

But the difference of approach between China and the fund reveals a larger mismatch between two competing visions for global development.

The IMF represents the Washington consensus, which stresses multilateral initiatives, open procurement and financial transparency. China’s approach in the BRI is largely bilateral, with project details withheld and contracts awarded mostly to Chinese state firms.

There is much at stake, given the likelihood that other countries will soon be queueing at the fund’s doors.

Last month, the IMF warned that more than 45 per cent of low income countries were at high risk of — or already in — debt distress, up from one-third in 2016 and one quarter in 2014.

Several sub-Saharan governments have asked the Fund for help: Chinese loans are among the obstacles to progress with Angola, which approached the IMF in August, and Zambia which has been locked in negotiations for months.

Many other countries China has chosen as participants in the BRI are financially insecure. According to Moody’s, the credit rating agency, 78 of them have a median rating of Ba2 — signifying a non-investment, or “junk”, level of risk.

Ted Truman, a fellow at the Peterson Institute for International Economics and a former IMF official, believes there could be bigger calls on the IMF within a few years. “Sooner or later, we all think that Venezuela [which has extensive debts to Beijing] will need an IMF programme to put the country back together again,” he said.

The US administration has already made it clear it will not back any IMF rescue that might serve simply to help its recipient pay off debts to Beijing.

Rescheduling debts to official creditors is usually a condition of an IMF bailout but China is not a member of the Paris Club, the group that coordinates debt relief.

The nature of Chinese lending is a further complication.

Gabriel Sterne, a former IMF official now at Oxford Economics, said it would not be easy to reschedule Chinese loans, often issued on commercial terms by state banks and other actors. “These chickens are going to come home to roost . . . it is completely unproven that China will behave cooperatively if things go bad,” he said.

Carmen Reinhart, a Harvard professor, has noted that China’s tendency to favour collateralised loans (such as oil backed loans extended to Angola and Ecuador) is a challenge, because their terms may affect the order of seniority among creditors.

China has at times proved willing to extend new loans or defer repayment when borrowers run into difficulties. It may now wish to be flexible — partly to avoid further conflict with the US, partly because it is worried that many loans may not be repaid.

Last month Wang Wen, the head of China’s export credit insure Sinosure, issued a rare public warning to Chinese developers of the need to step up risk management. He said Sinosure had already lost $1bn on a railway linking Addis Ababa to Djibouti — a project whose terms Ethiopia recently managed to renegotiate with Beijing.

But western governments will now want to see a formal commitment to burden sharing before they back an IMF bailout of any country heavily indebted to China. Pakistan’s crisis “is a test of the system,” Mr Truman said. “If they blink it’s a mess.”

Britain and the EU

The truth about a no-deal Brexit

Time to bust the last great Brexit myth 

THE BRITISH body politic is again convulsing. Theresa May has appointed new ministers, including her third Brexit secretary and counting, following another round of cabinet resignations. The prime minister’s own backbenchers are feverishly (if ineptly) plotting to bring her down. The Labour opposition’s position is hopelessly unclear. The cause of this chaos is that those with long-standing delusions about what Brexit would mean have been forced to swallow a dose of reality.

With negotiating time almost up, Britain has the imperfect deal that it was always going to get. Promises of having cake and eating it have given way to a less appetising offering. Yet among Brexiteers, one hopeful fantasy lives on: the idea that, if all else fails, Britain can prosper outside the European Union without signing a deal at all. The idea’s proponents tout a no-deal Brexit as a way to avoid giving ground, or money, to Brussels. They dismiss objections as another round of the alarmist “Project Fear” that Remainers deployed before the referéndum.

They are gravely mistaken. It is time to debunk the last, and most dangerous, of the Brexit fantasies.

The notion that Britain should leave the EU without agreeing on exit terms or paying its tab has gained currency. Perhaps two dozen Tory MPs want such an outcome, now that a cake-and-eat-it deal is off the menu. Given the government’s wafer-thin majority, this small band has undue clout (see article). Assurances by level-headed ministers that Parliament would block a no-deal exit are constitutionally questionable. The public, meanwhile, are worryingly relaxed about no deal. Polls find that many voters would rather do a runner from the EU than accept the compromise that Mrs May has struck.

The reality is that no deal amounts to a very bad deal, as our briefing this week spells out. It would rip up 45 years of arrangements with the continent that in living memory has gone from existential threat to vital ally. It would swap membership of the EU’s single market for the most bare-bones trading relationship possible. Reneging on £39bn ($50bn) in obligations to the EU would devastate Britain’s international credibility. Reaching no deal on the Irish border would test the Good Friday Agreement that ended a serious armed conflict. And the violent dislocation of nearly every legal arrangement between Britain and Europe would affect daily life like nothing outside wartime.

The myth has taken hold that no deal simply means no trade deal. Proponents of a no-deal exit say it will involve Britain trading with the EU on the standard terms used by other members of the World Trade Organisation (WTO). No-dealers argue, correctly, that Britain could eventually adjust to this. It would be painful, but the economy could move beyond industries like carmaking, which would be ruined by the 10% tariffs that the EU would impose on British exports. Consumers would gain if the government took the highly unlikely step of abolishing all tariffs, as no-dealer economists recommend. But protected sectors, particularly agriculture, would wither. And many Leave-voters might be surprised that the price of exit was the collapse of much of Britain’s high-end manufacturing and the demise of farming.

More important, no deal would mean not just no trade deal, but the rupture of a whole corpus of legal arrangements with the EU. Britain would be left without rules to govern the trade in radioactive materials, international electricity markets, financial-contract clearing, aviation, medicines regulation, immigration control and much else. What some Brexiteers describe as a “clean break” from Europe would in fact be horrifically messy.

No-deal proponents counter that Britain and the EU would quickly sign side-deals to mitigate the worst of the chaos—allowing flights to carry stranded citizens home, for instance. But it is unlikely that the EU would do more than the minimum if Britain defaults on its debts. What little goodwill remains would turn to dust. Brexiteers say that shortages could be avoided if Britain threw its borders open to EU products without checks. But eschewing any sort of regulation would be an odd way for Britain to “take back control”, as the Leave campaign promised.

If Mrs May wonders how this dire outcome has come to be more popular than her hard-won deal, she should start by re-reading her own speeches. Her mantra that “no deal is better than a bad deal” was supposed to persuade the EU to give Britain better terms. It didn’t work. But it struck a chord at home. David Davis, her first Brexit secretary, compared the talks to buying a house: “You don’t walk in and say, ‘I’m going to buy the house, now what’s the price?’ So why should it be any different in a big negotiation like this?” The answer is that not buying a house means sticking with the status quo, whereas not signing a Brexit deal means swapping the status quo for a new, very bad alternative. The house-buying analogy works only if the buyer has burned down their existing home and is negotiating to buy the only one on the market.

Advocates of no deal brim with the same misplaced confidence with which they approached the Brexit talks. The grim warnings of what would happen after the referendum have turned out to be overblown, they point out. Britain has not fallen into recession, as Remainers forecast, though its performance relative to other advanced economies has declined. Might the impact of no deal turn out to be less bad than feared?

Perhaps. But the disruption caused by an unmediated exit would be far more dramatic than the economic harm caused by the Brexit vote. The public cannot easily see what they have lost as a result of Britain’s slip from being the fastest-growing member of the G7 to one of the slowest. A no-deal Brexit, by contrast, could have highly visible effects. Essentials drying up, travellers stranded, motorways gridlocked: these things bring down governments and undermine faith in democratic politics. In 2000 Tony Blair’s administration was plunged into crisis when protesting lorry-drivers blockaded oil refineries. The protests lasted barely a week but still forced supermarkets to ration bread and milk, and the government to deploy army ambulances.

It is hard to imagine any government surviving the chaos of a no-deal Brexit, let alone one as weak as Mrs May’s. So far the decision to quit the EU has slowed Britain down, rather than derailing it. Leaving with no deal, however, could result in a wreck.

Europe Finally Pulls the Trigger on a Military Force

After two years of US President Donald Trump treating European allies as if they were adversaries, France and Germany have finally committed to the creation of an EU-wide army under a central command. Far from signaling a break from the transatlantic order, the move promises to shore up existing alliances for the long term.

Hans-Werner Sinn  

soldier eiffel tower

MUNICH – US President Donald Trump is making an intolerable show of himself in Europe. Not only has he cast doubt on America’s commitment to mutual defense under NATO; he has also unilaterally withdrawn from the 2015 nuclear agreement between Iran and the five permanent members of the United Nations Security Council, plus Germany and the European Unión.

Since then, the Trump administration has unilaterally imposed an embargo on goods deliveries to Iran from any third country, including the other signatories of the agreement. Foreign firms that continue to conduct business in Iran now face the threat of sanctions, and banks that process transactions risk losing access to the US financial system.

Meanwhile, the US has been threatening similar action with respect to the new Nord Stream 2 gas pipeline that will run from Russia to Germany. The US Congress is considering legislation that allows the Trump administration to impose sanctions on European firms taking part in the project, even though these companies are contractually obliged to see the work through. And, according to Gerhard Schröder, a former German chancellor who now chairs the pipeline project, the US ambassador to Germany has been acting more like an “occupation officer” than like a diplomat.

All told, the Trump administration’s disruptive behavior has left the French and German governments furious. But, beyond fueling anger, Trump’s attacks on other countries’ sovereignty are adding momentum to a new push for European political unification.

It is no secret that Europe is in the midst of an internal economic crisis – a result of the euro saddling southern eurozone countries with high inflation prior to the 2008 financial crash, which severely reduced their competitiveness within the euro system. These economic problems have led to the emergence of Euroskeptic nationalist parties and movements across the continent. More recently, the European project has been weakened further by the United Kingdom’s decision to withdraw from the EU.

Against this backdrop, Trump’s actions are actually something of a godsend, because they have forced Europeans to accept that they must stand together in defense of their sovereignty and prosperity. A union of almost 450 million people (after Brexit) cannot allow a country two-thirds its size to treat it like a group of vassal states.

Accordingly, both French President Emmanuel Macron and German Chancellor Angela Merkel declared this month that they support the need to create a joint European army. The best way to understand this effort, said German Minister of Defense Ursula von der Leyen, is as an answer to Trump’s demand that Europeans spend more on defense.

Of course, von der Leyen knows that the formation of an independent European force isn’t really what the US president had in mind. But the German establishment credibly maintains that a European army is meant to supplement and strengthen NATO. The transatlantic alliance will be no less necessary than it was before, nor will European citizens regard their American counterparts with any less sympathy and fellow feeling. The deep historical ties between the US and Europe remain unchanged; everybody knows there will be an America after Trump.

Better yet, Europe is once again pursuing political unification with vigor and a sense of collective purpose, and that is how it should be. The European project has long suffered from giving economic integration pride of place while pushing political unification to the backburner. Indeed, France, Italy, the Benelux countries (Belgium, the Netherlands, and Luxembourg), and Germany had agreed to form a European army as early as 1952 under the Framework of the European Defense Community. But the French National Assembly never ratified that treaty, so it never entered into force.

Then came the Maastricht Treaty, which offered a second chance for a political union. Yet France stood in the way once again. The French supported euro membership, because they wanted the Mediterranean countries, including themselves, to be able to borrow at the same low rates as Germany on the capital markets. But they successfully resisted the creation of a political union, which is predicated on a central state with a joint army and monopoly on the use of military force.

If France is now serious about merging national armies into a joint defense force under a central EU command – rather than just an intervention force for its former African colonies – Macron could well secure his place in the history books. There is much work to be done. But if it happens, he will have Trump to thank.

Hans-Werner Sinn, Professor of Economics and Public Finance at the University of Munich, was President of the ifo Institute and serves on the German economy ministry’s Advisory Council. He is the author, most recently, of The Euro Trap: On Bursting Bubbles, Budgets, and Beliefs.

domingo, diciembre 02, 2018



Why Gold Is Money

By Doug Casey, founder, Casey Research

It’s an unfortunate historical anomaly that people think about the paper in their wallets as money. The dollar is, technically, a currency. A currency is a government substitute for money. But gold is money.

Now, why do I say that?

Historically, many things have been used as money. Cattle have been used as money in many societies, including Roman society. That’s where we get the word “pecuniary” from: the Latin word for a single head of cattle is pecus. Salt has been used as money, also in ancient Rome, and that’s where the word “salary” comes from; the Latin for salt is sal (or salis). The North American Indians used seashells. Cigarettes were used during WWII. So, money is simply a medium of exchange and a store of value.

By that definition, almost anything could be used as money, but obviously, some things work better than others; it’s hard to exchange things people don’t want, and some things don’t store value well. Over thousands of years, the precious metals have emerged as the best form of money. Gold and silver both, though primarily gold.

There’s nothing magical about gold. It’s just uniquely well-suited among the 98 naturally occurring elements for use as money… in the same way aluminum is good for airplanes or uranium is good for nuclear power.

There are very good reasons for this, and they are not new reasons. Aristotle defined five reasons why gold is money in the 4th century BCE (which may only have been the first time it was put down on paper). Those five reasons are as valid today as they were then.

When I give a speech, I often offer a prize to the audience member who can tell me the five classical reasons gold is the best money. Quickly now – what are they? Can’t recall them? Read on, and this time, burn them into your memory.


If you can’t define a word precisely, clearly and quickly, that’s proof you don’t understand what you’re talking about as well as you might. The proper definition of money is as something that functions as a store of value and a medium of Exchange.

Government fiat currencies can, and currently do, function as money. But they are far from ideal. What, then, are the characteristics of a good money? Aristotle listed them in the 4th century BCE. A good money must be all of the following:

• Durable: A good money shouldn’t fall apart in your pocket nor evaporate when you aren’t looking.

It should be indestructible. This is why we don’t use fruit for money. It can rot, be eaten by insects, and so on. It doesn’t last.

• Divisible: A good money needs to be convertible into larger and smaller pieces without losing its value, to fit a transaction of any size. This is why we don’t use things like porcelain for money – half a Ming vase isn’t worth much.

• Consistent: A good money is something that always looks the same, so that it’s easy to recognize, each piece identical to the next. This is why we don’t use things like oil paintings for money; each painting, even by the same artist, of the same size and composed of the same materials is unique. It’s also why we don’t use real estate as money. One piece is always different from another piece.

• Convenient: A good money packs a lot of value into a small package and is highly portable.
This is why we don’t use water for money, as essential as it is – just imagine how much you’d have to deliver to pay for a new house, not to mention all the problems you’d have with the escrow. It’s also why we don’t use other metals like lead, or even copper. The coins would have to be too huge to handle easily to be of sufficient value.

• Intrinsically valuable: A good money is something many people want or can use. This is critical to money functioning as a means of exchange; even if I’m not a jeweler, I know that someone, somewhere wants gold and will take it in exchange for something else of value to me. This is why we don’t – or shouldn’t – use things like scraps of paper for money, no matter how impressive the inscriptions upon them might be.

Actually, there’s a sixth reason Aristotle should have mentioned, but it wasn’t relevant in his age, because nobody would have thought of it… It can’t be created out of thin air.

Not even the kings and emperors who clipped and diluted coins would have dared imagine that they could get away with trying to use something essentially worthless as money.

These are the reasons why gold is the best money. It’s not a gold bug religion, nor a barbaric superstition. It’s simply common sense. Gold is particularly good for use as money, just as aluminum is particularly good for making aircraft, steel is good for the structures of buildings, uranium is good for fueling nuclear power plants, and paper is good for making books. Not money. If you try to make airplanes out of lead, or money out of paper, you’re in for a crash.

That gold is money is simply the result of the market process, seeking optimum means of storing value and making exchanges.