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China Agrees Landmark Debt Relief Deal for Zambia

Taylor Johnston

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Zambia’s official creditors led by China have agreed to provide debt relief to the southern African nation, paving the way for an IMF bailout and setting a precedent for how Beijing could work with other lenders to tackle the threat of a wave of defaults across emerging markets.

A committee of creditors co-chaired by China and France said on Saturday that they were “committed to negotiate with the Republic of Zambia terms of a restructuring” under a G20 framework to co-ordinate debt relief.

Kristalina Georgieva, the IMF’s managing director, said that she was “very pleased to welcome” the commitment by the creditors, which will unlock a $1.3bn IMF loan to revive Zambia’s finances. Zambia still has to negotiate exact terms of the relief and reach a similar deal with private creditors.

“The support from the official creditor committee for Zambia’s envisaged IMF-supported programme, together with its commitment to negotiate debt restructuring terms, accordingly, provides the IMF with official financing assurances,” Georgieva added.

The deal is an early sign that China is prepared to co-ordinate with other official creditors on restructuring the debts of low-income countries, rather than deal with defaults on its own loans behind closed doors. Zambia has become a test case for countries that also turned to Beijing for financing in recent years, such Sri Lanka, which has already defaulted, and Pakistan.

Zambia became the first African country to default during the pandemic in 2020 when it halted payments on $17bn of external debt, including $3bn in US dollar-denominated eurobonds, after years of rising debt distress.

China has emerged as the country’s biggest creditor in the last decade, offering an estimated $6bn of loans as Zambia embarked on ambitious infrastructure projects such as roads, dams, and airports. These soured as the economy slowed.

President Hakainde Hichilema’s government agreed terms for a three-year IMF bailout last year within months of coming to power in a landslide poll victory over Edgar Lungu, who presided over the worsening debt crisis.

But the Hichilema government had to wait for assurances from official creditors before it could begin the IMF programme and thrash out terms of a debt restructuring in detail with both private and official creditors.

“We are confident that together with our partners, Zambia will address the issue appropriately and with the urgency needed to help get the economy back on a sustainable growth trajectory,” Situmbeko Musokotwane, the Zambian finance minister, said.

The Zambian finance ministry on Friday detailed plans to cancel a further $2bn in yet to be disbursed loans tied to projects — mostly affecting Chinese creditors.

Private creditors such as bondholders will be expected to grant Zambia debt relief that is at least as large as what will be offered by official lenders, under the so-called comparability of treatment principle.

On Saturday the official creditor committee urged other lenders to “commit without delay to negotiate with Zambia such debt treatments that are crucial to ensure the full effectiveness of the debt treatment for Zambia under the common framework.” 

“If negotiations are starting with bilateral creditors, that shows that the Chinese are in agreement on the financial assurances and are relatively comfortable with the IMF’s debt sustainability analysis and with the restructuring and the size of any haircut,” said Kevin Daly, investment director at Abrdn and a member of a committee representing Zambia’s bondholders.

But he said bondholders were unhappy with the common framework’s sequencing of events, under which commercial creditors would be told the size of any restructuring, and the assumptions on which it is based, only after the official creditors had reached agreement with each other, the IMF and Zambia.

“We are still in the dark as creditors,” Daly said. “We have been saying all along that to speed things up, they should share [the IMF’s debt sustainability analysis] with us. Why such a veil of secrecy?”

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Source: ft.com

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Japan Intervenes to Shore up Yen As ‘reverse Currency Wars’ Deepen

Taylor Johnston

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Japan intervened to strengthen the yen for the first time in 24 years as a trio of European central banks raised interest rates, underlining the disruptive impact of inflation on currencies and monetary policy.

Inflation’s rise to multi-decade highs in much of the world has led to sharp increases in borrowing costs, with foreign exchange markets whipsawing. This in turn has set off what economists call a “reverse currency war” in which central banks seek to shore up their exchange rates against the dollar, through intervention or interest rate rises.

The latest moves, which included rate rises in the UK, Switzerland and Norway, came a day after the US Federal Reserve drove the dollar higher by announcing its third consecutive 0.75 percentage point rate rise on Wednesday.

However, Turkey’s central bank moved in the opposite direction, continuing its unorthodox policy by slashing its one-week repo rate from 13 per cent to 12 per cent despite inflation rising above 80 per cent last month. The lira fell to a record low against the dollar.

As investors bet the Fed and other leading central banks will raise rates higher than previously expected to bring inflation under control, US bond yields have risen, boosting the dollar and putting downward pressure on other major currencies including the yen, the pound and euro.

“The Fed is really setting the pace of interest rate rises and transmitting pressure to other central banks via the foreign exchange markets,” said Krishna Guha, head of policy and central bank strategy at US investment bank Evercore.

The yen has lost about a fifth of its value against the dollar this year, lifting the price of imports and contributing to an eight-year high in the growth of Japan’s core consumer prices, which exclude volatile food prices, to 2.8 per cent in the year to August.

Masato Kanda, Japan’s leading currency official, said on Thursday that Tokyo had “taken decisive action” to address what it warned was a “rapid and one-sided” move in the foreign exchange market. It was the first time Japan had sold dollars since 1998, according to official data.

The move caused the yen to surge to ¥142.39 to the dollar in the space of a few minutes. In the currency’s most volatile day since 2016, it had previously hit a low of ¥145.89 after the Bank of Japan signalled it would not change its forward guidance about interest rates and stuck to its ultra-accommodative policy.

Citigroup economist Kiichi Murashima said that, even if the BoJ were to fine-tune its policy, it would not fundamentally change the broader picture of a widening gap in financial conditions between Japan and the rest of the world. “It’s very questionable how far the government can actually avert the yen’s fall against the dollar,” he said.

There have been similar concerns in South Korea about this year’s 15 per cent fall in the value of the won against the dollar, prompting speculation about a potential currency swap arrangement with the Fed, which Seoul denied on Wednesday.

Japan is now the only country in the world to retain negative rates after the Swiss National Bank lifted its own policy rate by 0.75 percentage points on Thursday, taking it into positive territory and ending Europe’s decade-long experiment with sub-zero rates.

The Bank of England on Thursday resisted pressure to match the pace set by other major central banks, raising its benchmark rate by 0.5 percentage points to 2.25 per cent and pressing ahead with selling assets accumulated under earlier quantitative easing schemes.

But it also left the way open to take more aggressive action in November, when it will update its economic forecasts and assess the impact of tax cuts set to be unveiled on Friday by UK prime minister’s Liz Truss’ new administration.

Norway’s central bank also pushed up rates by 0.5 percentage points, indicating smaller increases would follow until early next year. Pictet Wealth Management estimated central banks around the world had this week raised policy rates by a cumulative 6 percentage points.

Emerging and developing economies are particularly vulnerable in what the World Bank’s chief economist has described as the most significant tightening of global monetary and fiscal policy for five decades.

In an interview with the Financial Times, Indermit Gill warned that many lower-income countries could go into debt distress.

“If you look at the situation of these countries before the global financial crisis and now, they are much weaker,” he said. “If you go in weak, you usually come out weaker.”

The interest rate rises set off heavy selling in government bond markets. US 10-year Treasury yields, a key benchmark for global borrowing costs, soared 0.18 percentage points to 3.69 per cent, the highest since 2011. Britain’s 10-year bond yield rose by a similar margin to 3.5 per cent.

The volatility in the bond market also rippled into equities, with the European Stoxx 600 falling 1.8 per cent. Wall Street’s S&P 500 fell 0.8 per cent by lunch time, leaving it on track for its third-straight fall as traders bet on further big rate increases from the Fed.

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Original Post: ft.com

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Bank of England Lifts Interest Rates by 0.5 Percentage Points

Taylor Johnston

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The Bank of England raised interest rates by 0.5 percentage points on Thursday, holding out the prospect of a further big increase in November, as central banks across the world seek to bring inflation under control.

The rise, to 2.25 per cent, the UK’s highest level since 2008, came as central banks around the world tightened policy in the wake of a third successive 0.75 percentage point rate increase by the US Federal Reserve.

Switzerland and South Africa raised interest rates by 0.75 percentage points, while Norway increased by 0.5 percentage points and Japan intervened to strengthen the yen for the first time in 24 years.

The BoE’s move was smaller than markets had expected and sterling later cut its gains on the day against the US dollar, at around $1.13; it is still trading near its weakest level since 1985 against the US currency.

Central banks around the world are rapidly increasing interest rates as they seek to fight the worst bout of inflation for decades, with the Fed leading the charge. But the majority of the BoE’s Monetary Policy Committee resisted pressure to match the pace set by the Fed, reflecting worries about the state of the British economy.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said that decision provided “reassurance that it is focused on the outlook for consumer price inflation and evidence of emerging slack in the economy, rather than with arbitrarily keeping up with the Joneses”.

The BoE said it now expected UK gross domestic product to fall 0.1 per cent in the third quarter of the year, compared with August’s forecast of 0.4 per cent growth. This would mark a second consecutive quarter of decline, cementing fears that the economy is falling into recession.

It also suggested it would wait until November, when it updates its forecasts, to take a firmer view of the new UK government’s fiscal policy, which will be unveiled in a mini-budget on Friday.

Even as the central bank seeks to rein in inflation, Kwasi Kwarteng, the new chancellor, is set to try and jump-start the economy with debt-financed tax cuts and an emergency plan to hold down energy bills.

The MPC said that, “should the outlook suggest more persistent inflationary pressures, including from stronger demand, the committee would respond forcefully, as necessary”.

Economists said this left the BoE’s path open to offset the tax cuts’ impact with a large rate increase at the November meeting. “In short, the Bank has indicated it will raise rates further to offset some of the boost to demand from the government’s fiscal plans,” said Paul Dales, chief UK economist at Capital Economics.

The MPC said the government’s energy price guarantee would lower inflation in the short term, with CPI now likely to peak at just under 11 per cent in October, earlier than expected — in contrast with previous private-sector forecasts of levels of around 15 per cent next year.

But it said inflation would hover around 10 per cent for several months, not necessarily low enough to dampen expectations of big price rises.

“Many of our members think that the peak [in inflation] will come next year and so may price accordingly, running the risk that inflationary expectations become self-fulfilling,” said Kitty Ussher, chief economist at the Institute of Directors.

In its deliberations on Thursday, the committee split three ways, with the majority — including BoE governor Andrew Bailey and chief economist Huw Pill — voting for the 0.5 percentage point move.

Three members — Jonathan Haskel, Catherine Mann and deputy governor Dave Ramsden — favoured a bigger, 0.75 percentage point increase, arguing that acting faster now could help the BoE avoid “a more extended and costly tightening cycle later”.

Swati Dhingra, a newcomer to the committee, favoured a more modest 0.25 percentage point move on the grounds that economic activity was already weakening.

The BoE also confirmed it would press ahead with plans outlined in August to reduce the stock of assets it had amassed under previous quantitative easing programmes. It is aiming for gilt sales of £80bn over the next 12 months, which would bring total assets on its balance sheet down to £758bn.

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Original Source: ft.com

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US and EU Step up Pressure on Turkey Over Russia Sanctions

Taylor Johnston

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The US and EU are stepping up pressure on Turkey to crack down on Russian sanctions evasion amid concerns that the country’s banking sector is a potential backdoor for illicit finance.

The US is focusing on Turkish banks that have integrated into Mir, Russia’s domestic payments system, two western officials involved in the plans told the FT, as Brussels prepares a delegation to express its concerns to Turkish officials directly.

The pressure on Turkey comes as western capitals pivot towards tighter implementation of existing sanctions rather than the imposition of new measures. The shift acknowledges that economic sanctions imposed after Vladimir Putin’s invasion of Ukraine in February failed to damage Russia’s economy as much as they had hoped. But they maintain closing off loopholes in the current measures will slowly squeeze the Kremlin’s financial lifelines.

“You’re going to see us kind of focus on financial sector evasion,” said the first western official. “We’ll send a message very clearly that, for example, third-country financial institutions should not be interconnecting with the Mir payment network because, you know, that carries some sanctions-evasion risks.”

“We need to close loopholes,” said a second official involved in this month’s talks between the EU and US on sanctions enforcement, citing Turkey as the major target.

Turkish bank VakıfBank is a member of the Mir payment system © John Wreford / SOPA Images/Sipa

In guidance issued on Thursday, the US Treasury department warned that non-US financial institutions risk “supporting Russia’s efforts to evade US sanctions through the expanded use of the Mir National Payment System outside the territory of the Russian Federation”.

It added that the US’s Office of Foreign Assets Control was prepared to use its “targeting authorities” — such as imposing blocking sanctions — in response to supporters of Russia’s sanctions evasion, including in relation to Mir.

Turkey’s president Recep Tayyip Erdoğan, whose country has been a Nato member since 1952, has pursued what he calls a “balanced” approach to the Ukraine conflict. His refusal to sign up to sanctions against Russia and a recent pledge to deepen economic co-operation with Moscow have alarmed his western allies. Erdoğan, who will meet Putin on Friday, said last month that there is “serious progress” on expanding Mir in Turkey.

Five of Turkey’s largest banks, VakıfBank, Ziraat Bank, İş Bank, DenizBank and Halkbank, are members of the Mir payment system, which was developed by Russia’s central bank as a domestic alternative to Visa and Mastercard.

Two of those — UAE-owned private lender DenizBank and state-controlled Halkbank, notorious for its alleged role in a scheme to evade US sanctions on Iran that dates back to 2010 — signed up to Mir after Putin launched his full-scale invasion in February.

İşbank said that its policy required “strict compliance with all applicable US sanctions”, adding: “We closely monitor sanctions and take the necessary measures to carry out Mir card transactions in compliance with this policy.”

DenizBank said: “We don’t execute transactions with sanctioned banks. We fully comply with international sanctions on Russia.” Halkbank, VakıfBank and Ziraat Bank did not respond to requests for comment.

Turkey’s foreign ministry said that while Ankara had a longstanding policy of only implementing UN-backed sanctions, “we have also been equally firm in our policy of not allowing Türkiye to become a channel to evade sanctions”.

As part of efforts to strengthen enforcement, Mairead McGuinness, the EU’s financial services commissioner, is aiming to visit Turkey next month, according to people familiar with the plans. A senior EU official said: “Commissioner McGuinness has recently visited a number of countries to discuss issues related to financial services, and the implementation of sanctions in particular, given Russia’s aggression against Ukraine.”

Wally Adeyemo, deputy US treasury secretary, wrote to Turkish businesses last month warning them of “Russia’s attempts to use your country to evade sanctions” and the risks of “conducting transactions with sanctioned Russian-based entities”.

Rolled out in waves of measures in the initial weeks after Russia’s invasion, western sanctions have sought to cut off Russia’s biggest banks, energy and defence companies and hundreds of senior officials and richest businessmen from the global market.

As part of the broader crackdown on sanctions evasion, western efforts will target individuals handling payments on behalf of Russians as well as businesses that have helped set up parallel payment networks for Moscow, according to one of the officials.

The EU and US will also target entities assisting Moscow with processing Russian export revenues or facilitating imports of industrial or defence products banned under western sanctions, the three officials said.

Other measures under discussion include targeting more individuals involved in Russia’s software, ecommerce and cyber security industries, two officials said.

In addition to Turkey, the crackdown on potential back doors for sanctions evasion is targeting countries in the Caucasus, central Asia and the Gulf, officials said. “Russia will try every door. And every country needs to be mindful that we will track that and talk to them,” said James O’Brien, sanctions co-ordinator at the US state department.

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Original Source: ft.com

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