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Foreign Countries Default Risk On The Rise. Rate Hikes Colliding With Overvalued Markets.
US Labor Market Gradually Weakens.
Here is what we will be getting into today:
Debt Servicing Costs Raise Default Risk.
Rate Hikes, Overvalued Markets.
US Labor Market Gradually Weakens.
Doubt over Jamie Dimon's $30 Billion Rescue Plan.
Let's Dive In!
Rising Debt Servicing Costs Increase Default Risk for the World's Poorest Countries
Low-income countries are facing their highest bills for servicing foreign debts in 25 years, putting spending on health and education at risk. According to a study by debt campaign group Debt Justice, repayments on public debt owed to non-residents for 91 of the world's poorest countries will take up an average of more than 16% of government revenues in 2023. The figures follow a steep rise in global borrowing costs last year, when central banks sought to counter high inflation with rapid rate rises. For many of the 91 countries, repayments on domestic debt make the burden of debt service overall much greater still.
The rise in debt servicing costs will fuel an ongoing debate over debt forgiveness. Multilateral lenders and foreign governments led by the IMF and the World Bank delivered far-reaching debt relief around the turn of the millennium. The Highly Indebted Poor Countries initiative wiped out the bulk of bilateral and multilateral foreign public debt for many countries. Most borrowers want to keep their access to the multilateral lenders and, most importantly, to private-sector creditors.
Sri Lanka faces the steepest schedule of external repayments, equal to 75% of government revenues this year. The country is unlikely to meet those payments following a default on its external debts last year. Sri Lanka's scheduled repayments on domestic debt are even greater. According to an IMF report last month, these will be equivalent to more than 27% of gross domestic product in 2023.
Zambia, which defaulted on its external debts in 2020, and Ghana, which followed last year, also have high levels of domestic debt, adding to the strain on their public finances. Pakistan, seen by many economists as running a high risk of default, has scheduled repayments on foreign public debts this year equal to 47% of government revenues. In a report last September, the IMF said its external government debts were equal to 28% of GDP and its domestic debts 37% of GDP.
Rate Hikes, Overvalued Markets, and Economic Uncertainty
The current economic situation is showing signs of monetary policy failure, which will have significant consequences during the deflationary phase. Historically, there has never been a rate hiking cycle without a recession, and there has never been a recession without a significant rise in unemployment. However, some bullish pundits believe that we will have neither this time around, which is unprecedented.
The pandemic hangover bubble features both six sigma Tech overvaluation and record housing overvaluation, yet pundits do not predict a meaningful correction in either market. This is due to 15 years of central bank moral hazard unwinding the hard way, amid abject denial.
Homebuilder stocks are inversely correlated to homes sold for the first time in history, and the ratio of homebuilder stocks to homes sold is at a record high.
In Tech-land, delusion is likewise rampant, with the best performing sector so far in 2023 about to see the largest earnings decline of any sector. The projected drop for tech earnings in the first quarter would be the biggest since 2009.
The Fed has raised rates 4.75%, but the core CPI has only come down 1%, which means we are witnessing monetary policy failure for the first time in history. Warren Buffett believes there could be more bank failures down the road, but depositors should not ever be worried. He said the government would likely step in to backstop all depositors in all U.S. banks if that was ever necessary, though he did note that would require Congressional approval. Buffett is so confident that U.S. depositors are safe that he would put a million dollars of his own money in a bank. This confidence may be misplaced, as the current economic situation is showing signs of significant instability and uncertainty.
March Jobs Report Indicates Gradual Weakening in US Labor Market
The US added 236,000 jobs in March, according to the latest jobs report, indicating a gradual weakening in the labor market as the effects of the Federal Reserve’s interest rate increases begin to be felt. The data will be used to influence the Fed’s decision on whether to halt or continue interest rate hikes at its next board meeting in early May.
Government and professional and business services continued to grow at a similar pace to previous months. However, other reports suggest that the labor market is cooling from highs seen over the last two years. The Fed will have to weigh the latest job report against incoming inflation news as it decides whether or not to hike interest rates again.
Inflation reached a 40-year high last year and while it is declining, it remains stubbornly high. The Fed chair, Jerome Powell, has consistently said getting prices under control is the central bank’s top priority. Despite the banking crisis caused by the collapse of Silicon Valley Bank, the Fed went ahead and increased interest rates by a quarter point last month, bringing rates to 4.75% to 5% – its ninth consecutive raise and the highest since 2007.
Jamie Dimon's $30 Billion Rescue Plan for First Republic Bank Met with Doubt
On March 16, 2023, four of the eleven big banks announced that they would be depositing a combined $30 billion of their own money as uninsured deposits into First Republic Bank. JPMorgan Chase, Bank of America, Morgan Stanley, and Wells Fargo were underwriters of the majority of the preferred stock outstanding at First Republic Bank. UBS was also one of the primary underwriters. However, UBS did not contribute to the $30 billion deposit infusion.
All of First Republic's outstanding preferred stock was issued at $25 a share. Year-to-date, those shares have lost 65 to 70 percent of their market value. Adding more potential liability to the rescuers of First Republic Bank is the fact that in this year's and last year's secondary offerings of common stock for First Republic at dramatically higher prices than where the common stock trades today, units of JPMorgan Chase, Bank of America, Goldman Sachs, and Morgan Stanley participated as underwriters.
The Chairman and CEO of JPMorgan Chase, Jamie Dimon, has been given much media credit for the $30 billion rescue plan for First Republic Bank. However, S&P Global downgraded the credit rating on First Republic deeper into junk territory just three days after this plan was announced. Moreover, the common stock share price continued to plunge after the rescue plan was announced, and investment advisors in its wealth management unit have continued to flee, taking billions in assets with them to competitors. As of yesterday's closing price of its common stock at $14.13, First Republic Bank's total market value stood at $2.64 billion. Investors might be forgiven for asking themselves if Dimon's plan was a rescue or a box of explosives on a time delay.
For more in depth analysis of these topics, check out these articles:
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