NEW YORK, United States, Monday July 1, 2013 – Some relationships just don’t last too long; some don’t even get started if the other is broke.
This is exactly what happened some 10 weeks ago when investment suitors came rushing to the emerging markets with bags of money to mop up US$20 trillion of cheap government securities going below a one per cent return and now the tide of lenders is ebbing.
Investors began pulling stakes with large scale selling of these assets amid fears that the US Federal Reserve may slash the monthly US$85 billion flow of easy money that kept short interest-rates here around zero per cent.
The near zero rate has allowed the opulent investors to try their hand in the riskier emerging markets where a one-percent margin was better than nothing.
At the end of April, the average yield to maturity for Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index floated around 1.34 per cent.
Then almost everyone was at the feeding trough.
Analyst, Edward Al-Hussainy, an assistant VP at Moody’s, in a telephone interview from New York, noted that even the far flung Rwanda which had almost self destroyed by civil war a few years back raised US$400 million in bonds while hot spots like South Africa, Columbia and Thailand creamed off their share of the financial largesse of low cost money.
But not everyone had a seat at the table, Al-Hussainy, quipped: “The Dominican Republic was able to gain one billion in dollars bonds while most of the other Caribbean countries were unable to attract the attention of these investors”.
Earlier this year, Caribbean countries restructured three bonds totaling US$9.7 billion but analyst say in the absence of real economic growth, countries in this region may spin in more cycles of default.
“Jamaica and Belize hogged the lion’s share of some US$9.5 billion in restructured debt since 2006 and Barbados is running low on planned reserves. And overall, the average debt for the Caribbean to income ratio is about 70 percent with Jamaica ahead at 140 per cent,” Al-Hussainy said.
In March, the government of St. Vincent and the Grenadines failed to auction EC $40 million (One EC dollar = US$0.37 cents) 10- year bonds in a period when carry trade investors were on the hunt to lend around the globe. At the close of the action only 11 bids valued at EC$ 25.9 million were tendered.
In other words, the Caribbean area was not credit-worthy enough to cash in on the sweet low cost money “and that is an opportunity lost,” Al-Hussainy added.
But Jamaican born, Peter Blair Henry, dean of the New York University’s Stern School of Business and a former professor of international economics at Stanford has an alternative view.
“Short term debt such as bank loans and bonds require repayment when due irrespective of the country’s circumstances and when bad news circulates, lenders rush to get their money. So insolvent countries must carefully consider (other) financing options,” Henry Blair said.
That’s the kind of scenario now being talked about where bad news chases away good money.
Paul Christopher, the chief international strategist at Wells Fargo Advisors, told the Caribbean Media Corporation (CMC), a grain of information uttered in May in the form of a side-remark by Ben Bernanke, the Federal Reserve chairman, struck an ominous tone for the “carry trade where investors borrow at a lower cost and invest in another region that offers a higher yield”.
The “odd issue of this phenomenon is that Bernanke was not suggesting an immediate policy change although it is expected that the fed will continue bond purchases for some time to come,” he said.
The damage already was already done, regardless.
“Between May 8 and June 20, the Bloomberg US Dollar Emerging Deposit Bond (Index) dived by 5.1 per cent,” he added.
Christopher is nevertheless confident that the current violent market reaction may be stabilised “over the next six months but yields may be lower for the whole carry trade”.
But even in the near future when the market settles, Henry says investors may not be stirred to invite some regional countries to the bond party “as profit seekers do not lend to governments that cannot return their money with agreed interest payments”.
In other words, said he, “investors don’t want to be shaken by a heavily saddled debt burdened country”.