Category: Markets

What institutions is China establishing as a means of becoming an alternative to the World Bank & IMF?

  • New Development Bank (with India, Russia, Brazil & South Africa), $50bn in capital + $100bn of pooled foreign exchange reserves - copycat of World Bank.
  • Asian Infrastructure Investment Bank ($100bn in capital) - copycat of World Bank & Asian Development Bank (ADB).
  • Silk Road infrastructure fund ($40bn in capital) to boost connectivity across Asia.

Explain the debt-swap Greece is proposing?

  • Exchange European rescue loans for new bonds linked to future GDP growth.
  • Convert bonds owned by the ECB to perpetual bonds (bonds without maturity).
  • Nothing agreed yet, and resistance from EU.

What are the growth-linked bonds that Greece is proposing?

  • Exchange existing European rescue loans for new bonds linked to future GDP growth - Bosnia, Bulgaria, Costa Rica & Mexico have issued similar instruments in the past.
  • Downside protection for Greece - pay more to creditors when economy does well, and less when economy slows, so good risk-sharing solution.
  • But problem insofar as imply more flexibility from creditors (but better than outright default), and also might result in Greece fudging GDP numbers.

Dangers of strong US$?

  • Big structural currency shifts are never a good thing.
  • Political ramifications - might make Trans Pacific Trade Partnership harder to sign off this year.
  • Bad for exporters + bad for companies with overseas operations (e.g. 47% of revenues of S&P500 companies generated abroad, so negative impact on their earnings).

Why is US$ likely to remain strong in medium-term?

  • US growth solid compared to weakness in rest of world.
  • US bond yields higher than rest of developed world.
  • Latter will become more pronounced as Fed raises rates while rest of world cuts.

Summarise Greece’s position vis-a-vis creditors?

  • New Finance Minister defiant yet new PM (Tsipras) seems more pragmatic, saying no unilateral action will be taken.
  • Government initially stated it will no longer co-operate with the international lenders (i.e. IMF + ECB + EC) that oversaw bailout program, and will ignore the bailout terms (by reversing reforms).
  • Tsipras walking tightrope between electoral promises (to renegotiate Greece's debt) and promises to creditors.

Where does Italy’s PM Renzi stand vis-a-vis austerity?

  • In speeches is anti austerity + praises Draghinomics (i.e. stimulus via increased government spending).
  • Remains popular and has positioned himself as a rebel working within the system.
  • Walking tightrope of nudging his left-wing Democratic Party towards the right, while simultaneously urging the EU to give Italy more budget flexibility.
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