The author is Chairman of Rockefeller International
As global investors increasingly recognize that the era of easy money is over, many world leaders do not – and markets are punishing them for their free spending in the new era of tight money.
In the 2010s, when interest rates were at historic lows, markets penalized very few freedmen – notably Greece, Turkey and Argentina – for extreme fiscal or monetary irresponsibility. Now that inflation is back, interest rates are rising and debt has risen around the world, investors are targeting a growing list of countries.
Markets have forced a policy shift, or at least a change of direction, this year on countries like the UK, Brazil, Chile, Colombia, Ghana, Egypt, Pakistan and even defiantly populist Hungary. What these countries had in common was relatively high levels of debt and a growing twin deficits—government and external—combined with unorthodox policies that likely exacerbated these burdens. But tight money is here to stay. The target list will grow. Probably no country is immune, not even the US, which has one of the highest twin deficits in the developed world.
The new sentiment is often described as the return of ‘bond watchdogs’ as if confined to bond investors and ‘market fundamentalists’. But tight money sweeps through all asset markets, including stocks and currencies, penalizing governments of the right and left and raising a practical question as to whether countries without easy money can pay their bills.
Conservative British Prime Minister Liz Truss was ousted in October after markets reacted to her unfunded tax cuts by depreciating the pound. Her successor rejected her agenda. Shortly thereafter, the spending plans of left-wing arsonist Luiz Inácio Lula da Silva, Brazil’s new president, sparked a sell-off.
When Lula attributed this reaction to “gamblers” and not “serious people,” markets pushed up Brazil’s real interest rates, which were already among the highest in the world. Lula’s aides tried to water down his comments. His fellow socialists, who are on the rise across Latin America, are also being targeted.
Colombia’s first left-wing president, Gustavo Petro, promised free higher education, a public job for every unemployed person and weaning the economy off oil. Skeptical that Petro can pay for new benefits with less oil revenue, investors dumped the peso and forced its Treasury Secretary to reassure the market that he “won’t do crazy things.”
Gabriel Boric became Chile’s president and lobbied for a new constitution that included many promises deemed “utopian,” including free health care, education, and housing. Investors fled and the peso fell 30 percent in just six weeks, sparking opposition to the constitution, which voters overwhelmingly rejected in a September referendum. Boric was forced to pivot his radical cabinet heavily toward the center.
Over the past decade, low interest rates have made borrowing so easy and sovereign defaults so rare that many governments have dared to live beyond their means. Now, as borrowing costs and default rates rise, changes are being forced upon them, beginning in the less developed countries that are most vulnerable to foreign creditors.
One is Egypt ruled by Abdel Fattah al-Sisi. As markets pressured Egypt to devalue its currency and reduce its twin deficit in order to secure IMF help, national authorities held out for months. When they finally relented, the devaluation was massive — more than 20 percent. Ghana also opposed IMF aid and its fiscal discipline mandates as an insult to this “proud nation”. But as markets hit the Ghanaian cedi and stoked calls for President Nana Akufo-Addo’s resignation, he relented and asked the IMF for help.
From Pakistan to Hungary, markets have central banks, thinking they could get away with low real interest rates, reverting to economic orthodoxy and raising rates again. Hungary imposed an emergency rate hike and backers of right-wing Prime Minister Viktor Orbán, who had built his base by opposing Europe, promised spending cuts and tax hikes to qualify for EU bailouts.
The markets will reward discipline. Among those punished by them in the 2010s, Argentina and Turkey stuck to unorthodox policies and still face punitively high borrowing costs. Greece has pursued orthodox reforms and is once again a borrower with a good global standing.
Only now discipline has a stricter meaning. Whether the US is running trillions in debt for Medicare and Social Security or Europe is shoveling in energy subsidies, even superpowers are ill-advised to borrow as if there was money left. In the new era of tight money, markets can quickly turn against free donors, no matter how wealthy they are.
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