The writer is chair of Rockefeller International
While global investors increasingly recognise that the easy money era is over, many world leaders do not — and the markets are punishing them for free spending in the new age of tight money.
In the 2010s, when interest rates hit historic lows, markets punished very few free spenders — Greece, Turkey and Argentina, most notably — for extreme fiscal or monetary irresponsibility. Now inflation is back, rates are rising and debt levels have been elevated worldwide, investors are targeting an expanding list of countries.
The markets have forced a shift in policy, or at least tone, this year on countries ranging from the UK to Brazil, Chile, Colombia, Ghana, Egypt, Pakistan, even defiantly populist Hungary. What these countries shared was relatively high debt and widening twin deficits — government and external — combined with unorthodox policies likely to make these burdens even worse. But tight money is here to stay. The target list will grow. No country is likely to be immune, not even the US, which has among the highest twin deficits in the developed world.
The new mood is often described as the return of “bond market vigilantes” as if it were confined to bond investors and “market fundamentalists”. But tight money is gripping all asset markets, including stocks and currencies, punishing governments of the right and left and posing a practical question about whether countries can pay their bills without easy money.
Conservative UK prime minister Liz Truss was forced out in October after markets reacted to her unfunded tax cuts by dumping the pound. Her successor scrapped her agenda. Soon after, the spending plans of leftist firebrand Luiz Inácio Lula da Silva, incoming president of Brazil, triggered a sell-off.
When Lula attributed this reaction to “speculators” not “serious people”, the markets drove up Brazil’s real interest rates, which were already among the world’s highest. Lula’s aides scrambled to dilute his comments. His fellow socialists, on the rise across Latin America, are targets too.
Colombia’s first leftist president, Gustavo Petro, came in promising free higher education, a public job for every jobless person and to wean the economy off oil. Sceptical that Petro can pay for new benefits with less oil revenue, investors offloaded the peso, compelling his finance minister to assure the market that he “will not do crazy things”.
Gabriel Boric became Chile’s president, promoting a new constitution packed with what many saw as “utopian” promises, including free healthcare, education and housing. Investors fled and the peso fell 30 per cent in just six weeks, inflaming opposition to the constitution, which voters overwhelmingly rejected in a September referendum. Boric was forced to turn his radical cabinet hard toward the centre.
In the past decade, low rates made borrowing so easy and sovereign default so rare, that many governments dared to live beyond their means. Now, as borrowing costs and default rates rise, change is being forced on them, starting in the less-developed nations most vulnerable to foreign creditors.
One is Egypt, ruled by Abdel Fattah al-Sisi. As markets pressured Egypt to devalue its currency and lower its twin deficit to secure IMF aid, national authorities held out for months. When they finally relented, the devaluation was massive — more than 20 per cent. Ghana, too, resisted IMF aid and its conditions of financial discipline as insulting to this “proud nation”. But as markets battered the Ghanaian cedi, fuelling calls for President Nana Akufo-Addo to resign, he relented and asked for IMF help.
From Pakistan to Hungary, markets have compelled central banks that thought they could get away with low real rates to return to economic orthodoxy, and resume raising rates. Hungary imposed an emergency rate rise and aides to rightwing prime minister Viktor Orbán, who built his base by defying Europe, promised spending cuts and tax increases to qualify for EU financial help.
Markets will reward discipline. Among those punished by them back in the 2010s, Argentina and Turkey clung to unorthodox policies, and still face punishingly high borrowing costs. Greece pursued orthodox reforms and is once again a borrower in good global standing.
Only now, discipline has a stricter meaning. Whether it is the US running up trillions in liabilities for Medicare and social security or Europe shovelling out energy subsidies, even superpowers are ill advised to borrow as if money were still free. In the new tight money era, markets can turn swiftly against free spenders, no matter how rich.