The writer is president of Rockefeller International
While global investors increasingly recognize that the era of easy money is over, many world leaders are not – and the markets are punishing them for their gratuitous spending in the new era of tight money.
In the 2010s, when interest rates hit historic lows, markets punished very few free spenders — Greece, Turkey, and Argentina, among others — for extreme fiscal or monetary irresponsibility. Now that inflation is back, rates are rising and debt levels have risen around the world, investors are targeting a growing list of countries.
Markets have forced a change in policy, or at least tone, this year in countries ranging from the UK to Brazil, Chile, Colombia, Ghana, Egypt, Pakistan and even Hungary. populist. What these countries have in common is relatively high debt and growing twin deficits – public and external – combined with unorthodox policies that could further compound these burdens. But tight money is here to stay. The target list will grow. No country is likely to be immune, not even the United States, which has one of the highest twin deficits in the developed world.
The new vibe is often described as the return of “bond market vigilantes,” as if limited to bond investors and “market fundamentalists.” But tight money is gripping all asset markets, including equities and currencies, punishing governments on the right and left and posing a practical question about countries’ ability to pay their bills without easy money.
Conservative British Prime Minister Liz Truss was expelled in October after markets reacted to her unfunded tax cuts by dumping the pound. His successor abandoned his agenda. Soon after, the spending plans of left-wing brand Luiz Inácio Lula da Silva, Brazil’s new president, sparked a sell-off.
When Lula attributed this reaction to “speculators” and not “serious people”, the markets drove up Brazil’s real interest rates, which were already among the highest in the world. Lula’s aides rushed to water down his remarks. His socialist colleagues, on the rise across Latin America, are also targets.
Colombia’s first left-wing president, Gustavo Petro, came promising free higher education, public employment for every unemployed worker, and to wean the economy off oil. Skeptical that Petro could pay new benefits with less oil revenue, investors unloaded the peso, forcing his finance minister to assure the market that he “won’t do crazy things”.
Gabriel Boric became Chile’s president, promoting a new constitution filled with what many saw as “utopian” promises, including free health care, education, and housing. Investors fled and the peso fell 30% in just six weeks, igniting opposition to the constitution, which voters overwhelmingly rejected in a referendum in September. Boric was forced to turn his radical cabinet to the center.
Over the past decade, low rates have made borrowing so easy and sovereign defaults so rare that many governments have dared to live beyond their means. Today, as borrowing costs and default rates rise, changes are being forced upon them, starting with the least developed countries most vulnerable to foreign creditors.
One is Egypt, led by Abdel Fattah al-Sisi. As markets pressured Egypt to devalue its currency and reduce its twin deficits in order to secure IMF aid, national authorities resisted for months. When they finally gave in, the devaluation was massive – over 20%. Ghana, too, has resisted IMF aid and its conditions of financial discipline as an insult to this “proud nation”. But as markets pounded the Ghanaian cedi, fueling calls for President Nana Akufo-Addo to step down, he caved and asked for help from the IMF.
From Pakistan to Hungary, markets forced central banks that thought they could get away with low real rates to revert to economic orthodoxy and start raising rates again. Hungary imposed an emergency rate hike and aides to right-wing Prime Minister Viktor Orbán, who built his base by defying Europe, promised spending cuts and tax increases to benefit from the financial aid from the EU.
The markets will reward discipline. Among those punished by them in the 2010s, Argentina and Turkey clung to unorthodox policies and still face extremely high borrowing costs. Greece pursued orthodox reforms and once again became a reputable global borrower.
Only now discipline has a stricter meaning. Whether it’s the United States racking up trillions in debt for Medicare and Social Security or Europe dishing out energy subsidies, even the superpowers are ill-advised to borrow as if the money was still free. In the new era of monetary tightening, markets can quickly turn against free spenders, no matter how wealthy.