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The Big Default?

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The Big Default?

Pakistan has recently struck a crucial IMF deal. The breakthrough could not be timelier, with high energy-import prices pushing the country to the brink of a balance of payments crisis. Foreign currency reserves have fallen to as low as $9.8b, hardly enough for five weeks of imports. The Pakistani rupee has weakened to record lows. The new government needs to cut spending rapidly now as it spends 40pc of its revenues on interest payments.
The sovereign default world record-holder looks likely to add to its tally. The peso now trades at a near 50pc discount in the black market, reserves are critically low and bonds trade at just 20 cents in the dollar – less than half of what they were after the country’s 2020 debt restructuring.
The government doesn’t have any substantial debt to service until 2024, but it ramps up after that and concerns have crept in that powerful vice president Cristina Fernandez de Kirchner may push to renege on the IMF.
Russia’s invasion means Ukraine will almost certainly have to restructure its $20b plus of debt, heavyweight investors such as Morgan Stanley and Amundi warn. The crunch comes in September when $1.2b of bond payments are due. Aid money and reserves mean Kyiv could potentially pay. But with state-run Naftogaz asking for a two-year debt freeze, investors suspect the government will follow suit.
Africa has a cluster of countries going to the IMF but Tunisia looks one of the most at risk.
A near 10pc budget deficit, one of the highest public sector wage bills in the world and there are concerns that securing, or at least sticking to, an IMF programme may be tough due to President Kais Saied’s push to strengthen his grip on power and the country’s powerful, incalcitrant labor union.
Tunisian bond spreads – the premium investors demand to buy the debt rather than US bonds – have risen to over 2,800 basis points and along with Ukraine and El Salvador, Tunisia is on Morgan Stanley’s top three list of likely defaulters.
Furious borrowing has seen Ghana’s debt-to-GDP ratio soar to almost 85pc. Its currency, the cedi, has lost nearly a quarter of its value this year and it was already spending over half of tax revenues on debt interest payments. Inflation is also getting close to 30pc.
Egypt has a near 95pc debt-to-GDP ratio and has seen one of the biggest exoduses of international cash this year – some $11b according to JP Morgan. Fund firm FIM Partners estimates Egypt has $100b of hard currency debt to pay over the next five years, including a meaty $3.3b bond in 2024.
Cairo devalued the pound 15pc and asked the IMF for help in March but bond spreads are now over 1,200 basis points and credit default swaps (CDS) – an investor tool to hedge risk – price in a 55pc chance it fails on a payment.
Kenya spends roughly 30pc of revenues on interest payments. Its bonds have lost almost half their value and it currently has no access to capital markets – a problem with a $2b dollar bond coming due in 2024.
Addis Ababa plans to be one of the first countries to get debt relief under the G20 Common Framework programme. Progress has been held up by the country’s ongoing civil war though, in the meantime, it continues to service its sole $1b international bond.
El Salvador
Making bitcoin legal tender all but closed the door to IMF hopes. Trust has fallen to the point where an $800m bond maturing in six months trades at a 30pc discount and longer-term ones at a 70pc discount.
Western sanctions wrestled Russia into default in June, and Belarus now facing the same tough treatment having stood with Moscow in the Ukraine campaign.
The Latin American country only defaulted two years ago but it has been rocked back into crisis by violent protests and an attempt to oust President Guillermo Lasso. It has lots of debt and with the government subsidizing fuel and food JP Morgan has ratcheted up its public sector fiscal deficit forecast to 2.4pc of GDP this year and 2.1pc next year. Bond spreads have topped 1,500 bps.

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