The author is chairman of Rockefeller International
While global investors increasingly recognize that the era of easy money is over, many world leaders do not – and markets are punishing them for free spending in the new era of tight money.
In the 2010s, when interest rates reached historic lows, markets punished a very few free users – Greece, Turkey and Argentina, in particular – for extreme fiscal or monetary irresponsibility. Now that inflation is back, interest rates are rising and debt levels have been elevated around the world, investors are targeting an expanding list of countries.
Markets have forced a shift in policy, or at least tone, this year for countries ranging from Britain to Brazil, Chile, Colombia, Ghana, Egypt, Pakistan, even defiantly populist Hungary. What these countries shared was relatively high debt and growing twin deficits—government and external—combined with unorthodox policies that are likely to make these burdens even worse. But scarce money is here to stay. The target list will grow. No country is likely to be immune, not even the United States, which has among the highest twin deficits in the developed world.
The new mood is often described as the return of the “bond market watchers” as if it were limited to bond investors and “market fundamentalists”. But tight money is gripping all asset markets, including stocks and currencies, punishing governments on the right and left and posing a practical question of whether countries can pay their bills without easy money.
Conservative British 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, president-elect of Brazil, triggered a sell-off.
When Lula attributed this reaction to “speculators”, not “serious people”, markets drove up Brazil’s real interest rates, which were already among the world’s highest. Lula’s aides sought to water down his comments. His fellow socialists, on the rise across Latin America, are also targets.
Colombia’s first leftist president, Gustavo Petro, came in promising free higher education, a public job for all unemployed and weaning the economy off oil. Skeptical that Petro can pay for new benefits with less oil revenue, investors unloaded on the peso, forcing his finance minister to reassure the market that he “will not do wrong 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 percent in just six weeks, stoking opposition to the constitution, which voters overwhelmingly rejected in a referendum in September. Boric was forced to turn his radical cabinet hard towards 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 on them, starting in the less developed countries 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 double-digit deficit to secure IMF support, national authorities held out for months. When they finally relented, the devaluation was massive – more than 20 percent. Ghana too opposed IMF assistance and its conditions for economic discipline as insulting to this “proud nation”. But as markets battered the Ghanaian cedi, fueling calls for President Nana Akufo-Addo to step down, he relented and asked for help from the IMF.
From Pakistan to Hungary, markets have forced central banks that thought they could get away with low real interest rates to return to economic orthodoxy and resume rate hikes. 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 hikes to qualify for EU financial aid.
Markets will reward discipline. Among those punished by them in the 2010s, Argentina and Turkey stuck to unorthodox policies, and still face punishingly high borrowing costs. Greece followed orthodox reforms and is again a borrower with good global status.
Only now does discipline have a stricter meaning. Whether it’s the United States running up trillions in Medicare and Social Security liabilities or Europe shoveling out energy subsidies, even superpowers are ill-advised to borrow as if money were still free. In the new tight money era, markets can quickly turn against free users, no matter how rich they are.