The most distressed sovereign debt in the world

Delivered on By Justin Pyvis

Good morning! Perhaps it was the six consecutive days of 40°C plus heat, or maybe there’s something wrong with the drinking water over in WA’s Parliament House, but clearly some kind of collective delusion has taken hold because that’s the only way we can explain this statement from WA’s Health Minister Amber-Jade Sanderson:

“We have, in all but name, lockdowns over East. It’s essentially lockdown by default.”

Right… Does anyone in the WA government actually talk to people over East? Tune in to the news? Watch some of the Australian Open? Examine the the actual data? Seriously – we’re at a loss for words.

You know it’s bad when even VIC Premier Daniel Andrews, a member of the same political party as the WA government, jokingly responded by quipping “I can get our ambassador to talk to theirs”. 🤣

Reading the tea leaves

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Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries. The S&P500 is a snapshot 30 minutes before close.

At the time of writing the US S&P500 was down -0.8%, rallying late from being down as much as -3.8% at midday after business activity was shown to be growing at its slowest pace in 18 months in January ahead of potential monetary tightening by the US Federal Reserve.

Locally, the ASX200 (-0.51%) lost ground for a second straight session, closing at an 8-month low. Tech (-1.58%) once again led the decline, as concerns about interest rates rising everywhere in the world except China fuelled another sell-off of companies with high price-to-sales multiples.

Elsewhere, the STOXX Europe 600 regional share index fell -3.81% after IHS Markit’s Flash Composite Purchasing Managers' Index showed activity growing at its slowest rate for 11 months, with the average prices charged for goods and services rising at the fastest rate since the survey started in 2002, suggesting inflation may continue to be a problem in Europe as well.

Food for thought

"El Salvador now has the most distressed sovereign debt in the world."
"El Salvador now has the most distressed sovereign debt in the world." Source

In the middle of last year El Salvador’s government, led by millennial Nayib Bukele who is the self-proclaimed “CEO of El Salvador” (formerly “the world’s coolest dictator”), made Bitcoin legal tender. The small (~6.5 million) Central American country had previously adopted the US dollar as legal tender in 2001, following many years of monetary ill-discipline and repeated bouts of double-digit inflation.

Bukele is certainly ambitious – no other nation has attempted such a feat and in November last year he even proposed to build a Bitcoin city at the base of a volcano, funded by a $US1 billion bitcoin bond (half of which would be used to speculate on bitcoin!).

But unfortunately for El Salvadorians, the experiment has not gone well to date. Based on Bukele’s various tweets, the government now owns ~1,800 BTC at an average purchase price of around $US49,500 – well below (-28%) yesterday’s close of around $US35,800.

If it were just speculative losses (currently ~0.1% of GDP) it might not be so bad, but the problems run much, much deeper.

Currency reform expert Steve Hank of Johns Hopkins University described Bukele’s Bitcoin rollout as “forced tender. It’s what the Soviet Union imposed in banning all other currencies, or what nations demand when they conquer other nations”.

El Salvadorians were forced by law to use Bitcoin for remittances, which are payments to local families from relatives or friends working abroad – hugely important to the relatively poor country. But the switch caused El Salvador’s remittance costs to go from “sixth lowest in a survey of 104 countries at 2.8%”, to “7.0% to 9.5% a transfer… And that doesn’t include the inconvenience of traveling to the ATM, which are scarcely distributed, or the risk of getting mugged while counting your cash”.

Markets certainly aren’t confident that Bukele’s gamble will pay off either, with El Salvador’s dollar denominated notes due in 2050 currently trading at all-time lows (see the chart above), making it “the most distressed sovereign debt in the world”.

Compounding matters is Bukele’s ongoing attempt to sell sovereign Bitcoin bonds while simultaneously seeking a $US1.3 billion loan from the International Monetary Fund (IMF), which has strongly criticised his use of Bitcoin as legal tender.

We’re not sure how this will play out but it’s certainly worth keeping an eye on. El Salvador’s next big bond payment to foreign creditors isn’t due until January 2023, so Bukele has less than a year to convince enough people that he can pull it off.

Bits and bytes

📜 A petition from WA doctors called for Premier Mark McGowan to open WA’s borders as originally planned on 5 February.

💉 Australia will make the Novavax vaccine, a traditional protein-based jab, available from late February.

🥳 The scandal surrounding UK Prime Minister BoJo intensified after it was claimed his staff held him a birthday party during the lockdowns “despite Covid lockdown rules banning all indoor socialising”.

📵 ScoMo’s WeChat account was confiscated and renamed to “New Life for Chinese Australians”. But why are politicians installing Chinese government-controlled apps in the first place?

📈 Inflation in Singapore jumped 4.0% in December, well above forecasts and prompting authorities into “reviewing the current forecast ranges for Consumer Price Index all items inflation and core inflation in 2022”.

👨‍👩‍👧‍👦 15 years ago the Simpsons showed a cartoon of Tom Hanks doing an advert for the White House because “The US government has lost its credibility so it’s borrowing some of mine.” Flash forward to yesterday and Tom Hanks has narrated the official “Year One of the Biden-Harris Administration” video.

🏉 The Western Force rugby team claimed it “will struggle to survive” if it can’t play any games in Perth due to the WA government’s border restrictions, with the season due to start on 18 Feb.

🎾 After the Australian Open ordered a spectator to remove a shirt supporting missing Chinese star Peng Shuai, former world #1 doubles French tennis player Nico Mahut tweeted “What’s going on!? What lack of courage! What if you did not have Chinese sponsors.” 18-time grand slam singles winner Martina Navratilova agreed, calling it “pathetic”.

🙊 Deputy Prime Minister Barnaby Joyce was forced to immediately apologise for saying “Well, people aren’t dying [from Omicron]”, clarifying it with “the fatality rate is very low”.

🎌 After the Japanese government said “strong actions” might be required if Russia invaded Ukraine, the office of the Russian Foreign Minister said “The inadmissibility and senselessness of such statements, as well as their counterproductiveness for the atmosphere of Russian-Japanese relations and dialogue, are obvious.”

✈️ The Australian government warned any citizens in Ukraine to leave “reflecting the increased risk of armed conflict”.

📉 The IHS Markit Flash Australia PMIs showed that input-price inflation accelerated to a record high in December, suggesting inflation in Australia may not be as “transitory” as the RBA hopes.

🏝️ Indonesia’s government said it will reopen Batam and Bintan to fully vaccinated travellers from Singapore, although has yet to provide a date.

😎 China’s government hired “an army of western social media influencers, each with hundreds of thousands of followers on TikTok, Instagram or Twitch… to spread positive stories about China throughout next month’s Winter Olympics”.