Sri Lanka is girding for potential shortages of food products and fuel in the near future. Citizens have been lining up for cooking gas, automobile fuel since Friday. As the government attempts to stave off complete economic meltdown, the nation has defaulted on debt for the first time in its history. So, much to the chagrin of Sri Lanka’s leaders, the economic outlook remains bleak as the government lifts the state of emergency decree that has been in place since early May. The state of emergency went into effect as a result of violent street protests and riots in Colombo and across the country in late April and early May. The root cause of the unrest was spiraling inflation and other factors of the nation’s economic crisis.
India and Japan will provide emergency relief to the island-nation in a bid to stave off a complete collapse. The first ship laden with food and other material will depart from India on Wednesday. Japan will provide an emergency grant for $3 million worth of medicine and food. These moves also have geopolitical purpose as both nations would prefer to keep Chinese involvement in the Sri Lankan crisis at bay. Tokyo and New Delhi are wary about offering an opening for China to expand its presence and influence in the Indian Ocean region.
The debt crisis now threatening to overwhelm property developer Evergrande arrives at a decidedly inauspicious time for China. With the national economy continuing to slow, the prospect of an economic crisis centered on a Chinese entity is quite real. Global markets sense it and investors are preparing for the ripple effects. Last week, Fitch Ratings agency downgraded its forecast for China’s economic growth, citing the slowdown in the property sector as the prime contributing factor. Evergrande has been in trouble for some time now and its current problems did not arrive out of nowhere. In fact, alarm bells have been sounding for years over the state of the Chinese property market.
All eyes are focusing on Xi Jinping now as it becomes clear the Chinese government will likely have to intervene. To put it simply, Beijing cannot stand on the sidelines and permit a chaotic default where citizens lose large sums of money. Allowing that could cause a ripple effect in other sectors of the national economy, another prospect Beijing cannot allow. As a hedge against a worst-case scenario coming about, the Chinese government has ordered local officials to prepare for a potential Evergrande collapse. Local governments and Chinese-owned enterprises are being directed to intercede only if Evergrande is unable to meet its obligations. Some Chinese officials have described the measures as storm preparation.
How Beijing handles the crisis in coming days will set the tone for market behavior. If investors are encouraged by the way the Chinese government handles the Evergrande situation it will minimize the damage and perhaps instill a burst of positivity to China’s national image, which has absorbed considerable damage over the past 18 months.
Argentina is on the brink of a financial crisis once again. Current leader Mauricio Macri’s loss to left-wing opponent Alberto Fernandez in the primary election has caused a swarm of financial repercussions. The S&P Merval, Argentina’s main stock market plunged 48% on Monday. It was then second largest drop of any major stock index since 1950. The Argentine peso dropped 15% versus the US dollar on Monday as well. These losses extended on Tuesday. The wide margin of Macri’s loss is what triggered the financial earthquake. Investors were expecting him to be defeated, yet not to the extent that he was.
Now the future appears uncertain. The looming probability of a sovereign default on the country’s IMF loans is sending investors scrambling for cover. The emerging political scenario is causing concern around South America and beyond. Should the Peronists return to power, Argentina will once again be ruled by a leftist government. Brazil’s right-wing President Jair Bolsonaro is publicly warning of a possible Argentine refugee crisis affecting his country in the future. Brazil is already contending with waves of Venezuelan immigrants streaming into the northern region of the country, fleeing the economic and political crises in their homeland. The possibility of a second refugee crisis at Brazil’s southern border is unpalatable to say the least.
After the downturn in global markets yesterday stemming from global recession fears, it would appear that the Argentine headache will add to the increasing concerns among investors about the health of the global economy, as well as the growing influence that the geopolitical climate has on markets and national economies this summer.
Tomorrow, Venezuela’s newly created debt restructuring committee is scheduled to meet with creditors in hopes of renegotiating, or restructuring $69 Billion of Venezuela’s outstanding debt. It is not presently clear just how many creditors will actually be attending the meeting. It is also unknown if the meeting will include frank discussions about restructuring Venezuela’s current debt, or if Venezuelan officials will use the opportunity to simply blame the current economic situation on US sanctions. Quite honestly, it is unclear at this time whether or not a meeting will even take place tomorrow.
As meeting preparations continue this evening rumors of default continue to swirl from Caracas to Wall Street. Venezuelan President Nicolas Maduro has adamantly insisted that his country will never default on its debt. Despite his assurances, speculation is growing that the true purpose of tomorrow’s meeting is to lay the foundation for default. Venezuela’s economic situation is beyond dire. It’s cash reserves are nearly dried up, and US sanctions are making it impossible for Venezuela to refinance its debt. Securing a debt restructure in the current climate is virtually impossible. Therefore, Maduro’s only other option would be to declare insolvency and default on the country’s $150 Billion in debt.
The uncertainty surrounding Venezuela’s economic future is causing anxiety internationally. A default could possibly spark a global financial crisis, although the prospects of this happening are low. There is still a possibility of Russia extending a lifeline and saving the day. Or, at least postponing the inevitable for some time. The two nations are expected to sign a debt restructuring deal later this week that will provide some relief for Maduro’s socialist paradise.
Realistically, however, even Russian assistance might not be enough. After years of political catastrophe, social unrest, and economic disasters, time is truly running out for Venezuela. What happens this week will likely determine its fate whether Maduro is prepared to face the truth or not.
Following a marathon 17 hour session that dragged on into the early morning hours, Eurozone leaders finally agreed on the terms for a third bailout for Greece. With the prospect of a ‘Grexit’ looming over their heads, European leaders negotiated the terms of the third bailout deal and they were accepted by Greek Prime Minister Alexis Tsipras. He will now have to get key measures of the deal passed through parliament. That process will not easy. The terms of the third deal are not as generous as the ones included in the deal that Greek voters turned down in last week’s referendum. In fact, the reaction of many in Greece to the harsh terms has been one of anger and humiliation. Tsipras was elected in January on a platform of rolling back austerity measures. His dangerous game of brinkmanship took Greece to the edge of the abyss and some European leaders, especially Angela Merkel, called his bluff. Tsipras was forced to go to Brussels this weekend with hat in hand and beg for a third bailout without any room to maneuver.
Despite Monday morning’s sense of relief, the deal is not complete just yet. The prospect of a ‘Grexit’ has not disappeared entirely. As I stated above, Tsipras still has to get approval from parliament. By all appearances, Tsipras is going to be faced with at least some political opposition. It remains unclear if this will force him to call for new elections in the coming months, however, the possibility is real. In the meantime, he has to convince the voters that this is a negotiated settlement and not a surrender of Greek sovereignty.
The crisis is not yet over, however, if parliament agrees to the terms of the deal, the light at the end of the tunnel will be much closer than it has been at any point in the last thirty days.