Mumbai No. 5 - EU looking to mind the gap - IMF deal Argentina lifeline | 3 Things

February 21st, 2020

Happy Friday!

We hope that you did more planning for your weekend than Mike Bloomberg did for his first democratic party debate.

Did You Know...

Donald Trump is the richest man to take office with a net worth estimated to be $3.1bn, the poorest was Harry S. Truman who ended up moving into his mothers-in-law after his presidency - that’s got to be tough to take.

Can you name the other four that make up the top 5 wealthiest presidents?

(Answers below)


Mumbai Number 5!!

A little bit of data from the IMF has ranked India’s nominal GDP as the 5th largest in the world and caused them to leapfrog the UK and France in the search for economic dominance.

This shouldn’t come as too much of a surprise with India’s GDP regularly achieving growth between 6-7%.

VC and PE firms are looking at India as the next big frontier and it is this investment that is growing the middle class.

However, challenges remain

  1. It’s a large country and access to development and new opportunity is uneven in the country according to the World Bank.

  2. It still homes to a quarter of the world’s poor and just 39% of rural residents have access to sanitation.

  3. 22 of the 30 most polluted cities are in India, contributing to the deaths of 2M Indians every year.

  4. India’s income inequality is one of the worst in the world (Gini coefficient of .35)

India’s economy is undeniable on an upward trajectory and in the search of the $5 Trillion denomination, however, at the current growth rate, the $2.7tr economy won’t achieve its goal for another 12 years. We may be looking at a new world superpower in 50 years… or less. While the economy has been growing steadily, the currency has perversely been falling steadily. Over the last 10 years, INR has lost almost 50% of its value - the worst-performing of all emerging Asian currencies. This is surprising given the continuous foreign direct investment (FDI).  The RBI has attempted to prop it up, purchasing $18B worth of FX between the end of Sept and now, to no little or no effect.


The EU tries to fill an $81bn hole left by BREXIT. Will the Frugal 4 step up?

Tensions are mounting across the EU between it’s largest contributing and beneficiary members. The UK was a net contributor close to 10BN EUR/yr and now it’s up to the others to plug the gap.

EU’s 1st Offer - “We want 1.074% of Gross National Income (GNI) of all net contributors from 2021-2027.”

  1. The Frugal Four’s (Netherlands, Sweden, Austria, and Denmark) response - “Nah we are staying at 1%

  2. Germany’s response - “More than 1% less than 1.07%”

  3. France - “We still get our agriculture subsidies though...  right?”

  4. Poland and the Friends of Cohesion - “Can we have some more?”

  5. The UK - “Toodle pip and cheerio!”

As the largest contributor by far, Germany is clearly aware of their responsibility and are choosing to lead by example. They will also be acutely aware of the risks that this potential budget deficit poses on the EU’s $1Tr Green Deal, as they actively look to fight climate change.

The EU zone will likely continue to slow - exports are cooling off due to ROW problems and trade tensions. Industrial output fell a huge 2% in December. Growth (if you can call it that) will be roughly 1% for 2020; which is a 7 year low.

All of this will continue to weigh on the currency, which is nearing a three year low; currently 1.08, likely headed to 1.05.

Volatility is somewhat elevated at 7%, which translates to a 9% VaR percent.


Argentina bondholders told to expect a haircut on $100bn of bonds

A few weeks ago, we wrote about the impending doom for Argentinian government debt. Back in January, the Argentine government was able to unanimously pass a bill in the hope to restructure the growing debt with the IMF and other bondholders. As the crisis continues, the International Monetary Fund (IMF) came in, which could be perceived to be of defense of Argentina saying that creditors should prepare for losses as Argentina struggles to avoid defaulting on $100bn of loans. The loans are supposed to be re-negotiated by March 31st.

The IMF has stated a number of times that the debt in Argentina is an unsustainable burden and if the country were to restore debt sustainability, then it would require a “meaningful contribution from private creditors”.The economy is in somewhat of a shambles. Economic activity shrunk again in Q42019 (along with exports), and is expected to shrink another 1.5% this year. Consumer confidence is gone. Interest rates are really high, as is inflation. Expectations are that the country will remain in recession all year. China has been suggested as a potential suitor and could come to the rescue. They did it before in 2013 with a $10B swap of international reserves.

Holy ARS batman, 20% volatility; which equates to a 25.6% VaR rate.

The currency broke through the psychological barrier of 60, currently 61.8 It's hard to believe it was only 2 years ago it was at 20. It’s lost 75% of its value in just 2 years.


In Other News

  1. Former Mexican President arrested for Fraud

  2. USD - Democratic debate - everyone attacked everyone and everyone else attacked Bloomberg

  3. Japan's economy shrinks dramatically

This Weeks Economic Data Calendar

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Quiz of the week

  1. Donald Trump - $3.1bn

  2. George Washington - $587m

  3. Thomas Jefferson - $236m

  4. Theodore Roosevelt - $139m

  5. Andrew Jackson - $132m

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