Investing
Explainer-Can a New York State Law Solve An Emerging Markets Debt Crisis?
A bill backed by debt justice campaigners and civil society groups advocating on behalf of economically distressed countries could alter past and future sovereign debt restructurings covered by New York state law – and Wall Street is watching. These are some key points about the bill. WHAT DOES THE BILL PROPOSE? Senate Bill S4747, the NY Taxpayer and International Debt Crises Protection Act, “relates to New York state’s support of international debt relief initiatives for certain developing countries.” The bill includes limits to state investments into foreign entities and would include private creditors in “burden-sharing standards” in which they would take the same losses – or “haircuts” – that the United States government would as a sovereign creditor when a low-income country in distress qualifies for debt relief. The limit of this definition is a point of contention between the advocates of the bill and its detractors. WHAT ARE THE NEXT STEPS FOR THE BILL? In the Assembly, the bill passed 14 to 5 in the Judiciary Committee and is now awaiting a vote in the Ways and Means Committee. Alexander Flood, director of communications for Patricia Fahy, the bill sponsor in that chamber, said they are “hopeful” it will be out of committee and up for a full vote next week. At the Senate, it remains at the Judiciary Committee. Time is tight, as the 2023 legislative session ends on June 8. It could get a floor vote as late as June 7, and if the same versions are approved it goes to Governor Kathy Hoche who, in the off-session, would call the bill up at her own time. She could sign, veto, or amend it – in which case it needs to go back to the sponsors. WHY IS THE ISSUE SO PRESSING?
A toxic mix of ballooning inflation, escalating borrowing costs and a strong dollar in the wake of COVID-19 and Russia’s war in Ukraine has made repaying loans and raising money significantly more expensive for dozens of developing nations. Some, such as Sri Lanka and Zambia have tipped into default. Emerging markets total debt climbed to over $100 trillion by end-March, a nominal record, according to data from the Institute of International Finance (IIF). The Group of 20 pledged to streamline debt treatments through its Common Framework platform and seeks comparable relief from bilateral creditors such as the Paris Club and China. The initiative has so far failed to accelerate debt relief talks, while private creditors are not even formally included in this initiative. WHO ARE THE BILL’S BACKERS? The bill is supported by major state and national unions and churches, as well as economic development organizations. It would “bring badly needed improvements to the framework for resolving unsustainable sovereign debt burdens,” according to Nobel Prize-winning U.S. economist Joseph Stiglitz. “The bill helps to add enforcement capabilities – something that the G20 Common Framework lacks even though as a matter of principle it recognizes the need for private sector participation,” said Rishikesh Ram Bhandari, Assistant Director of the Global Economic Governance Initiative at Boston University’s Global Development Policy Center. “A speedy and orderly economic recovery is in the interest of all creditors,” he said. “Moreover, through this legislation creditors would also have the clarity on what the terms are for everyone else, so this helps inter-creditor equity as well.” WHY ARE PRIVATE CREDITORS AGAINST THE BILL? The argument from banking trade group IIF and others is that the bill won’t work as written, with investors concerned their capital would potentially “become hostage to a protracted legal process to define appropriate recovery values.” Additionally, issuers could face higher costs as the legal uncertainty raises risk premiums. “The bill’s proponents hope to change international debt markets, but the much more likely outcome would be capital flight from New York, ultimately leading to lost income tax and other revenue to the state,” a group of capital markets trade groups, including the IIF and insurers said in a recent statement. If this bill passes, “I would recommend issuers not go through New York law, (but) through London or any other jurisdiction,” said Rodrigo Olivares-Carinal, professor of banking and finance law at Queen Mary University of London. The law as written is “way more far-reaching” than covering just the debt of poor and distressed countries and, for example, a Paris Club agreement with U.S. participation and dealing with Brazil, Argentina or other non-low-income country could fall under this if few private creditors are somehow involved, he said.
Ford Motor Company (NYSE:F) held a work meeting Friday where the Detroit automaker revealed that they have found what was described as a major international investor for Ford’s German plant in Saar louis and signed initial agreements together with the western state of Saarland. “This is an excellent basis for further negotiations, with the potential to create around 2,500 jobs in Saar Louis,” said Martin Sander, head of the company’s German unit Ford Werke. “This week we have taken a big step towards this goal,” he said, adding that the aim was still to transform the plant and create future employment opportunities. According to a late January report by The Wall Street Journal, China’s BYD (OTC: BYDDY) was one of fifteen investors expressing interest in acquiring the Ford site in Saar louis once the production of the Ford Focus, its current model, ceases in 2025. Shares of F are up 0.67% in premarket trading on Friday.
The Dutch government on Friday announced new rules restricting exports of certain advanced semiconductor equipment, a move that comes amid U.S. pressure on its allies to curb sales of high-tech components to China. “We have taken this step in the interest of our national security,” said Trade Minister Lieske Schreinemacher, adding such equipment may have military applications. Schreinemacher added only a “very limited” number of companies and product models would be affected. China was not named. ASML, a Dutch company that is a key equipment supplier to computer chip makers, said in the reaction it would not change its financial guidance as a result of the new rules. The rules, which will require companies that make advanced chipmaking equipment to seek a licence before they can export it, are expected to go into effect on Sept. 1. A technical document specifying which equipment will require a licence accompanied the announcement. The introduction of the list is the result of a high-level agreement between the U.S. and two allies with strong chip equipment industries – The Netherlands and Japan – to tighten restrictions as Washington seeks to hobble Beijing’s ability to make its own chips. ASML, Europe’s largest technology company, repeated a March statement indicating the top section of models of its second most advanced “DUV” product line, which are used to manufacture computer chips, would need a licence. It named its 2000 series “and subsequent” models and said it did not expect the rules to have a material impact on its financial forecasts. ASML’s most advanced EUV machines have never been shipped to China. ASML’s shares were down 3.6% after the news, while smaller rival ASM International (OTC:ASMIY) dipped 1.8%. The U.S. in October imposed export restrictions on shipments of American chipmaking tools to China from U.S. companies like Lam Research (NASDAQ:LRCX) and Applied Materials (NASDAQ:AMAT) on national security grounds, and lobbied other countries with key suppliers to do similar. China decried the move, part of a heightening of tensions between the two countries that has spanned everything from 5G equipment and alleged spy balloons to relations over Taiwan. Reuters reported on Thursday the U.S. may introduce additional rules next month. Schreinemacher said she expected about 20 licence applications on an annual basis, representing a “limited part of the total product portfolio of the companies that fall under this rule”. ASML has been restricted from selling EUV machines without a licence under an international agreement known as the Wassenaar Arrangement, but the Dutch rules now make clear that EUV machines also fall under the Dutch rules.
European Union countries share a common trade policy and generally use the Wassenaar Arrangement to determine which exports are restricted on security grounds. The new Dutch list published may later be adopted by other European countries or added to the EU list, though few other European countries export high-end chipmaking equipment.
German manufacturers supply essential parts to ASML, including lasers made by Trumpf and lenses made by Zeiss, among others.
MG Motor, owned by Chinese company SAIC Motor, on Friday, announced a new leasing offer whereby drivers in France can get for 99 euros ($107.6) a month its MG4 electric car, matching a scheme the French government would like to see benefiting cars made in Europe. The offer runs from July 1 through to August 31 and is done in conjunction with MG Motor’s French banking partner Credit Agricole (OTC: CRARY) Consumer Finance. It is based on people getting a “super bonus” incentive of 7,000 euros for low-income buyers and also includes a 2,500 euros public aid paid in exchange for scrapping an old thermal engine car. MG Motor’s offer comes as major car companies from around the world compete in the electric car market, which is forecast to grow rapidly as customers ditch older models given current trends to protect the environment. The brand calls it its own “social leasing” offer, in reference to a scheme the French government is working on to make electric vehicles more affordable. It has been delayed several times because the French authorities fear it would benefit mainly Asian brands. According to a government source, it should be unveiled later this year and implemented in 2024, when the first European-made affordable electric cars will come to the market, such as the Citroen e-C3 from Stellates and the Renault (EPA: RENA) R5. The MG4, imported from China, was ranked as the 5th most sold EV in France in May, according to the French electric mobility association Avere-France.
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