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The EconomistMarch 14th 2020 Finance & economics 61

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Mixedsymptoms

Currenciesagainstthe$

%changeFebruary21st-March11th 2020

Source:Bloomberg

Russianrouble

Brazilianreal

Norwegiankrone

Australiandollar

Chineseyuan

Swedishkrona

Euro

Swissfranc

Japaneseyen

-10-15 -5 1050

T

here aretwo types of sellers in

financial markets. The first kind sell

because they want to. They may need

cash to meet a contingency; or they

might coolly judge that the risks of hold-

ing an asset are not matched by the pros-

pective rewards. The second kind sell

because they have to. The archetype is an

investor who has borrowed to fund his

purchase and has his loan called. If there

are lots of forced sellers, as can happen in

periods of stress, the result is a rout.

Involuntary selling can amplify any

decline in asset prices. A called loan is

not the only trigger. It might be a ratings

downgrade; an order from a regulator; or

a jump in volatility that breaches a risk

limit. What happens in the markets then

feeds back to the broader economy,

making a bad situation worse.

This brings us to the dollar. An ever-

green concern is the scale of dollar secu-

rities issued or held outside America. In

the midst of the financial crisis of

2007-09, the Federal Reserve set up

currency-swap lines with other central

banks to deal with a lack of dollars, as

borrowers outside America were caught

short. In stressed markets a spike in the

greenback is a tell. Investors sell what

they own to buy the dollar not because

they want to but because they have to.

So far the dollar has traded reason-

ably. In recent weeks it has rallied against

a clutch of currencies hurt most by the

slump in oil and commodity prices and

lost ground against the yen and Swiss

franc (the other havens in a storm) as

well as the euro (see chart). Perhaps there

are stresses out there, but they are ob-

scured by other factors weighing on the

dollar. There has been a sense that it is

due a fall. It looks expensive on yard-

sticks of value, such as purchasing-

power parity. The Fed’s interest-rate cut

earlier this month, with further reductions

likely, means that holding dollars has

become less appealing.

Yet it is easy to forget how bearish

sentiment on the dollar was in 2008. Many

expected it to fall in the teeth of a crisis

that had, after all, originated in America.

Instead it spiked as banks outside America

scrambled to get hold of greenbacks in

order to roll over the short-term dollar

borrowings that funded their holdings of

mortgage securities. In 2015-16 China ran

down its reserves by $1trn in part to meet

demand for dollars from Chinese compa-

nies who had borrowed heavily offshore.

And notwithstanding attempts by coun-

tries, such as Russia, to de-dollarise their

economies, the greenback is as central to

the world economy as it ever was. If there

are hidden strains in cross-border finance,

they will eventually be revealed by spikes

in the dollar.

It would be foolish to rule this out. No

doubt pockets of stress will emerge in the

coming weeks—a hedge fund, say, that has

borrowed dollars to buy riskier sorts of

assets and faces a cash crunch. But the sort

of aggressive borrow-short-to-lend-long

bets that intensified the 2007-09 crisis

have been much harder to make. Banks

have tighter constraints on their lending.

Panic by overborrowed foreigners does

not seem a first-order concern.

Other plausible, but voluntary,

changes in behaviour would affect the

dollar in a variety of ways, or not at all.

Foreign investors might simply choose

to sell (or refrain from buying) American

securities amid the current turmoil—a

sort of financial self-quarantine. But

surplus savings must be put to work

somewhere. Asian funds have been

steady buyers of overseas debt securities.

Japan’s Government Pension Investment

Fund, a $1.6trn pool of retirement sav-

ings, had signalled that it will increase its

holdings of foreign debt and equities in

the coming financial year. There is no

sign that it is backing away from this,

says Mansoor Mohi-uddin, of NatWest

Markets in Singapore. Indeed there is a

logic to its front-loading foreign-asset

purchases, as a means of weakening the

yen and helping Japan’s exporters.

Japanese funds have in recent years

preferred to buy euro-denominated debt,

because the costs of hedging euro cur-

rency risk is low. But if the Fed keeps

cutting rates, dollar hedges will become

cheaper. Currency-hedged Asian in-

vestors might then tilt towards American

assets. That would be neutral for the

dollar (because of the hedging) but a

welcome fillip for issuers of corporate

debt in America.

The dollar remains an unloved cur-

rency. Witness the surge in gold prices

spurred by seekers of an alternative. It is

the currency investors are forced to buy,

not the one they want to buy. The dollar’s

calmness is reassuring. A sudden spike

in its value would be a bad sign indeed.

A spike in the dollar has been a reliable signal of global panic. Are we due one?

tal-payments architecture.

The finance minister, Nirmala Sithara-

man, sought to allay depositors’ fears by

pledging that no financial institution

would “fall of the cliff” during her tenure.

The rbiattested to the soundness of the

banks and the safety of depositors. Less re-

assuringly, the comments echoed what

they had both said in September during the

collapse of yet another financial institu-

tion, the Punjab & Maharashtra Co-opera-

tive Bank.

While the technical issues were swiftly

sorted out, fundamental ones remain. The

resolution plan was far short of the $4bn

needed for provisioning, reckons Ashish

Gupta, an analyst at Credit Suisse, a bank.

sbihas said it does not intend to merge

with Yes, leaving the latter’s fate unclear

and, to use Mr Gupta’s careful phrasing, its

“reconstruction...unlikely”. The chaotic ap-

proach has complicated the life of other

small and mid-sized banks, he says, affect-

ing their liquidity and ability to raise de-

posits, which in turn may aggravate the

country’s deepening credit crunch.

This half-baked outcome was not inev-

itable. A private-equity investor says he

heard of more than 40 private-equity

firms, mostly from outside India, who had

expressed interest in buying Yes, only to be

dissuaded at the last minute by the thicket

of regulations, particularly for foreign in-

vestors, not to mention the business risks.

A handful of the same names are reported

to be in discussions with sbi about buying

stakes. Yet falling stockmarkets and finan-

cial mayhem make it an inopportune time

for dealmaking. Many of the former opti-

mists of Indian finance who bought into

Mr Kapoor’s story may never say yes so ea-

gerly again. 7