How EXIM and DFC Can Avoid a Deflationary Apocalypse in Emerging Markets
The emerging markets are hit by catastrophic declines in commodity prices, tourism, and remittances. So where are they supposed to get hard currency?
Local lending institutions may reschedule debts (really, what choice do they have, even if they’re not legally mandated to do so), but they are not providing fresh working capital for a simple reason. They can’t.
Risk of Deflationary Spiral:
This lack of liquidity can precipitate the sort of deflationary spiral that ended in the Great Depression. Economist Milton Friedman argued in The Great Contraction – 1929 – 1933 that the Federal Reserve´s contraction of the money supply by one-third was responsible for that cataclysm. Bernard Bernanke, in a talk honoring Friedman, said:
“Let me end my talk by abusing slightly my status as an officia representative of the Federal Reserve. I would like to say to Milton and Anna [Schwartz – Friedman’s co-author]: Regarding the Great Depression, you’re right. We did it. We’re very sorry. But thanks to you, we won’t do it again”.
Bernanke, who later was Fed Chairman during the 2008-9 Great Recession, didn’t let us down. By aggressively injecting liquidity he helped save our financial institutions and our economy. Of course, money creation has to be judicious, addressing a dearth of liquidity and with one eye kept on inflation.
U.S. Can Inject Liquidity via EXIM and DFC:
The U.S. has three things that can be of vital importance to our friends in emerging markets.
– The Export-Import Bank of the United State (EXIM), whose loans, insurance and guarantee products provide liquidity to facilitate the export of U.S. goods and services.
– The United States International Development Finance Corporation (DFC), which provides support through loans, guarantees and (at least, theoretically), direct equity investments.
While other countries also have export credit agencies like EXIM, and development finance institutions like DFC, there’s something the U.S. has that they don’t: A $USD printing press.
EXIM has guaranteed loans for fleets of now-grounded Boeing jets, multi-billion-dollar cruise ships with nowhere to sail, and petrochemical facilities for zero-dollar crude oil that needs storage. DFC (and its predecessor agency, OPIC) has provided billions of dollars for emerging market on-lending facilities targeting small-and-medium- sized enterprises and women-owned enterprises – what chance of survival do these entities have in the current situation? How about DFC-funded power plants in markets where power demand has dropped roughly 20% (say, India)?
With any other country, one would have to worry about EXIM’s and DFC’s own survival, but as agencies of the United States, they have unlimited dollars. So now is the time use them.
Working Capital Today (Tomorrow’s Oxygen Won’t Revive Dead Businesses):
As everyone in the workout business knows, maintaining going-concern value is the key to successful recoveries. A business may pay millions of dollars for custom-configured machinery; on the used market, that machinery may sell as scrap. So EXIM and DFC should focus their resources on preserving businesses.
EXIM Working Capital for Importers:
EXIM-guaranteed project finance transactions (where U.S. companies develop projects overseas) includes up to 30% in local costs for civil works, installation, and training. EXIM also has a working capital guarantee program to provide liquidity for U.S. exporters, to fund costs (personnel, material and component, etc.) to fill export orders. A logical corollary would be for EXIM’s guaranty of equipment export to include working capital covering the importer’s cost for commissioning.
DFC Working Capital Replenishment
DFC supports developmental projects. Unfortunately, many of those projects are now in distress and need liquidity to survive. For instance, consider a partially-completed affordable housing project where mortgage financing for buyers has dried up. DFC can write off its loan and allow the project to deteriorate. Or it can save the project by injecting liquidity. One way it could do so is by providing on-lending facilities for mortgage lenders or a mortgage loan guarantees so that affordable housing buyers have acquisition financing available.
It is legitimate to ask whether the United States, that just had a 20% + jump in unemployment and with myriads of businesses seeking bankruptcy protection, should use its money to benefit emerging market countries. For EXIM and DFC to get the funding necessary to meaningfully contribute to stabilizing emerging market economies, the objective needs to be treated as a priority. What about America first?
When Hitler in 1938 wanted the Sudetenland portion of Czechoslovakia for greater Germany, British Prime Minister Neville Chamberlain explained his appeasement of Hitler by asking rhetorically why the United Kingdom should involve itself in a “quarrel in a far away country, between people of whom we know nothing.” The answer, of course, was that the Czechs were part of “us” – part of the liberal western order. Abandoning them to the likes of Heydrich was worse than a crime – it was a mistake. The Marshall plan, under which the U.S. helped fund post-war Europe’s economic recovery, showed a lesson had been learned.
So with the emerging market countries, with which melting-pot America shares cultural and familial ties as well as commercial ones – especially Latin America. If they go the way of Venezuela, what happens to us? Countries will become destabilized and the dysfunction will be more infectious than any coronavirus. If, on the other hand, we are there for our partners and help salvage their economies, it will help salvage our own – the export markets we need, and the supply chains on which we rely.
We are on the same boat. So let’s start bailing.