The Era of Cheap Money Shows No One Knows How Monetary Policy Works
Ben Holland makes analysis on recent monetary policy trends. In short the low-rate environment has helped sovereign borrowers, rather than the real economy.
In our view this article underlines the dangers for governments that borrow in foreign currency, during the next financial downturn. While the monetary policy tools in the developed world appear ineffective to create growth and government willingness to invest outside of ones borders is scares it may create a vicious circle. Faced with lower revenues in a downturn developing governments may turn to money printing to finance their activities; this will create inflationary pressure on their currencies and increase the interest foreign investors may demand. With high leverage some sovereigns may run out of options and try to force debt restructuring. Such a scenario will affect bond investors adversely and will amplify the need for a safe collateral.
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