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February 21, 2005
Uribe's re-election and the bond market
“You mean to tell me that the success of my program and my reelection hinges on the Federal Reserve and a bunch of f***ing bond traders?”
That’s how Bill Clinton responded in 1993, according to an account in Bob Woodward’s The Agenda, after his advisors told him that his ambitious economic plan had to be put on hold because of deficit jitters in the equities markets.
It seems the bond traders are at it again in Colombia, according to a Reuters piece from last Wednesday.
In December, Colombia's Congress passed a constitutional amendment that would allow President Álvaro Uribe to run for re-election. Sometime during the next few months, Colombia’s Constitutional Court will rule on the amendment. It is possible that the court may strike it down on procedural grounds. Last spring, for instance, it killed an “anti-terror” amendment, heavily favored by President Uribe, that would have given Colombia’s military the power to arrest civilians, interrogate them and tap their phones.
Should the court stop Uribe from running again in 2006, writes reporter Hugh Bronstein, a likely result will be a “selling of the Andean country’s bonds.”
If Uribe can’t run for re-election, says one U.S.-based portfolio manager, “you would see a significant sell-off across the board in Colombian assets.” The result: “A dive in bond prices would make it more expensive for the already cash-strapped government to borrow.”
In other words: if Uribe’s re-election is struck down and someone else appears likely to occupy the Palacio de Nariño in 2006, Colombia risks seeing its debts approach junk-bond status. This other president would have to use much more of his budget just to service existing debt, which would mean less money for both military and social needs. Though foreign bond traders don’t get to vote in Colombia, they’re already indicating that electing someone other than Uribe could carry a big price tag.
The bond market is quite pleased with Álvaro Uribe. His security policies have made Colombia safer for the investor class. He is loath to tax upper income brackets or corporate profits. By holding down growth in social spending wherever possible, he has managed to bring deficits within IMF targets – though less-than-expected economic growth may make that hard to sustain. The bond traders would nonetheless hate to see Uribe have to go when his term ends.
When a country is running high deficits, the international bond market can become almost an additional branch of government, with strong checks on the other branches’ power. It is a very conservative branch – no surprise, since big money is involved – and its participants are made very nervous by leaders (such as Clinton, or Lula in Brazil) who appear to favor using government to fight poverty or increasing the tax burden of the wealthiest. The danger of a selloff leaves those leaders with fewer policy options; they in fact find themselves bending over backwards to prove that they are not about to recklessly blow the treasury on national healthcare, anti-hunger programs or education grants. They are left with incrementalism.
Meanwhile, bond traders don’t seem to put anywhere near as tight a straitjacket on leaders for whom they feel an affinity. George W. Bush thus continues to enjoy historically low interest rates even as he runs historically high deficits. And Álvaro Uribe’s mere presence is enough to avoid a bond selloff.
This is not a sinister conspiracy. Bond traders are ultimately motivated by perceptions of risk – the chance that they could lose lots of money – and not a right-wing political agenda.
However, there does seem to be an assumption that right-wing government equals lower risk. That assumption is faulty and it could end up losing people big money.
In fact, it’s been proven wrong. Look no further than the two recent examples of candidates who sent the bond market into a tailspin every time they went up in the polls: Bill Clinton and Luis Inacio Lula da Silva. Clinton ended up presiding over the longest period of economic expansion in U.S. history, and his government was the first in thirty years to run a budget surplus. Lula’s moderation has angered his base, but Brazil’s economy grew 5.2 percent last year, CEPAL estimates.
Colombia, by comparison, grew by only 3.3 percent. Its central government deficit is expected to top 6 percent of GDP this year. Yet the bond market sees no alternative to re-election?
Posted by isacson at February 21, 2005 01:49 AM
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Comments
Colombia was indeed expected to do much better, but unfortunately the last quarter of 2004 slowed the pace down tremendously.
And well, you said it...the bond market, like most people, unfortunately, may tend to read too much into perceptions, rather than sticking to purely economical facts (whether they are neoliberal based or not).
That's not to say that perceptions can't work for good things. In fact, security-wise, perceptions can play an important role in preventing the spread of crime, for example.
But in this particular case, they might contribute to creating a potentially negative atmosphere, even moreso by giving investors and the Colombian government a sense of exaggerated confidence.
When this is shattered, as may eventually be the case, reelection or no reelection, things may go bad...Not just for Uribe, but for all Colombians involved.
Perhaps the most that can be hoped for, in such a situation (without accounting for unforeseen events and their consequences), is to expect the next (non-Uribe) president of Colombia to follow the example of Lula and his moderation, even if that earns him some flak (first from the bond market, later from other sectors). Maybe that's expecting too much...who knows.
Btw, the recent IMF visit to Colombia seems rather contradictory...it's presenting an apparently more friendly face, socially-wise even, but at the same time it's expecting more of the government, not just in the traditional sense but also regarding the reduction of poverty and similar concerns.
And this is despite the fact that Colombia has, for the most part, tried to stick to economic orthodoxy during the last couple of decades and, at least indirectly, precisely such behavior has prevented those very objectives from being accomplished.
Any thoughts on that?
Posted by: jcg at February 21, 2005 02:38 PM
I might add that Brazil would have done even better if it hadn't been for the weak dollar. The trade surplus was a record, but the dollar has been weak against the real. Lula wants a range of between 2.9 to 3.3 to the dollar and they have bought dollars to weaken the real a little, but it really had no impact. One wonders if the dollar weakness has become institutional given the Bush administration's lack of effort to prop it up.
Posted by: Randy Paul ![[TypeKey Profile Page]](http://www.ciponline.org/colombia/blog/nav-commenters.gif)
at February 21, 2005 07:38 PM
The IMF's shifting positions on Colombia, evidenced during Rodrigo de Rato's visit last week, are puzzling. At least this indicates some momentum away from requiring Colombia to follow a cookie-cutter, one-size-fits-all, "cut the state sector and meet the deficit targets at all costs" approach. Some recognition that the state - and not just the magic of the free market - must play a role in reducing poverty. And some recognition that Colombia, a country at war and with strong vacuums of state presence that need filling, requires a different set of prescriptions than, say, Argentina or Ecuador.
De Rato was also a bit more vocal about the taxation issue than I remember the IMF being in the past, calling for better collection of existing taxes and elimination of exemptions (which overwhelmingly benefit the wealthy). Hitting the wealthy for more tax revenue - even without major changes in the tax code - is the only option Colombia has right now, since foreign aid isn't increasing and there is not much room left for spending cuts.
Posted by: Adam Isacson at February 23, 2005 06:35 PM
Uribe's re election is a question of democracy and not of bonds market. Maybe this aspect is so important because we have a lot of debt but however, we have the right to elect our leader with independence, and thinking in the possibility to be better. I am sorry with the investors but now the discussion is politic.
Posted by: Ximena Valdivieso at April 20, 2005 11:03 AM
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