MIKE SCHÜSSLER: Open the money taps

The rand has suffered a relentless beating in the market turmoil of the past few weeks. Economist Mike Schüssler says one way of stabilising the currency would be to introduce a swap line between the US Federal Reserve and SA’s Reserve Bank. We asked him what this would entail.

MS: The Bank of England, the European Central Bank (ECB), the Japanese central bank and the Swiss National Bank have permanent swap arrangements and there’s no limit, as far as I know, on them.

But then [the Fed] issued a statement, including Brazil, New Zealand, Australia, South Korea, Mexico, Singapore, Denmark and Norway, and they can tap up to a combined total of $450bn using assets in their own country. The rate that [the Fed] is charging on that is 25 basis points — their repo rate if you wish. That would allow the SA Reserve Bank to lend money out at a maximum of 0.5%.

And who would it lend to?

MS: It could lend it to commercial banks, it could lend the money to importers, the government; but the fact is you would have that money in your economy and you would not be printing it. It’s somebody else printing the money for you. Because the dollar is the world’s reserve currency, it doesn’t influence your situation too much.

When it was announced, many of those countries’ currencies went up. Right now SA does not have that much room to fund things that we need to fund, and it would allow the Bank to buy the government’s debt.

What is the significance of this?

MS: The First World could help emerging markets by printing the money for them. All the emerging markets have huge debt problems.

The fact of the matter is that it would benefit the Americans in that they don’t want too strong a currency, and at the moment there’s a surge in dollars.

So for them the big thing is, if they print more dollars and make [money] available to many of the emerging markets, it stops the panic in the emerging markets and … that would lower the strength of the dollar.

The same would apply to the ECB if they wanted to do that.

For emerging markets, we need to buy in supplies and the quantitative easing rounds that we saw overseas [in the aftermath of the global financial crisis] all went into stocks and if there was any jitters, the money flew out of our markets and our bond markets really got hit.

So this would help emerging markets strengthen their currencies, lower their bond yields and probably increase their stock markets.

And in that process the dollar and the euro would not strengthen too much and make it more difficult for them to export goods and services.

There are also other multinational institutions like the World Bank that can lend money and this is to keep trade lines relatively open.

Otherwise the Americans also run the risk where emerging markets say to themselves "our currencies are becoming very devalued", and money will head into, say, the American market, thereby pushing the dollar up into bubble territory, leaving the Americans in a difficult position.

The whole developed world will have to think about this. It would help stimulate economic growth in other areas of the world without our own money having to be printed.

There’s a difference between [this and] an emerging-market currency being printed nonchalantly.

We can’t just print — we’ll import inflation by our currency falling. And it’s not that we’re asking them for dollars in terms of their tax money, it’s that their money supply will expand. It will, in a way, create inflation for the whole world, not just one part. This could give us enough relief till this is over. It doesn’t have to be a permanent arrangement.

Moody’s is scheduled to swing the junk status axe this Friday. Given what has happened to markets, does it even matter anymore if we’re downgraded?

MS: If we get downgraded — and it sounds crazy — but that might actually help our bond market by putting an end to the uncertainty.

Everything is now over the top and after the downgrade, people will see we’re still here and we will make up some ground, I think. Then we can start working with the uncertainties of this virus. We know it’s going to be bad but compared to everything else, the downgrade is minimal.

Do you think SA’s economy will be shattered by this Covid-19-induced shutdown?

MS: There’s no doubt that our corporates have a lower debt level than those of most other emerging-market countries. Their average is about 90%; we’re at 40%, of which half is state-owned enterprises and half is Eskom. If we look at consumer debt it’s very low. We’ve [just] got to get growth back.