â€œYou 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?â€
Thatâ€™s how Bill Clinton responded in 1993, according to an account in Bob Woodwardâ€™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 Ãlvaro Uribe to run for re-election. Sometime during the next few months, Colombiaâ€™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 â€œanti-terrorâ€ amendment, heavily favored by President Uribe, that would have given Colombiaâ€™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 â€œselling of the Andean countryâ€™s bonds.â€
If Uribe canâ€™t run for re-election, says one U.S.-based portfolio manager, â€œyou would see a significant sell-off across the board in Colombian assets.â€ The result: â€œA dive in bond prices would make it more expensive for the already cash-strapped government to borrow.â€
In other words: if Uribeâ€™s re-election is struck down and someone else appears likely to occupy the Palacio de NariÃ±o 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 donâ€™t get to vote in Colombia, theyâ€™re already indicating that electing someone other than Uribe could carry a big price tag.
The bond market is quite pleased with Ãlvaro 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 â€“ 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 branchesâ€™ power. It is a very conservative branch â€“ no surprise, since big money is involved â€“ 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 donâ€™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 Ãlvaro Uribeâ€™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 â€“ the chance that they could lose lots of money â€“ 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, itâ€™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. Lulaâ€™s moderation has angered his base, but Brazilâ€™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?