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Yen rises to 2-month high as investors slash short bets

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The yen surged to a two-month high against the US dollar on Tuesday as leveraged investors slashed short positions to reassess inflation risk, recession fears and intensifying market volatility.

Dealing rooms in Tokyo opened on Tuesday to a dollar-yen rate of about ¥130.5 — a level significantly higher than ¥133 where it had traded on the previous trading day.

Tokyo dealers attributed the move to US-based funds retreating from their bets that the yen would remain historically weak well into the autumn.

“The combination of lower US bond yields, profit-taking in long dollar positions and safe haven inflows has lent the yen support recently versus the greenback,” said Jane Foley, senior FX strategist at Rabobank.

But analysts said that the big question was whether the yen’s strengthening against the US dollar marked a true inflection point or a “headfake”.

With summer trading volumes relatively light, the yen’s explosive rise has propelled it about 4.5 per cent higher against the US dollar over the past seven days. The Japanese currency’s sudden rise reverses a run of declines that began in early March from a level of ¥114.

In mid-July, the yen dropped to ¥139 against the dollar as hedge funds and other investors guessed that US rates would continue to rise while the Bank of Japan remained locked into its ultra-loose policy, widening the differential between the central banks.

“Short yen was one of the biggest G10 FX positions held by leveraged funds and vulnerable to a squeeze. Last week that squeeze arrived,” said Stephen Gallo, European head of FX strategy at BMO Capital Markets.

The squeeze began after the US Federal Reserve announced a 0.75 percentage point rate rise last month and issued an accompanying statement interpreted as a dovish signal.

The Fed’s assertion that it would likely “become appropriate to slow the pace of increases” lowered expectations for more aggressive increases that would cause the yen to slide.

The Fed’s comments on the need to be “nimble in responding to incoming data” also pointed to a new phase of increased volatility, said JPMorgan FX strategist Benjamin Shatil.

“In the statement, [Fed chair Jay] Powell telegraphed that from here on, its decisions would be more data-driven, and that introduces a lot more two-way risk in how dollar-yen will move,” said Shatil.

He added that the yen’s sudden rise could be reversed next week by the release of US inflation data.

“What Powell has done is introduce the possibility of more volatility in dollar-yen. By definition, if the Fed is going to depend more on data, and we don’t know what that data is going to be, investors will have to move more nimbly each time the data comes out,” said Shatil.

Other analysts said that while it was likely that the ¥139 to the dollar level reached last month probably marked the dollar’s peak against the yen, it was too early to declare that a clear turning point had been reached because of doubts about the timing and severity of a US recession.

Yujiro Goto, chief FX strategist at Nomura in Tokyo, said he was not adjusting his September target of ¥135. Goto explained that though the figure appeared low, there was a risk of the Fed becoming more hawkish again, with certain members hinting that it could become more aggressive.

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Crypto broker Genesis owes Winklevoss exchange’s customers $900mn

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Digital asset trading group Genesis and its parent company Digital Currency Group owe customers of the Winklevoss twins’ crypto exchange $900mn as the collapse of FTX reverberates across the market.

New York crypto exchange Gemini, run by Tyler and Cameron Winklevoss, is trying to recover the funds after Genesis was wrongfooted by last month’s failure of Sam Bankman-Fried’s FTX crypto group, according to people familiar with the matter.

Gemini’s bid to recover the funds underscores how the crypto lending market, where investors lend out their coins in exchange for high rates of return, sits at the centre of the industry’s credit crunch.

Genesis is the main partner in Gemini’s “earn” programme, where retail investors lend out their coins in exchange for a fixed stream of returns. Gemini halted withdrawals from the scheme last month after Genesis said “unprecedented market turmoil” meant it did not have sufficient liquidity to make good on all of its redemption requests.

Gemini has now formed a creditors’ committee to recoup the funds from Genesis and its parent DCG, the people said. Gemini and Genesis declined to comment.

Genesis has been scrambling to raise funding and has hired investment banking boutique Moelis & Co to help it explore all possible options, according to the people familiar with the situation.

The creditor committee is in negotiations with both Genesis and DCG, the parent group of Genesis which is run by billionaire Barry Silbert, the people said. DCG was founded in 2015 and is one of the biggest investors in the crypto industry. It was valued at $10bn last year by investors including Singapore’s sovereign wealth fund GIC, Google’s venture arm CapitalG and SoftBank, and its subsidiaries include Genesis and investment manager Grayscale.

DCG itself owes money to its subsidiary Genesis; these intercompany loans have complicated the picture for creditors.

DCG has $2bn worth of outstanding debt, $1.7bn of which is owed to its own subsidiary Genesis through two loans. Over the summer, Genesis lost $1.1bn on a loan to collapsed hedge fund Three Arrows Capital. DCG took on Genesis’s liabilities in the process, subsequently owing $1.1bn to Genesis. Silbert told investors last week that DCG had separately borrowed $575mn from Genesis “on an arm’s length basis” to fund undisclosed investments and share buybacks from non-employee shareholders.

“Because of the way the liabilities are, they’re negotiating together,” said one person familiar with the matter about Genesis and DCG’s approach to creditors.

DCG declined to comment. The Financial Times revealed last week that some of DCG’s borrowing was used to fund its investments into another of its subsidiaries, Grayscale.

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Sam Bankman-Fried’s trading shop was given special treatment on FTX for years

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Alameda Research was allowed to exceed normal borrowing limits on the FTX exchange since its early days, Sam Bankman-Fried has said, in a concession that illustrates how the former billionaire’s trading shop enjoyed preferential treatment over clients years before the 2022 crypto crisis.

In an interview with the Financial Times, the 30-year-old described the outsized role Alameda played in launching the exchange in 2019 and how it had access to exceptionally high levels of borrowing from FTX from the beginning.

Bankman-Fried said that “when FTX was first started” Alameda “had fairly large limits” on its borrowing from the exchange but he “absolutely” wished he had subjected the trading firm to the same standards as other clients.

Asked if Alameda had continued to have larger limits than other clients, he said: “I think that may be true.” He did not specify how much larger Alameda’s limits were than those of other clients.

FTX and Alameda portrayed themselves publicly as distinct entities to avoid the perception of conflicts of interest between the exchange, which processed billions of dollars’ worth of client deals a month before its collapse, and Bankman-Fried’s proprietary trading firm.

Bankman-Fried’s comments shed light on longstanding special treatment for Alameda. The close links between the firms and the large amount of borrowing by Alameda from FTX played a key role in the spectacular collapse of the exchange, once one of the largest crypto venues and valued at $32bn by investors including Sequoia and BlackRock. 

Previously one of the most respected figures in the digital assets industry, Bankman-Fried has apologised for mistakes that left up 1mn creditors facing large losses on funds they entrusted to FTX, but has denied intentionally misusing clients’ assets.

Bankman-Fried said the origins of the large borrowing limits for Alameda came as a result of the trading shop’s early role as the main provider of liquidity on FTX before it attracted other financial groups.

FTX, like other big offshore trading venues, handled large volumes of derivatives that allowed traders to magnify their bets using borrowed funds — but professional firms are typically needed to make the market function smoothly.

“If you scroll back to 2019 when FTX was first started, at that point Alameda was 45 per cent of volume or something on the platform,” Bankman-Fried said. “It was basically a situation where if Alameda’s account ran out of capacity to take on new positions that would lead to risk issues for the platform because we didn’t have enough liquidity providers. I think it had fairly large limits because of that.”

By this year, he said, Alameda accounted for around 2 per cent of trading volume and was no longer the key liquidity provider on the exchange. Bankman-Fried said he regrets not revisiting the trading firm’s treatment to ensure that it was subject to the same limits on borrowing as other similar firms operating on the exchange. 

FTX lent to traders so they could make big bets on crypto with just a small initial outlay, known as trading on margin. FTX’s large exposure to Alameda was a key reason that weakness in the trading firm’s balance sheet caused a financial crisis that engulfed both companies.

Bankman-Fried has estimated Alameda’s liabilities to FTX at roughly $10bn by the time both companies filed for bankruptcy in November.

“From a volume, from a revenue, from a liquidity point of view, the exchange was effectively independent from Alameda. Obviously that did not turn out to be true in terms of positions or balances on the venue,” Bankman-Fried said.

John Ray, the veteran insolvency practitioner running FTX in bankruptcy, has criticised its former leadership for failing to keep Alameda and FTX separate. In court filings, he pointed to a “secret exemption of Alameda from certain aspects of FTX.com’s auto-liquidation protocol”. 

Automatic liquidation, or closing, of souring positions was a key tenet of FTX’s risk management procedures and a core part of its proposals to change parts of US financial regulation. When a typical client’s trade started to go underwater, FTX’s liquidation mechanism was meant to start draining the account’s margin to protect the venue from a single trade causing a loss for the exchange.

However, Bankman-Fried said there “may have been a liquidation delay” for Alameda and possibly other large traders. He said was “not confident” as to whether Alameda was subject to the same liquidation protocol as other traders on the exchange, and that the treatment of the trading firm’s account was “in flux”.

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Defaults Loom as Poor Countries Face an Economic Storm

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WASHINGTON — Developing nations are facing a catastrophic debt crisis in the coming months as rapid inflation, slowing growth, rising interest rates and a strengthening dollar coalesce into a perfect storm that could set off a wave of messy defaults that inflict economic pain on the world’s most vulnerable people.

Poor countries owe, by some calculations, as much as $200 billion to wealthy nations, multilateral development banks and private creditors. Rising interest rates have increased the value of the dollar, making it harder for foreign borrowers with debt denominated in U.S. currency to repay their loans.

Defaulting on a huge swath of loans would send borrowing costs for vulnerable nations even higher and could spawn financial crises when nearly 100 million people have already been pushed into poverty this year by the combined effects of the pandemic, inflation and Russia’s war in Ukraine.

The danger poses another headwind for a world economy that has been sputtering toward a recession. The leaders of the world’s advanced economies have been grappling privately in recent weeks with how to avert financial crises in emerging markets such as Zambia, Sri Lanka and Ghana, but they have struggled to develop a plan to accelerate debt relief as they confront their own economic woes.

As rich countries brace for a global recession and try to cope with high food and energy prices, investment flows to the developing world have been abating and big creditors, particularly China, have been slow to restructure loans.

Mass defaults in low-income countries are unlikely to spur a global financial crisis given the relatively small size of their economies. But the potential is causing policymakers to rethink debt sustainability in an era of rising interest rates and increasingly opaque loan transactions. In part, that’s because defaults can make it harder for countries like the United States to export goods to indebted nations, further slowing the world economy and possibly leading to widespread hunger and social unrest. As Sri Lanka drew closer to its default this year, its central bank was forced to arrange a barter agreement to pay for Iranian oil with tea leaves.

“Finding ways to reduce the debt is important for these countries to get to the light at the end of the tunnel,” said David Malpass, the World Bank president, in an interview at the summit for the Group of 20 nations last month in Bali, Indonesia. “This burden on the developing countries is heavy, and if it goes on, they continue to get worse, which then has impacts on advanced economies in terms of increased migration flows and lost markets.”

The urgency follows lockdowns to contain the coronavirus in China and Russia’s war in Ukraine, which have stunted global output and sent food and energy prices soaring. The Federal Reserve has been rapidly raising interest rates in the United States, bolstering the strength of the dollar and making it more expensive for developing countries to import necessities for populations already struggling with rising prices.

Economists and global financial institutions such as the World Bank and the International Monetary Fund have been raising alarm about the gravity of the crisis. The World Bank projected this year that about a dozen countries could face default in the next year, and the I.M.F. calculated that 60 percent of low-income developing countries were in debt distress or at high risk of it.

Since then, the finances of developing countries have continued to deteriorate. The Council on Foreign Relations said this past week that 12 countries now had its highest default rating, up from three 18 months ago.

Brad Setser, a senior fellow at council, estimates that $200 billion of sovereign debt in emerging markets needs to be restructured.

“It is certainly a systemic problem for the countries that are affected,” Mr. Setser said. “Because an unusually large number of countries borrowed from the market and borrowed from China between 2012 and 2020, there’s an unusually large number of countries that are in default or at risk of default.”

Restructuring debt can include providing grace periods for repayment, lowering interest rates and forgiving some of the principal amount that is owed. The United States has traditionally led broad debt-relief initiatives such as the “Brady Bond” plan for Latin America in the 1990s. However, the emergence of commercial creditors that lend at high rates and prolific loans from China — which has been loath to take losses — has complicated international debt relief efforts.

Fitch, the credit rating firm, warned in a report last month that “more defaults are probable” in emerging markets next year and lamented that the so-called Common Framework that the Group of 20 established in 2020 to facilitate debt restructuring “is not proving effective in resolving crises quickly.”

Since the framework was established, only Zambia, Chad and Ethiopia have sought debt relief. It has been a grinding process, involving creditor committees, the International Monetary Fund and the World Bank, all of which must negotiate and agree upon how to restructure loans that the countries owe. After two years, Zambia is finally on the verge of restructuring its debts to China’s state banks, and Chad reached an agreement last month with private creditors, including Glencore, to restructure its debt.

Bruno LeMaire, the French finance minister, said that the progress with Zambia and Chad was a positive step, but that there was much more work to be done with other countries.

“Now we should accelerate,” Mr. Le Maire said on the sidelines of the Group of 20 summit.

China, which has become one of the world’s largest creditors, remains an obstacle to relief. Development experts have accused it of setting “debt traps” for developing countries with its lending program of more than $500 billion, which has been described as predatory.

“This is really about China being unwilling to admit its lending has been unsustainable and China dragging its feet in getting to deals,” said Mark Sobel, a former Treasury Department official and the U.S. chairman of the Official Monetary and Financial Institutions Forum.

The United States has regularly urged China to be more accommodating and complained that Chinese loans are difficult to restructure because of the opaque terms of the contracts. It has described China’s lending practices as “unconventional.”

“China is not the only creditor holding back quick and effective implementation of the typical playbook,” said Brent Neiman, a counselor to Treasury Secretary Janet L. Yellen, in a speech in Washington in September. “But across the international lending landscape, China’s lack of participation in coordinated debt relief is the most common and the most consequential.”

China has accused Western commercial creditors and multilateral institutions of failing to do enough to restructure debts and denied that it has engaged in predatory lending.

“These are not ‘debt traps,’ but monuments of cooperation,” Wang Yi, China’s foreign minister, said this year.

China’s own economy is slowing because of its strick “zero Covid” policy, which has included mass testing, quarantines and lockdowns of its population. A domestic real estate crisis has also made it more difficult for China to accept losses on loans that it has made to other countries.

I.M.F. officials will travel to Beijing this coming week for a “1+6” roundtable with the leaders of major international economic institutions. During those meetings, they will help China better understand the process of debt restructuring through the common framework.

Ceyla Pazarbasioglu, the director of the strategy, policy and review department at the I.M.F., acknowledged that agreeing to terms on debt relief could take time, but said she would convey the urgency to Chinese officials

“The problem we have is that we don’t have the time right now because countries are very fragile in dealing with debt vulnerability,” Ms. Pazarbasioglu, who will travel to China, told reporters at the I.M.F. this past week.

At the annual meetings of the I.M.F. and World Bank in Washington in October, policymakers said the pace of debt restructuring was too slow and called for coordinated action among creditors and borrowers to find solutions before it was too late.

During a panel discussion about debt restructuring, Gita Gopinath, the first deputy managing director of the I.M.F., said countries and creditors needed to avoid the kind of wishful thinking that led to defaults.

“There is very much the tendency to gamble for redemption,” Ms. Gopinath said. “There’s very much a tendency for creditors to hope there will be gambling for redemption, and then nothing gets solved.”

But at the conclusion of the Group of 20 meeting in November, it appeared that little progress had been made. In a joint declaration, the leaders expressed their concern about the “deteriorating debt situation” in some vulnerable middle-income countries. However, they offered few concrete solutions.

“We reaffirm the importance of joint efforts by all actors, including private creditors, to continue working toward enhancing debt transparency,” the statement read.

The statement included a footnote saying that “one member has divergent views on debt issues.” That country, according to people familiar with the matter, was China.

In the interview, Mr. Malpass said that China had been willing to discuss debt relief, but that the “devil is in the details” when it comes to restructuring loans to reduce debt burdens.

The World Bank president predicted that the fiscal problems facing developing countries were unlikely to become a global debt crisis of the kind that occurred in the 1980s when many Latin American countries could not service their foreign debt. He suggested, however, that there was a moral imperative to do more to help poor countries and populations that had been pushed deeper into poverty during the pandemic.

“There would be continued reversals in development in terms of poverty, in terms of hunger and malnutrition, which are already going up,” Mr. Malpass said. “And it’s coming at a time when countries need more resources, not less.”

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