Under Daniel Zelikow, global head of its international public sector group, JPMorgan has been integral to helping to keep the lights on at central banks and governments across the world.
“In the early part of the Covid-19 crisis, there was general market volatility and a loss of liquidity,” says Zelikow. “As a big provider of liquidity to securities markets, we helped central banks remain liquid in US dollars.” This in turn enabled those central banks to provide dollar liquidity to their domestic financial systems.
With its huge balance sheet ensuring abundant capital and liquid assets, JPMorgan was able to maintain big inventories of securities and offer better pricing than others. Zelikow reports a huge uptick in its provisioning to central banks and other official institutions.
“We believe our market share increased sharply in the initial quantitative easing period and, if anything, rose more in Europe than it did with dollar area central banks,” he says.
As important as its role in maintaining global liquidity was JPMorgan’s part in helping governments meet escalating funding needs.
“The fiscal response of most European governments to Covid-19 has been north of 10% of GDP and because this would not be the time to increase taxes to pay for deficits on this scale, they have financed their deficit spending and will continue to finance deficit spending at large scale,” he says.
Before markets had time to digest the central bank stimulus, dislocations occurred and there were concerns about how governments were going to meet financing needs. Getting the early deals right was key.
In the first half of this year, eurozone sovereigns raised €127 billion of funding, of which around €80 billion was explicitly Covid-related.
In the early part of the Covid-19 crisis, there was general market volatility and a loss of liquidity. As a big provider of liquidity to securities markets, we helped central banks remain liquid in US dollars
Daniel Zelikow
JPMorgan sole led a three year €1.3 billion bond tap for the German State of North Rhine-Westphalia to reopen the European sovereign, supranational and agency (SSA) market on March 19. It also acted as a joint bookrunner on the first supranational benchmark from the European Investment Bank, a €3 billion three-year, and on a €10 billion seven-year bond from Spain, the first sovereign benchmark.
During the period under review, JPMorgan was the leading bookrunner on 849 global SSA deals with a value of $174.2 billion. It took a 7.63% market share ahead of Citi at 6.69%.
It was equally important in helping emerging market sovereigns navigate the crisis. Their ability to access capital markets was less certain than the eurozone issuers and added to this was the complication of calls for both public-sector and private-sector creditors to provide debt relief to International Development Association (IDA) countries.
Pre-Covid focus
Zelikow identifies the two most important pre-Covid themes this year as greater focus on accountability for the use of resources and increased focus on operational efficiencies.
Previously, commodity exporting governments would have been reluctant to hedge on account of the perceived cost and concerns that the hedge wouldn’t be needed and so the money ‘wasted’. They would instead rely on fiscal stabilization funds and stockpiling cash. But now Zelikow reports an increase in the number of governments using and considering the use of hedging products to manage their fiscal risks.
“What we are finding more and more is that countries are awake to that problem and are going forward with the right solutions,” he says. “There is more use of hedging instruments to manage the price risk in their budgets, be it commodity price risk, interest rates or FX.”
JPMorgan organized a large long-dated cross currency swap in reais to allow a Brazilian utility to borrow in its currency of operation.
The bank also maintains a strong commitment to the UN’s Sustainable Development Goals and works closely with the world’s development banks to assist in meeting these. Before joining JPMorgan, Zelikow was chief operating officer of the Inter-American Development Bank and clearly maintains a passion for development finance.
The team has been active on several Multilateral Investment Guarantee Agency (Miga) guaranteed deals, including a $400 million 95% Miga covered Covid-19 response transaction for Bancoldex, a Colombian state-owned development finance institution.
In January, JPMorgan launched a development finance institution, partly in response to the growing desire for accountability in use of proceeds, which is already driving the green and social bond markets.
It has also been active in export credit agency (ECA) financing and arranged a €2 billion UK Export Finance (UKEF)-backed facility for the construction of two monorails in Egypt, a UKEF-backed facility for the construction of a motorway in Ghana and has supported seven airlines in restructuring ECA loan payments.
On the advisory side, its sovereign ratings team has helped to defend several sovereigns from downgrades. JPMorgan is also playing a role in advising countries how best to use the DSSI offered by the G20.
“The risk is that, by asking for private-sector DSSI [debt service suspension initiative] for some IDA sovereigns, they would obtain relatively little cash flow savings, yet would cut off access to new market financing at the sovereign level. This could in turn bleed into the financing prospects of the local private sector,” he says. “We are spending a lot of time with IDA sovereigns on these trade-offs.”
