The “Mar-a-Lago Accord” is a concept, not an event. Some are advocating a new currency accord and debt restructuring to fix the US balance sheet.
What is the meaning of the Mar-A-Lago Accord?Fixing the US balance sheet: a future Mar-a-Lago accord?
By Henry Cobbe, Head of Research, Elston Consulting
A deal on the dollar?
Back in 1985, policymakers from the US, the UK, Germany and Japan signed the “Plaza Accords” which orchestrated a structural devaluation of the US Dollar to help boost domestic industry and ensure the US remained internationally competitive.
Fast forward to today and policymakers close to the Trump administration are advocating a similar accord to structurally weaken the US dollar and/or reduce the US’s debt cost burden. Why has US debt got more expensive to service?
During the zero-interest-rate policy era, US debt was essentially “free” to service. Following the normalisation of interest rates, the cost to the government of servicing its debt has increased materially – for obvious reasons. Not only is there more debt in issue following the Covid money printing intervention, but with normalised interest rates the cost of interest on US government debt soared from US$402 billion in 2015 to US$1.13 trillion in 2024.
What could a modern-day debt deal look like?
For the central banks of US allies that enjoy its military protection, a debt deal could involve swapping their existing coupon-paying treasury bonds for long-dated zero-coupon treasury bonds. Similar debt restructurings are used for businesses if their overall debts are unpayable. It is deemed better to have a lower value (or later maturity) debt that can be paid than a higher value (or ‘as planned’ maturity) debt that can’t be paid.
To Trump, the logic would be that US allies get military security protection but don’t pay for it, thus by accepting a debt swap they are effectively being made to compensate. Why do foreign central banks hold US treasuries?
Western economies moved away from the gold standard between the 1930s and the 1970s. Nonetheless gold remained an important component of central bank reserves during that time. In the 1990s, UK and European policymakers made the case for reducing central bank gold holdings and replacing them with government bonds of the US and other major global economies.
Gordon Brown famously sold off Britain’s gold reserves at an average price of US$240/oz. The value today is over ten times that. The substitute assets (mainly trade-weighted government bonds) will not have delivered that return. In that anti-Gold era, it was argued that unlike equities or debt, gold had no intrinsic value because it produced no income. While this is still true today, our view is that as an asset, gold has stood the test of time, riding out the vicissitudes of crises, wars and revolutions. In any case, because foreign central banks hold US Treasuries, the US is in a position whereby it is paying a substantial amount of interest to those foreign central banks. By contrast, the central banks of countries that do not count themselves as US allies (China excepted – it is the second largest owner of US debt behind Japan) have been nervous of holding their reserves in assets controlled by the US government (just look what happened to the freezing of Russia’s reserves). In recent years, emerging market central banks have been diversifying their holdings into each other’s currencies – see Russia holding increasing volumes of Chinese renminbi-denominated assets – and indeed physical gold. A conceptual currency accord
A research paper from Stephen Miran at Hudson Bay Capital outlined the logic of revisiting a currency accord for a managed devaluation of the Dollar to stimulate the domestic economy. He terms this concept (as others have done) the “Mar-A-Lago Accord.” It’s a concept, not an actual event.
One version of the rumoured plan would potentially involve allied governments swapping the short-dated interest-bearing debt maturing for non-interest bearing (zero coupon) debt that is repayable in 100 years’ time, in exchange for the US security umbrella. This would reduce the debt servicing cost of the US Government, and push liabilities further to the future which is positive for the US balance sheet as they owe less in today’s terms but commensurately negative for allies’ balance sheets. It would also help improve the US government budget as it no longer has to pay interest on huge swathes of debt. This represents a material cost in the form of lost interest to US allies, but as Trump sees it, that is the price to pay for US protection which has essentially been given for free all this while. Additionally, a deferral of US debt will help government bond yields on its traditional debt because those interest payments are now more affordable. It will also help depress the dollar (because of the lower yield on US dollar assets) thereby making US industry and manufacturing more globally competitive. What might happen next?
Although this is all theory and speculation, these potential changes have already been dubbed the “Mar-A-Lago Accords” even though nothing has been officially acknowledged or discussed. At present, there is sufficient chatter among policy-making circles for the market to take notice.
How to position portfolios
The risk of debt indigestion is one of our key themes for 2025, but a debt devaluation (whether planned or not) is not our base case as yet. However, if this idea become less of a rumour and more of a plan, what are the sensitivities? It depends on how the debt devaluation unfolds - disorderly or managed?
A disorderly devaluation of US government debt would be a shock to markets. Much will ride on the format of the devaluation – whether it is defaulting on the interest, deferring or cancelling capital payments (less likely), failed auctions (possible) or higher yields to reflect oversupply (which already happened in January this year). Even a managed devaluation of US debt would force a repricing of US Treasuries and trigger substantial volatility in the bond market while the detail was worked through. In either case, our recommendation for insuring against such bond market shocks would be similar to our 2022 playbook when inflation hit the real value of debt: shorten duration to <1 year (if holding bonds at all), hold Floating Rate Notes whose interest rises with rates, and hold risk-constrained liquid real assets including Gold & Precious Metals. While near -erm volatility would impact equities initially - company shares offer greater long-term protection against inflation and nominal assets than bonds (whether devalued or not). Particularly those with strong cashflows and dividends. Given the potential for dollar devaluation this would be positive for the following:
Reevaluating US assets
So, if a debt swap with allies helps take pressure off the liability side of the US balance sheet, what about the asset side?
The first step could be to move from debt to GDP ratios to a debt to total asset ratio. This means that governments can evaluate their debt levels relative to all their assets (including land, buildings, energy reserves). This makes debt ratios look more comfortable. The other rumour is that Trump is considering revaluing the gold held in US reserves from book cost (about US$40/oz) to the market rate of approximately US$3,000. This would make the US debt to total asset ratio look much better than it does today. With this in mind, the sustained demand for physical gold - not just in ETP form but where physically held – for example within US jurisdictions- begins to make sense. This might explain why gold traders have been shipping bars from vaults around the world to the US in anticipation of any import restrictions. Summary
Trump wants to find a series of “deals” that help “make America great again”. Possibly at the expense of US allies, but ideally with their co-operation.
So, if these ideas go from think tank conjecture to White House policy making, it would be important to adapt portfolios to reduce exposure to USD and Global Aggregate debt (unhedged), as well as a careful look at equities’ export/import positioning and reporting currency. Whilst the plan to create a “Mar-A-Lago accord” on the Dollar are a rumour, not a plan, the lesson of Trump 2.0 Presidency is to rule nothing out. Comments are closed.
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