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Finance and economics
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Why everybody is concerned about corporate-bond liquidity

Thu, 07/11/2019 - 14:51

IN SEPTEMBER 2007 Britain suffered its first bank run in a century. Television pictures showed a long queue of depositors outside a branch of Northern Rock. Alistair Darling watched in dismay from Portugal, where he and his fellow European Union finance ministers were gathered. “They’re behaving perfectly rationally, you know,” Mervyn King, the governor of the Bank of England, said in the smarty-pants manner that economists are cherished for. Mr Darling was uncharmed. “It was not what I wanted to hear,” he recalled.

What Lord King probably had in mind was a well-thumbed textbook model. Banks have a liquidity mismatch. One side of the balance-sheet is hard-to-sell loans; the other side is deposits that can be withdrawn in a trice. If depositors believe that a bank is sound, there will be no runs on it. But if enough start to demand their deposits back, it makes sense for everybody to join the rush.

This model can also be applied in other areas. Take the corporate-bond market. Every policy body of stature, from the IMF to the European Central Bank (ECB), has worried about a growing mismatch between investors’ expectations that they can sell out at any moment and an underlying shortage of liquidity in the market. More investors are using corporate-bond funds as an alternative to cash. But fewer dealers are willing to trade...

The choice of the IMF’s next boss could be a coronation

Thu, 07/11/2019 - 14:51

FOR THE purposes of decision-making, the IMF’s 189 member countries are divided into 24 constituencies of peculiar shapes and sizes. Ghana, for example, belongs to the same group as Afghanistan. Ecuador sits with East Timor. But in choosing the next boss after Christine Lagarde moves to the European Central Bank in October, the most decisive constituency may be a different group entirely: the “New Hanseatic League”. This includes eight small, northern members of the European Union (EU) with bad weather and good credit ratings. They lost out in the fight for big EU jobs earlier this month. In compensation they may have a large say in Europe’s pick to lead the fund.

That could be good news for Mark Carney, the charismatic and credentialled boss of the Bank of England. As well as Canadian and British citizenship, he holds a passport from Ireland, one of the new Hanseatics. If Ireland champions his cause in the league, and the league backs him within the union, he would be hard to resist within the fund. By convention the IMF is led by whichever European candidate the Americans can live with. And the Americans are unlikely to object to him, especially after the Europeans dutifully supported Washington’s choice to run the World Bank earlier this year.

What about an Asian rival? One obvious candidate is Tharman Shanmugaratnam...

A new study tracks the surge in Chinese loans to poor countries

Thu, 07/11/2019 - 14:51

LOAN TALKS with Belarus; funding for bridges in Liberia; a possible gas project in Timor-Leste; accusations of exploitation in Tanzania; a corporate dispute in India; pledges to support the Rwandan private sector. And that was just the past few weeks. Such is the frenetic pace of China’s overseas lending that its outstanding loans have risen from almost nothing in 2000 to more than $700bn today. It is the world’s largest official creditor, more than twice as big as the World Bank and IMF combined. Yet tracking the money is hard because of limited transparency in its disclosures.

A new study by Sebastian Horn and Christoph Trebesch of the Kiel Institute for the World Economy and Carmen Reinhart of Harvard University offers the most comprehensive picture yet of China’s official credit flows (including state-owned banks). It adds to concern about whether China has sowed the seeds for debt problems abroad. They find that nearly half of China’s lending to developing...

To get a ticket to Wimbledon you must be rich, patient or lucky

Thu, 07/11/2019 - 14:51

ECONOMICS IS ALL about allocating scarce resources. Usually that is done by pricing. If demand for strawberries exceeds supply, prices will rise. Customers may switch to raspberries, or farmers may plant more strawberries. But some markets are more complex. 

Take those for tickets to popular events—like Wimbledon. The tournament is played over a fortnight each July at the All England Lawn Tennis & Croquet Club, which has a fixed capacity. Raising prices until demand met supply would exclude most tennis fans, tarnishing the tournament’s image. A price overshoot would leave some seats empty, ruining the atmosphere.

Around a sixth of seats on Centre Court, where the big-draw matches are played, are reserved for debenture-holders, who pay through the nose for a specific seat for five years. These can be freely resold. Debentures for 2021-25 went for £80,000 ($100,000); a single resale ticket costs thousands.

Other seats are rationed in different ways. The first is chance: the All England Club runs a ballot six months before the tournament each year. Winners get the option to buy a randomly allocated pair of tickets at a price that varies according to the day and court—this year, between £33 and £190. These cannot be resold.

The second is queuing. Except on the final four days, 500 tickets for the top...

Recep Tayyip Erdogan sacks the head of Turkey’s central bank

Thu, 07/11/2019 - 14:51

TURKEY’S ECONOMY had just begun to show signs of recovery. High interest rates, a measure of calm following local elections earlier this year and attempts to rebuild a strained relationship with America had allowed the lira, which fell by 12% against the dollar in the first four months of the year, to strengthen. Inflation had fallen to 16%, from 25% last autumn.

But in the small hours of July 6th Recep Tayyip Erdogan, Turkey’s president, put the progress in jeopardy by sacking Murat Cetinkaya, the boss of the central bank. Though Mr Cetinkaya was not widely admired by investors, his peremptory removal unsettled markets. Mr Erdogan compounded the damage by proclaiming that high lending rates were to blame for inflation (a view roundly mocked by economists) and making clear that it was he who was in charge of monetary policymaking. “We told him several times to cut interest rates at meetings on the economy,” said the president of Mr Cetinkaya. “We said that if rates fall, inflation will fall. He didn’t do what was necessary.”

Mr Erdogan scored an own goal, says Paul McNamara, an investment director at GAM, an asset manager. “The best case is that they get a lira sell-off that keeps rates higher than they otherwise would have been. The worst case is that they set off a currency avalanche.” Mr Cetinkaya’s sacking showed...

Recognising reality at Deutsche Bank

Thu, 07/11/2019 - 14:51

“THE MOST fundamental transformation of Deutsche Bank in decades.” So Christian Sewing described his refashioning of the chronically unprofitable firm, announced on July 7th. Germany’s biggest lender is trimming its investment bank—and excising the trading of shares altogether. Mr Sewing, chief executive since April 2018, intends to cut costs by €5.8bn ($6.7bn) a year, a quarter of the total, by 2022. Eighteen thousand jobs, a fifth of the payroll, will go. Some equity traders were shown the door on July 8th.

The restyling has taken five months to plan (during which time Deutsche also pondered and dismissed a merger with its Frankfurt neighbour, Commerzbank). It looks bold. Yet it is also a belated recognition of reality. For years after the financial crisis, Deutsche clung to the hope that it would again strut alongside Wall Street’s most glamorous names, as it had for a heady 20 years. Mr Sewing has binned the last threads of that ambition. The remodelled Deutsche—150 years old next year—will look a lot more like the sober servant of international companies it originally was.

Mr Sewing is reshaping the bank around four lines. At the centre will be a corporate bank, chiefly providing European businesses with cash management, trade finance, foreign exchange and so forth: dull-sounding work but steady. A substantial...

Should egalitarians fear low interest rates?

Tue, 07/09/2019 - 15:09

JOHN MAYNARD KEYNES once fantasised about a world of permanently low interest rates. In the final chapter of “The General Theory” he imagined an economy in which abundant available capital causes investors’ bargaining power, and hence rates, to collapse. In such a world markets would reward risk-taking and entrepreneurial talent, but not the mere accumulation of capital. The result would be the “euthanasia of the rentier”.

That low rates could feature in a leftish Utopian vision might come as a surprise today. It is commonly argued that a decade of monetary-policy stimulus has filled the pockets of the rich. Low rates and quantitative easing (QE) are said to have sent stock and bond markets soaring, thereby exacerbating wealth inequality. They have also boosted house prices, adding to intergenerational tension. A glance at financial markets suggests more of the same is coming: long-term rates have tumbled this year in anticipation of monetary easing, while stockmarkets have boomed.

Central bankers have defended their policies by arguing that, without loose money, unemployment would have been much higher, badly hurting the poor. That is true. But the effect of monetary stimulus on financial markets has nonetheless angered left and right alike. Judy Shelton, one of President Donald Trump’s new picks for the board of the...

A new trade deal has FOMO as its secret sauce

Thu, 07/04/2019 - 14:59

THE MOTIVE force behind trade deals is supposed to be “FOMO”—the fear of missing out. If negotiators fail to grab new markets for their exporters, the theory goes, rivals may snap those markets up first. On June 28th two trading partners seized better access to each other’s markets as Mercosur, a customs union comprising Argentina, Brazil, Paraguay and Uruguay, agreed to a new trade deal with the European Union. An EU press release gloated that European companies would gain an “important head start into a market with an enormous economic potential”.

The details have yet to be published. But the pact should improve market access for French cheese, Brazilian orange juice and Argentine fish, as well as car parts made in Europe, which now attract Mercosur tariffs of 14-18%. European companies will be eligible to compete for government contracts within Mercosur. Customs procedures will be simplified. Based on current trade patterns, the annual bill for tariffs on Mercosur’s imports from the EU should fall by over €4bn ($4.5bn), more than four times the equivalent sum for the deal the EU recently signed with Japan.

Though 9% of Mercosur’s tariff lines, and 5% of the EU’s, will remain above zero, a “standstill” clause commits the members not to raise any of the tariffs above an agreed rate. In effect the EU has insured itself...

The rise and rise of private capital

Thu, 07/04/2019 - 14:59

THE BIGGEST event on Wall Street in 1956 was the IPO of a company that had stayed private for more than half a century. Investors queued to secure shares in the Ford Motor Company. Their price jumped $5 on the first day’s trading. Yet by the time the company listed, it had no real need for capital. Henry Ford, its founder, had long been hostile to the idea of going public. It was almost a decade after his death in 1947 when the family foundation at last decided to sell some of its Ford shares to the public.

This year’s wave of high-profile flotations has some similarities. Uber, Lyft, Slack and the rest are not old as Ford was when it listed. But nor are they in the first flush of youth. New firms are staying private for longer. The number of public firms in America has declined by more than a third since the 1990s.

One explanation is that today’s tech firms have less need of public capital. More of the value of startups is tied up in ideas than in fixed assets such as factories. Tech moguls like the opportunities a public listing brings. But, like Henry Ford, they are less keen on the loss of control—and the scrutiny (business secrecy matters a great deal for ideas-led firms). Yet the crucial shift has been not a fall in demand for capital, but a rise in its supply. Sums that could once be raised only on public markets...

Swiss stocks are collateral damage in a worsening trade row

Thu, 07/04/2019 - 14:59

IT IS A country famed for avoiding conflict. Yet on July 1st, in a serious escalation of a trade spat with the European Union, Switzerland barred the trading of Swiss-listed companies’ shares on EU platforms. Last December the trade bloc had given Switzerland an ultimatum: sign up to a revamped deal replacing the patchwork of 120 bilateral agreements that governs trade relations between the two by June 30th, or lose stockmarket “equivalence”—a status bestowed by the EU that allows seamless trading of shares across borders. Rather than fold, Switzerland retaliated.

Before the ban traders based in the EU accounted for 60-80% of trading in Swiss shares by volume, some of that on Swiss exchanges and some on multilateral trading platforms in EU countries. Now those platforms have suspended trading in Swiss shares, as have the London Stock Exchange and Deutsche Börse. Swiss shares are available only on Swiss exchanges—and on far-distant ones, such as American and Asian trading hubs.

This does not mean that Swiss giants such as Nestlé, Novartis and Roche have suddenly become untradeable from within the EU. Though the bloc usually requires its traders to trade on its own venues, or those it recognises as equivalent, it makes an exception when too few of a company’s shares would be available. So EU traders keen to buy Swiss...

President Donald Trump is trying to fill two jobs at the Fed

Thu, 07/04/2019 - 14:59

HIRING FOR the Federal Reserve has been difficult for President Donald Trump. He clearly regrets his pick for chairman, frequently railing against Jerome Powell for keeping interest rates too high. His last two nominees could have fought his corner, but both withdrew after it became clear that neither would be confirmed by the Senate. On July 2nd he had another shot, announcing candidates to fill two vacant spots: Judy Shelton of the European Bank for Reconstruction and Development, and Chris Waller of the Federal Reserve Bank of St Louis.

Mr Trump’s reasoning seems obvious: both look doveish. In a recent interview Mr Waller expressed scepticism about the Phillips curve—the idea that low unemployment necessarily leads to inflation. His boss at the St Louis Fed, James Bullard, voted to lower interest rates at the most recent Fed meeting. Ms Shelton has called for interest-rate cuts, saying that companies benefiting from Mr Trump’s pro-growth agenda need better access to capital.

But there the similarities end. Mr Waller is a conventional choice. Though he has questioned the Fed’s decisions on interest rates, he has also defended its balance of independence and accountability before Congress. Ms Shelton, meanwhile, who acted as an adviser to Mr Trump’s election campaign, has shown distinctly more eccentric—and fluid—views...

Borrowing against art is growing at a stunning rate

Thu, 07/04/2019 - 14:59

FEW ART collectors are as liquid as Patrick Drahi, a French telecoms magnate, who purchased Sotheby’s, an auction house, for $3.7bn in cash last month. Selling art can take months, even years. The only way to unlock its value quickly is to borrow against it. And indeed the number of owners doing so is rising. Deloitte, an accounting firm, estimates that the outstanding value of loans against art in America reached $17bn-20bn in 2017, up 13% from the previous year. Industry insiders say such lending has continued to grow at double-digit rates since then.

“Ten or 20 years ago it never crossed your mind to leverage your art collection. But the word is out now,” says Evan Beard of Bank of America Private Bank, the institution with the highest outstanding value of art-secured loans. As interest rates have fallen, borrowing has become more attractive. Open public registers make it easy to check if art is encumbered. Price estimates and auction results available online since the early 2000s have made underwriting easier. In America collectors can even keep encumbered art on their wall.

Large banks’ private-banking arms have been lending against art since the 1970s. Now the strong market is attracting specialist lenders. For a private bank, though a loan may be secured against a piece of art, it will almost always be backed in...

Japanese people need to put more aside for retirement

Thu, 07/04/2019 - 14:59

LAST MONTH Japan’s Financial Services Agency (FSA), the financial-industry regulator, lobbed a grenade into a fractious debate on how to support the world’s oldest population in retirement. The typical elderly couple, it warned, will need to top up their public pensions by a whopping ¥20m ($185,000). The furore that followed put Taro Aso, the finance minister, on the back foot. Japan’s pension system “will never collapse”, he insisted.

His attempt at reassurance was widely mocked. A cartoon in a weekly magazine depicted him helping a Buddhist deity dispatch souls to financial heaven or hell. The implication was that, aged 78 and one of Japan’s richest politicians, he personally did not risk ending up in penury.

And yet the gloomy forecast should have come as no surprise. Government mandarins have fretted over Japan’s pension system for years. The Nikkei Shimbun, a staid business newspaper, warned last year of “disaster” unless it was reformed. The system was built on the expectation that people would live until their 70s or 80s, says Naoyuki Yoshino of the Asian Development Bank Institute, a think-tank. But more than half of Japanese babies today can expect to live to over 100. A quarter of all 60-year-olds will still be alive in 35 years, estimates the government.

All 20- to 59-year-...

Foreign financiers look past the trade war and ramp up in China

Thu, 07/04/2019 - 14:59

AS CHINA WAS preparing to join the World Trade Organisation in 2001, the phrase “the wolves are coming” kept cropping up in state media. The country was about to open up to foreign banks and the fear was that Wall Street’s finest would devour their Chinese rivals. But regulators managed to defang the wolves, never giving them a chance. Today, foreign firms account for less than 2% of assets in China’s banking sector.

It is instructive to keep this in mind as China again talks of opening its financial system. On July 2nd the prime minister, Li Keqiang, said that foreign investors would be allowed to take full ownership of investment banks and insurers in China from 2020, a year earlier than previously promised. Over the past two decades they have been limited to minority shares, and only last year were they permitted 51% stakes.

For foreign financiers the initial reaction is naturally one of scepticism. China still has plenty of ways to slow them down. One investment banker says that rather than rejecting his firm’s application for a majority stake, which might have sparked criticism, regulators simply refused to acknowledge receipt.

Nevertheless, there are grounds for cautious optimism. For starters China is under closer scrutiny than in the past. Its rule changes are partly a response to the trade war with...

OPEC’s predictable deal cannot conceal its long-term difficulties

Wed, 07/03/2019 - 19:50

THE MEETING of the Organisation of Petroleum Exporting Countries (OPEC) in Vienna on July 1st and 2nd was, in some respects, a snooze. The deal announced by OPEC and its allies was the continuation of one struck late last year. For at least another nine months, daily production will remain 1.2m barrels below last October’s level. But behind the predictability giant problems loom, for the oil market and for OPEC itself.

America and Iran, an OPEC member, are flirting with war. The decline in Venezuela’s production has steepened since January, when America announced sanctions against PDVSA, its national oil company. Escalating conflict in Libya could cause production there to plummet as well.

Nevertheless, oil producers are more concerned about weakening demand than tight supply. The price of Brent crude climbed to $74 a barrel in late April, after President Donald Trump said he would not extend waivers to sanctions on Iranian exports. It then plunged in May as inventories built up, investors fretted about the trade war and government-bond yields tumbled in America and Europe. The announcement on June 29th that America and China would resume trade talks has helped, but a deal is far from certain. Faced with shaky economic indicators, OPEC is keen to avoid a market awash...

How a victim of the Cultural Revolution mastered economics

Tue, 07/02/2019 - 16:40

THE STUDENTS embarking on an economics doctorate at the University of California, Berkeley, this autumn face a daunting obstacle: Econ 201A, a course in microeconomic theory inflicted on all new recruits. Over 16 weeks they must acquaint themselves with some of the most formalised parts of economics, including Houthakker’s Axiom, the Slutsky matrix and Afriat’s Theorem. According to one instructor, between five and seven class members (out of 20 to 25) usually receive a grade of B- or worse.

But anyone losing heart should take inspiration from a past student, Weijian Shan. He tried the course in 1982 after becoming one of America’s first PhD students from communist China. As he recounts in “Out of the Gobi”, his memoir published earlier this year, he had not taken a mathematics class beyond the age of 12. His faculty adviser, Janet Yellen, who would later chair the Federal Reserve, and George Akerlof, who would later win a Nobel prize, worried that the difficulties of Econ 201A would be “insurmountable”.

Mr Shan, however, had already surmounted more than most. After his schooling was cut short in 1966 by the Cultural Revolution, he was “sent down” to the countryside, like millions of other city kids. He joined a Construction Army corps in the Gobi desert, trying to create farms out of...

Russia is heaven for bondholders and hell for stockpickers

Thu, 06/27/2019 - 14:25

A VISITOR TO Moscow inquiring about the outlook for Russia’s economy will often be met with answers that take a detour into the country’s past. Ask, for instance, why Russia runs such conservative budgetary and interest-rate policies and you may be told that the trauma of default in 1998 bred a strong desire for low debt and low inflation. Ask why property rights are weak and you may be taken further back, to the end of serfdom in 1861. Until then many Russians did not even own their own souls.

Not all investors are history buffs. But looking at Russia through the lens of risk and reward they see a dichotomy. On the one hand, the emphasis the authorities place on controlling public debt and curbing inflation makes it an attractive place for bond investors. Russia is fixed-income heaven. On the other, the economy lacks dynamism, in large part because the venturesome cannot lay secure claim to their investments. For equity investors, Russia can be hellish.

Start with its charms for bond investors. Their aim for their money is to get it back with interest. They would also like it to retain its purchasing power. Their big concerns, aside from default, are inflation and (unless they are buying hard-currency bonds) devaluation. So there is much to like about Russia. The public-debt burden is light, at below 20% of GDP. True...

The war on money-launderers’ vehicle of choice intensifies

Thu, 06/27/2019 - 14:25

FINANCIAL CRIMES come in all shapes and sizes, from politicians siphoning off state wealth and officials taking bungs to terrorists buying arms and gangs laundering drug profits. A common element is the use of shell companies, partnerships or foundations to hide the identities of those moving dirty money. Such brass-plate entities, whose ownership is typically hard if not impossible to trace, were at the heart of the theft from 1MDB, a Malaysian state fund, and a $230bn money-rinsing scandal at Danske Bank. They have been dubbed the “getaway cars” of financial crime.

NGOs such as Global Witness and Transparency International have long highlighted shells’ pernicious role, picking up support from government investigators sick of trails going cold. Their biggest success was to persuade Britain, in 2016, to become the first G20 country to set up a public register of company owners. The rest of the European Union is set to follow once a new money-laundering directive takes effect. That leaves plenty of gaps. But two of the biggest, Britain’s offshore territories and America, are also moving in the direction of ditching secrecy.

Earlier this month Britain’s three Crown Dependencies—Jersey, Guernsey and the Isle of Man—issued a surprise joint statement pledging to table legislation to introduce public registers by 2023. They...

An idea for a parallel currency resurfaces in Italy

Thu, 06/27/2019 - 14:25

GOVERNMENTS IN FISCAL distress sometimes find creative ways to pay the bills. Revolutionary France sold bonds secured against land confiscated from the Catholic church; America used paper bills to fund its war of independence. In 2001 Argentina issued IOUs, as did California in 2009. During Greece’s sovereign-debt crisis Yanis Varoufakis, then its finance minister, toyed with plans for a parallel currency.

Not the most desirable of clubs, then, yet some in Italy are eager to join. So-called mini-BOTs, originally hatched by eurosceptics to replace the euro, made it onto the ruling coalition’s manifesto last year. Mini-BOTs (Buoni Ordinari del Tesoro, or ordinary treasury bonds) would be used to settle the government’s bills with commercial suppliers. Recipients could use them to pay taxes, or for public services. Devised by Claudio Borghi, an economist of the Northern League, one of Italy’s ruling parties, they would be low-denomination bills (up to €500, or $569) that bear no interest.

They would not be legal tender—that would break EU law. But Mr Borghi would like them to circulate widely, eventually being used in shops to price goods. He has written that mini-BOTs would enable a quick exit from the euro, though ministers say they have no such plan.

On May 28th the lower house of...

The Big Four may be blocked from doing Indian audits for years to come

Thu, 06/27/2019 - 14:25

GLOBAL AUDITORS have had a torrid time of late. KPMG is haemorrhaging clients in South Africa after allegations of fraud linked to its work for the powerful Gupta family; Deloitte is under investigation in both America and Malaysia relating to scandal at 1MDB, a Malaysian state-development fund. In Britain the Big Four face threats of break-up after the failure last year of Carillion, a big government contractor for which all four had done work. Now Indian prosecutors have the auditors in their sights.

The most serious case concerns the collapse last year of IL&FS, a monstrously complex financial firm with deep state ties. On July 15th the corporate-affairs ministry will argue before a commercial court to have Deloitte’s and KPMG’s local affiliates suspended from doing audits for five years because of flaws in their work for an IL&FS subsidiary. Ernst & Young (EY) is under fire, too: its local affiliate audited IL&FS and another subsidiary. It had already been suspended for a year from doing bank audits because of its work for Yes Bank, India’s fourth-biggest private lender. PwC, meanwhile, faces a two-year suspension relating to work for Satyam, a computer-services firm that went bust a decade ago.

These legal travails could bring to an end an odd exception to India’s localism. In most areas, lobby...

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