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Finance and economics
Updated: 2 hours 48 min ago

The City of London prepares for Brexit

Thu, 07/06/2017 - 14:50

OVER a year has passed since Britons voted to leave the European Union. More than three months have gone by since Britain gave formal notice to quit. Less than 21 months remain until March 29th 2019, the scheduled date of Brexit. Yet banks, insurers, asset managers and other financial firms that use London as a base from which to serve the entire EU are little wiser than they were on referendum day about what Brexit will entail. They must plan for it nonetheless.

The Prudential Regulation Authority (PRA), Britain’s financial supervisor, wants to see their contingency plans by July 14th. The European Central Bank (ECB) has also asked the banks it watches to lay out their post-Brexit strategies. This is probably not demanding for big banks, which are in constant touch with their overseers and already operate both in London and elsewhere in the EU. But some smaller lenders, especially, have work to do. “I think it is fair to say that most banks are not where they should be,” said...

Markets worry about central banks

Thu, 07/06/2017 - 14:50

IN JANE AUSTEN’S novel, “Sense and Sensibility”, Henry Dashwood’s death plunges his wife and two daughters, Elinor and Marianne, into financial distress, because his heir grants them only a meagre allowance. Bond-market investors have started to worry that something similar is about to happen to them.

Since 2009 central banks have been incredibly supportive of the financial markets—keeping short-term interest rates at historic lows and buying trillions of dollars worth of bonds. But in recent weeks, several of them have been hinting at reducing their largesse.

The Federal Reserve has been slowly pushing up interest rates and has talked about reducing the size of its balance-sheet, by not reinvesting the proceeds of bonds when they mature. There have been suggestions that the Bank of Canada might push up rates when it meets on July 12th. Both Mark Carney, the governor of the Bank of England and Andrew Haldane, its chief economist, have hinted that a rate rise may be on...

The EU proposes pan-European pension products

Thu, 07/06/2017 - 14:50

THE story of the European Union is in part that of the steady accretion of power by its central bodies. But until now the politically touchy business of running pensions has, like taxation, been zealously guarded by national governments. No longer: on June 29th the European Commission presented a long-awaited proposal for a pan-European personal-pension product, the snazzily named “Pepp”.

Any attempt to encourage Europeans to make adequate provision for their old age is welcome. The combination of ageing populations, falling birth rates and generous state pensions could leave future generations footing the bill, unless people work for longer. Especially in countries such as Italy and Greece, where the state is the main pension provider, encouraging people to make personal savings for their retirement would be sensible (see this week’s ...

An American payments firm goes online and buys British

Thu, 07/06/2017 - 14:50

Purchasing power

A BIDDING war was briefly but eagerly anticipated. In the end, not a shot was fired. On July 4th the share price of Worldpay, a British payments processor, leapt by 28% after the company said it had received preliminary approaches from JPMorgan Chase, America’s biggest bank, and Vantiv, an American payments firm. The next day Worldpay said it had accepted a cash-and-shares bid from Vantiv, worth £7.7bn ($10bn), giving its shareholders 41% of the combined group. JPMorgan Chase, sniffily explaining that it had considered a bid after an “invitation” from Worldpay, which is a client, declined to proceed. Under Britain’s takeover code that refusal rules out a counter bid for six months. The shares slipped back by nearly 9%.

Vantiv and Worldpay are “merchant acquirers”: companies that have contracts with sellers of goods and services, and licences from credit- and debit-card companies, to accept and process card payments. They also provide...

A new trade deal between the EU and Japan

Thu, 07/06/2017 - 09:48

FREE-TRADE agreements have seemed out of fashion as President Donald Trump has set about scotching some of America’s. But on July 5th Cecilia Malmström, the EU trade commissioner, and Fumio Kishida, the Japanese foreign minister, announced they had achieved consensus on a Japan-EU Economic Partnership Agreement (JEEPA). In front of the cameras, they swapped Japanese Daruma dolls, talismans of perseverance and good luck, and, they hope, of a win-win agreement.

The timing of JEEPA was just as carefully co-ordinated. When negotiations started in 2013, it was neither side’s main priority. But now both want to show that they can fill the vacuum left by America’s withdrawal under Mr Trump from its role as the world’s trade leader. To highlight its political importance, they note that this is the first trade agreement to mention the Paris climate accord, another deal Mr Trump has spurned. Haste is handy: the EU wanted success before Brexit negotiations and national...

BNP Paribas faces accusations over the Rwandan genocide

Wed, 07/05/2017 - 09:31

BNP PARIBAS, France’s biggest bank, pleaded guilty in America three years ago to assisting a monstrous regime in east Africa. In 2006 it had helped to finance Sudan’s government, which in turn supported militias that massacred tens of thousands of civilians in Darfur. The firm thus abetted genocide and circumvented American sanctions on Sudan. It agreed to pay a fine of $9bn for breaking that embargo, as well as ones on Cuba and Iran.

The bank, naturally, hopes to put that grim episode behind it. These days it makes much of its social-responsibility efforts. Its 2015 annual report, for example, trumpeted the financing of a big supermarket in Ivory Coast as typical of its contribution to African development. On July 3rd it named a new head of compliance plus a new “company engagement department”, responsible, among other things, for setting strategy on human rights.

Yet the past is hard to banish. The bank faces scrutiny over an even uglier episode. On June...

America’s banks pass the Federal Reserve’s tests

Thu, 06/29/2017 - 14:48

OVER the years, the grumbles have got louder. Since 2011 America’s big banks have undergone annual “stress tests” overseen by the Federal Reserve, along with scrutiny of their plans for paying dividends and buying back shares. A product of the post-crisis Dodd-Frank act, the tests are intended to make sure that lenders have enough equity on hand should catastrophe strike again. But banks say they are both opaque and burdensome. And because failure can mean a block on payouts, the tests have bred caution and ire.

The time for caution seems to be over. On June 28th the Fed said it had approved the dividend and buy-back plans of all 34 banks tested this year—plans which propose handing shareholders a pile of cash. All 34 also passed the first stage, results of which were revealed six days earlier and which assume no repurchases and unchanged dividends. Even under a “severely adverse” scenario involving a nasty recession, all would keep key capital ratios above the...

Pakistan’s old economic vulnerabilities persist

Thu, 06/29/2017 - 14:48

THE IMF, claims Pakistan’s government, is surplus to requirements. Ministers in its business-minded ruling party, the Pakistan Muslim League-Nawaz (PML-N), boast of a record that means the country can pay its own bills. “We will not go back to the IMF programme,” declared Ishaq Dar, the finance minister, in May, almost a year after the completion of Pakistan’s most recent, $6.6bn bail-out. In a country that mistrusts Western assistance and where protesters portray the IMF as a bloodthirsty crocodile, such words have a heady appeal. But they ring hollow.

On June 16th the IMF warned of re-emerging “vulnerabilities” in Pakistan’s economy. It praised GDP growth of above 5% a year, but noted missed fiscal targets and a ballooning current-account deficit. The fund’s own projections a year ago for the fiscal year ending this June underestimated this deficit by about half the final total of $9bn. And based on trends in early April it overestimated the fiscal-year-end foreign-exchange reserves by $3bn.

Independent economists point out that, many times before, collapse has come on the heels of an IMF programme’s conclusion. Sakib Sherani, a former government economist, says that to avoid “egg on its face” for cheerleading Pakistan’s economic recovery just months ago, the IMF is slowly changing its story. By the end of 2018, many predict, Pakistan will come...

Developing countries rebel against the credit-rating agencies

Thu, 06/29/2017 - 14:48

EARLIER this year, a crowd of patriotic Indian students bristled when Arvind Subramanian, the government’s chief economic adviser, showed them a slide with two charts. One showed India’s steady economic growth and flat debt-GDP ratio; the other China’s slowing growth and fast-rising debt. Yet India’s credit rating from S&P Global Ratings (formerly Standard and Poor’s), has been stuck at BBB-. China, on the other hand, was upgraded from A+ to AA- in 2010 even as its debt shot up. The slide was pithily titled “Poor Standards”.

Rating government debt is always controversial. And India v China is often a grudge match. But many emerging-market governments agree with Mr Subramanian, who has contrasted the rating agencies’ treatment of India with that of the rich world in the 2008 crisis, when they “closed the stable doors after the horses bolted”.

In frustration, the BRICS grouping—Brazil, Russia, India, China and South Africa—plans to set up an “independent” ratings...

The complicated failure of two Italian lenders

Thu, 06/29/2017 - 14:48

BANKS sicken slowly but die fast. For years Banca Popolare di Vicenza and Veneto Banca, in the prosperous Veneto, in north-east Italy, had been plagued by mismanagement. Even criminal investigations are under way. For months the Italian government had been wrangling with European authorities over the terms of a bail-out. For weeks it had seemed improbable that private investors would put in money alongside the state, as the European Commission insisted.

On June 23rd the European Central Bank (ECB) declared that the banks were “failing or likely to fail”. Two days later, after a frantic weekend, the Italian government pronounced them dead: their good assets were sold to Intesa Sanpaolo, Italy’s second-biggest lender, for a token €1 ($1.14), and their dud ones put into a “bad bank”. The operation may cost Italian taxpayers €17bn. This is the second call on Italy’s public purse this month. On June 1st the commission approved, in principle, the rescue of long-troubled Monte dei Paschi...

What Asia learned from its financial crisis 20 years ago

Thu, 06/29/2017 - 14:48

MUSEUM SIAM in Bangkok is dedicated to exploring all things Thai. Until July 2nd, that includes an exhibition on the Asian financial crisis, which began on that date 20 years ago, when the Thai baht lost its peg with the dollar. The exhibition features two seesaws, showing how many baht were required to balance one dollar, both before the crisis (25) and after (over 50 at one point). Visitors can also read the testimony of some of the victims, including a high-flying stockbroker who was reduced to selling sandwiches, and a businesswoman whose boss told her to “take care of the work for me” before hanging himself. (In Hong Kong, Japan and South Korea, 10,400 people killed themselves as a result of the crisis, according to subsequent research.) In Thailand the financial calamity became known as the tom yum kung crisis, after the local hot-and-sour soup, presumably because it was such a bitter and searing experience.

The exhibition’s subtitle, “Lessons (Un)learned”, seems unfair. The victims of the crisis (Thailand, South Korea, Malaysia, Indonesia and Hong Kong) took many lessons to heart. With the exception of Hong Kong, they no longer rely on a hard peg to the dollar to anchor inflation, giving their currencies more room to move. (The sandwich vendor’s chosen logo for his new business was a...

Alarm grows about over-exuberance in corporate lending

Thu, 06/29/2017 - 14:48

WHEN the financial crisis was at its height in 2008, being a debtor was a dreadful experience. Banks and companies scrambled desperately to get the financing they needed.

But the balance of power in the financial markets can easily shift. In 2005 and 2006, credit had been easy to get on generous terms. Not only were loans cheap and plentiful; they also suffered from fewer restrictions. Until then, corporate loans had many covenants offering safeguards for lenders if the debtor’s financial position were to deteriorate. But 2005-06 saw the emergence of “covenant-lite” loans in which such restrictions were virtually non-existent.

The cycle has turned again. Analysis by Moody’s, a ratings agency, shows that the proportion of the loan market that is “covenant-lite” has risen from 27% in 2015 to more than two-thirds in the first quarter of this year (see chart). Some loans even contain restrictions on the lender, not just the borrower. Private-equity firms demand a veto over...

The infant Islamic-bond industry faces a crisis

Thu, 06/29/2017 - 14:48

DANA GAS, an exploration business listed in Abu Dhabi, seems in a spot of bother. Ten years after sealing a landmark production deal with Iraqi Kurdistan, it is struggling to recover $900m it is owed by the autonomous region and the Egyptian government. So it faces a liquidity squeeze. That is not, however, why it says it wants to restructure $700m-worth of Islamic bonds maturing in October 2017. Rather, it says it has received legal advice that the bonds are no longer compliant with sharia—rules based on Islamic scripture.

The bonds were deemed compliant in 2013, but Dana cites evolution in the “interpretation” of Islamic financial instruments. It is seeking to have them declared invalid in a United Arab Emirates court. Its domestic assets are shielded from creditors under UAE law; it has also obtained injunctions in Britain and the British Virgin Islands protecting it from claims until the case is settled. Hearings are not due to start before December, months after the bond’s next payment-due dates.

Islamic law forbids the generation of money from money—interest. Sukuk, or Islamic bonds, thus differ from their conventional peers. They are backed by assets and instead of lending the issuer money, the holder owns a nominal share of what the cash was spent on and receives an agreed ratio of the profit...

America’s programme to help trade’s losers needs fixing

Thu, 06/29/2017 - 14:48

Alas, poor Warrick

BRIAN AUNSPACH thought he had a job for life. After six years at a smelter owned by Alcoa, America’s largest aluminium company, his work was hard but the benefits decent. Warning signs came with crashing aluminium prices in the summer of 2015 and murmurings about unfair Chinese competition. Then reality hit: in January 2016 Alcoa announced the smelter’s closure. Around 600 people lost their jobs.

The events of 2016, from Brexit to Donald Trump’s election, were widely seen as a backlash against globalisation. The Warrick smelter in Indiana, which shut amid “challenging market conditions”, was perceived to be a victim of free trade. And the likes of Mr Aunspach, an American displaced by trade, are the objects of keen attention from wonks as well as politicians.

His is an old problem, with old solutions. Since 1962 America has earmarked funding to help people adjust to trade-related shocks. Trade-Adjustment Assistance (TAA)...

Kenya launches the world’s first mobile-only sovereign bond

Thu, 06/29/2017 - 14:48

Trading floor of the future

MOBILE money is ubiquitous in Kenya. Someone tapping on their phone might be paying school fees, sending money home or donating to a church. Soon they might be trading bonds. On June 30th the Kenyan government was due to launch M-Akiba, the world’s first sovereign bond to be sold exclusively through mobile platforms.

The bond is marketed at small investors, who will not need a bank account to take part. They can register on their phone in a few minutes and invest as little as 3,000 shillings ($29), far less than the 50,000 shillings needed to buy other treasury bonds. “Akiba” means savings in Kiswahili. The government is keen to promote thrift and is offering a juicy 10% annual return on the three-year bond, about three percentage points above deposit rates at commercial banks. Coupon payments are made through mobile money.

A pilot offer in March lured over 100,000 people to register. But only 5,692 of them went...

Fund managers rarely outperform the market for long

Thu, 06/22/2017 - 13:43

THE big investment shift of recent years is from active to passive. Clients have been buying index funds, which passively track a benchmark like the S&P 500 index, and shunning fund managers who actively try to pick the best shares.

One reason for the shift is that passive managers charge lower fees than active funds. Many clients would be happy to pay more if that translated into better performance. However, it is very difficult for investors to select fund managers who can reliably beat their peers. Performance does not persist, as the latest data from S&P Dow Jones Indices show clearly.

Suppose you had picked one of the best-performing 25% of American equity mutual funds in the 12 months to March 2013. In the subsequent 12 months, to March 2014, only 25.6% of those funds stayed in the top quartile (see chart). That result is no better than chance. In the subsequent 12-month periods, this elite bunch is winnowed down to 4.1%, 0.5% and 0.3%—all figures that are worse...

Investors snap up Argentina’s 100-year bonds

Thu, 06/22/2017 - 13:43

ONE hundred years ago, Argentina was not the country it is today. Thanks to a belle époque of lavish foreign investment, rapid inward migration and bountiful agricultural exports, its GDP per person in 1917 was comparable to that of Germany and France. Although the first world war brutally interrupted international trade and investment, the country profited from filling the bellies of soldiers on the front with tinned corned beef.

No one knows how Argentina may change over the next 100 years. But many investors seem willing to bet on one forecast: that its government will in 2117 repay $2.75bn-worth of dollar-denominated, 100-year bonds, sold to enthusiastic investors on June 19th.

Since Argentina has defaulted six times in the past 100 years, that belief seems brave. But instead of looking backwards, investors are looking from side to side, at the miserable yields on offer elsewhere. Argentina’s “century” bonds yield almost 8%....

China enters the big leagues of global markets

Thu, 06/22/2017 - 13:43

FROM shoes to shirts and phones to fridges, made-in-China goods have blanketed the globe over the past three decades, entering every country and just about every home. But one kind of Chinese good few abroad dare touch: its financial assets. Outsiders own less than 2% of its shares and bonds, far below the levels of foreign ownership seen in other markets. Capital barriers and financial risks have put investors off. This, however, is changing. The globalisation of China’s capital markets is slowly gathering steam, as symbolised by the inclusion of Chinese stocks and bonds in global indices.

MSCI, a company that designs stockmarket indices, announced on June 20th that it will bring Chinese equities into two of its benchmarks: one that covers emerging markets; and another that follows stocks around the world. To begin, it will include a small number of shares, just 222 of the more than 3,000 listed in China. But its decision matters to asset managers who track their performance...

Barclays and four former executives are charged with fraud

Thu, 06/22/2017 - 13:43

IN 2008, as banks cracked on both sides of the Atlantic, Britain’s government prepared to shore up tottering lenders. It eventually poured £45bn ($71bn) into the Royal Bank of Scotland (RBS) and £20.3bn into Lloyds, which ministers coaxed into buying the stricken HBOS. Barclays, however, needed no such help: the bank raised enough equity from private investors, notably in Qatar, to meet higher capital targets set by regulators as the crisis deepened, and thus escape a taxpayer rescue.

However, for five years Britain’s Serious Fraud Office (SFO) has been investigating Barclays’ dealings with the Qataris. On June 20th those inquiries yielded criminal charges. These include (remarkably, some will say) the first such charges to be levelled at the head of a big international bank as a result of the crisis. John Varley is a pillar of London’s financial establishment. Save for one short break he spent 28 years at Barclays, more than six in the top job, before standing down at...

Hong Kong’s stock exchange proposes a controversial reform

Thu, 06/22/2017 - 13:43

The big bored

BOSSES at Hong Kong Exchanges and Clearing (HKEX) ought to be feeling smug. In five of the past eight years it has been the world’s leading exchange for initial public offerings (IPOs). Chinese companies have swarmed to list on its comparatively mature, open and transparent capital market, generating over 90% of the funds raised there in the past five years. Yet, launching a long-awaited consultation on reforms on June 16th, HKEX warned of “stagnation” if it does not change. It has one eye on its regional rivals. Last year Singapore knocked it into fourth place in a prominent ranking of financial centres. As Shenzhen and Shanghai, where trading volumes dwarf Hong Kong’s, open up, they could eat Hong Kong’s lunch.

Besides tinkering with the rules on Hong Kong’s main board and its second one, the Growth Enterprise Market, the proposed changes include, most contentiously, a third board. This would be designed to attract fizzy “new economy”...