The Economist

Subscribe to The Economist feed The Economist
Finance and economics
Updated: 21 min 15 sec ago

Raids and arrests cast doubt on the Holy See’s clean-up

Thu, 10/10/2019 - 14:46

THE BLOCK of shops, offices and apartments at 60 Sloane Avenue was once a warehouse for Harrods of London. Now it is the focal point of the latest financial scandal to rock the Vatican—potentially the worst since Archbishop Paul Marcinkus, whose buccaneering presidency of the Vatican Bank in the 1970s and 1980s led it to deal with Masons and mobsters. At stake now, as then, is not just the probity of an individual, but the trustworthiness of the Holy See’s system of financial governance.

On October 1st the Vatican’s gendarmes, on orders from its prosecutors, raided the offices of the Financial Information Authority (AIF), the banking regulator, and the Secretariat of State, which combines the roles of prime minister’s office and foreign ministry in the Vatican administration. They were looking for “documents and electronic devices”, the Vatican said. A leaked circular to the Swiss Guards, who control access to the walled city, showed that among the five officials suspended pending the outcome of the investigation was the AIF’s director, Tommaso Di Ruzza.

“It’s a nightmare,” says a senior Vatican official. “It risks undoing everything we have achieved in the past eight years.” In 2011 the Vatican agreed to inspection of its financial sector by Moneyval, Europe’s anti-money-laundering and anti-terrorist-financing watchdog...

Indian banks’ share prices are being hammered

Thu, 10/10/2019 - 14:46

THE RUN on the Punjab and Maharashtra Co-operative Bank (PMC), a small Indian lender, is now in its third week. At a branch in Mumbai near the Reserve Bank of India (RBI), the central bank, depositors wait in line, scanning their mobile phones. But the calm is deceptive. A single bankrupt borrower, Housing Development and Infrastructure Limited (HDIL), accounted for 73% of PMC’s loan book. As part of the elaborate deception it created 21,000 fake customer accounts.

Posted outside PMC branches is a letter from the RBI dated September 23rd. A passage is highlighted in pink: withdrawals are to be limited to 1,000 rupees ($14) over six months. That fired the starting pistol for the bank run. Protesters showed up at the gates of the RBI. The withdrawal limit was raised in response, first to 10,000 and then to 25,000 rupees. That was high enough to cover the balances of 73% of customers, but represents just 7.75% of the bank’s $1.7bn of deposits. Government-backed deposit insurance covers just 100,000 rupees per account.

PMC’s chairman, Waryam Singh, as well as the head of HDIL, Rakesh Wadhawan, and his son Sarang, have been arrested. Local papers are plastered with tales of the Wadhawans’ close relationships with politicians, lavish parties with Bollywood stars and assets seized or sought by enforcement agencies, including...

Hong Kong’s pursuit of the London Stock Exchange ends in tears

Thu, 10/10/2019 - 14:46

FEW BOURSES have been wooed as often as the London Stock Exchange Group (LSE). It has been the target of a bid every two and a half years on average since going public in 2000, according to Berenberg, a bank. All have failed, including the latest, a £32bn ($39bn) offer from Hong Kong Exchanges and Clearing (HKEX) in September that would have created the world’s second-largest exchange group by market value (behind America’s CME Group). On October 8th HKEX called the whole thing off.

Charles Li, HKEX’s boss, styled himself as a Romeo to the LSE’s Juliet, and held out the prospect of a tie-up between East and West. HKEX is China’s main gateway to Western capital markets. It offered a 23% premium to the LSE’s share price. But the LSE’s shareholders wanted more, and a greater share of cash, at which point HKEX’s shareholders reportedly balked.

HKEX’s management had been planning a run at the LSE for about a year, but delayed it because of Brexit uncertainty. Then their hand was forced. In August the LSE had said it would buy Refinitiv, a data conglomerate, for $27bn. Though the timing was terrible, with protests roiling Hong Kong and an escalating trade war between America and China, HKEX realised it was now or never.

The LSE will now return to its original plan of buying Refinitiv. That will probably leave it too...

America’s slowing economy could become an election issue

Thu, 10/10/2019 - 14:46

FINANCIAL MARKETS have seen several episodes of panic since early 2018, often triggered by developments in President Donald Trump’s trade war with China. And in recent months, indicators of economic activity in America have begun to lose momentum. The worst figures are in manufacturing. Growth in the sector almost halted over the summer. Industrial production declined in July, according to the Federal Reserve, and in September the ISM-Chicago Business Survey, another closely watched indicator, hit its lowest level since 2009.

Jobs figures published on October 4th showed a decline of 2,000 jobs in manufacturing between August and September. In parts of America’s industrial heartland, including midwestern states such as Indiana and Michigan, which helped carry Mr Trump to victory in 2016, the hiring slump has been pronounced.

Industry is a politically resonant sector. But more than 90% of Americans work in other parts of the economy, in particular services. What happens next depends on whether the weakness in manufacturing spreads. So far it has not. Private employers added a net 358,000 jobs in the third quarter, down from 527,000 during the same period a year earlier, but still well in positive territory. The unemployment rate, meanwhile, fell to 3.5%, the lowest since December 1969.

Consumer spending is the...

New South Korean investment schemes aim to prop up domestic industry

Thu, 10/10/2019 - 14:46

A STATUE OF Admiral Yi Sun-Shin, famous for his victories over the Japanese navy in the 16th century, casts a fierce eye over Gwanghwamun Square in the centre of Seoul. Recently he has also been staring down at visitors in branches of Nonghyup, a local bank. A picture of the man in full battle gear encourages customers to invest in the “Certain Victory Korea Fund”, which Nonghyup’s asset-management arm set up in August to bet on domestic firms it says will benefit from government support in the wake of a trade dispute with Japan.

Nonghyup is not the only South Korean bank seeking to capitalise on a nationalist moment. KB Kookmin Bank, a rival, is planning a similar fund. Several have been offering free tickets to a film about a famous battle with Japan to anyone opening a liberation-themed account. One has been giving out loans with the interest rate capped at 8.15%, alluding to August 15th, when the country celebrates the end of Japanese occupation. Another said it hoped its “Liberation Day” savings account would “inspire patriotism” as well as increase customers’ assets.

The financial nationalism chimes with the economic agenda of Moon Jae-in, the president, who has promised billions of dollars in support to local manufacturers of components hit by recent Japanese export restrictions. The aim is to make South Korea “...

The issuer of a star cryptocurrency is being sued for $1.4trn

Thu, 10/10/2019 - 14:46

LAUNCHED AS REALCOIN in July 2014, Tether aimed to become a more reliable alternative to Bitcoin, the best-known cryptocurrency. With a $4.1bn market capitalisation, it is now the fifth-largest virtual currency. But its efforts to gain investors’ trust have fallen short. On October 6th a group filed a class-action lawsuit in New York, accusing Tether of being “part-fraud, part-pump-and-dump, and part-money laundering”. They call for truly startling damages: more than $1.4trn.

In response to The Economist’s queries, Tether’s general counsel said that “the lawsuit is meritless and the plaintiffs’ complaint is rife with errors.” The firm “has not used Tethers to manipulate any market”, he added, and operates in “full conformity with applicable laws”.

In 2014 Tether adopted its current moniker, which made its selling point explicit. With dollar reserves that it said matched Tethers one-to-one, it was one of the first “stablecoins”—digital...

How stories can help explain booms and busts

Thu, 10/10/2019 - 14:46

EVERYONE KNOWS, or thinks they know, the story of the Wall Street shoeshine boy. In 1929 Joseph Kennedy, patriarch of the Boston-Irish political clan, had an epiphany while his shoes were being cleaned. When the boy who shined his shoes offered him stock tips, he realised the stockmarket was about to implode. Kennedy promptly sold all his shares and took a short position, betting that the market would fall. When it crashed that October he made a killing.

In his new book, “Narrative Economics”, Robert Shiller, a Nobel laureate, offers this tale as an example of a contagious narrative that becomes part of folk wisdom. A story need not be accurate to spread. Mr Shiller searched archives of newspapers from the period, and could find no record of it. But he did find a similar kind of story in the Minneapolis Morning Tribune. The stockmarket, it said, could not yet have peaked because “we do not hear of the chamber maids and bootblacks who have cleaned up fortunes by lucky plays.” That story was published in 1915.

Whatever their provenance, says Mr Shiller, it matters which kinds of narratives are contagious and why. The ones that catch on have the power to influence behaviour. Stories sway decisions to hire or fire; to buy or sell; to spend or save. These individual choices, writ large, move markets...

What to make of the strife at the ECB

Wed, 10/09/2019 - 16:12

NOT LONG ago it was hard to find anyone with a bad word to say about Mario Draghi, the Italian boss of the European Central Bank (ECB). He is credited with saving the euro by pledging, in the depths of a crisis in 2012, to do “whatever it takes” to stop the currency from breaking up. He seemed certain to leave office at the end of October to gushing tributes and an assured place in the pantheon of Europe’s great leaders. Instead, his critics are out in force.

Their fury was aroused by the stimulus package Mr Draghi unveiled on September 12th, which included cutting interest rates from -0.4% to -0.5% and resuming quantitative easing (QE), the purchase of bonds with newly created money. In the hope of reviving inflation, the ECB has pledged to keep rates low and continue buying bonds until underlying inflation returns to its target of “close to, but below, 2%”. At least seven members of its 25-strong rate-setting body, including the central-bank governors of France and Germany, opposed restarting QE. Klaas Knot, the head of the Dutch central bank, called it “disproportionate”.

On October 4th the old guard joined the fray. Six former Austrian, Dutch, French and German central bankers released a memo criticising the ECB’s direction under Mr Draghi. The bank misinterprets its job of maintaining price...

The economics of streaming is changing pop songs

Thu, 10/03/2019 - 14:37

“WHERE THE streets have no name”, the first song on U2’s blockbuster 1987 album, “Joshua Tree”, begins with 40 seconds of ambient noise. A guitar arpeggio enters and accelerates into the driving rhythm of the drums and bass that arrive around 1:10. Nearly two minutes pass before Bono breathes the first lyrics. Such leisurely intros are no more, says Justin Kalifowitz of Downtown Music Publishing, a rights manager. Streaming platforms like Spotify have reshaped the music business—and pop songs. The gist of it: songwriters now get to the good stuff sooner.

From sheet music to MP3s, technology has long influenced the form of music. Ever since songwriters have been paid royalties, however, one thing was constant: compensation was tied to sales. But last year streaming accounted for almost half the industry’s revenues of $19.1bn. In America, the share was 80%.

Artists are paid per play—provided the listener stays tuned for at least 30 seconds. Each stream earns a tiny fraction of a cent. And just 13% of that goes to the songwriter, says David Israelite of the National Music Publishers Association, an American trade group. To make half-decent money, a song needs millions of plays.

The pressure is greater since overall revenues are lower than in the music industry’s heyday around the turn of the millennium. Global...

It has been a torrid week for Indian banks

Thu, 10/03/2019 - 14:37

BUSINESS DAYS now begin in India with a scan of the headlines and then a click to check on the shares of Yes Bank, the country’s fourth-largest private bank. They peaked at 394 rupees ($5.64) in August 2018, and have staggered downwards ever since. On October 1st they hit 32 rupees after a 23% drop on the day, before rising by 23% on October 3rd as The Economist went to press.

Yes is not alone in its troubles. The shares of Indiabulls Housing Finance, the second-largest home lender—and, not coincidentally, a big borrower from Yes—have also plummeted. Late last month the Reserve Bank of India (RBI), the central bank, suddenly capped withdrawals from a small lender, Punjab and Maharashtra Co-operative Bank. That brought into the open what a police investigation now alleges was a vast lending fraud. Rumours of similar issues at other financial institutions prompted the RBI to tweet on October 1st reassuring “the general public that the Indian banking system is safe and stable and there is no need to panic”.

That is unlikely to help. Such words from a financial authority are prone to be heard as a signal to stampede. Even if that is averted, India’s banks are obviously faltering. They are still dealing with the overhang from a splurge of bad lending years ago. Yes Bank is merely a particularly marked...

America’s notorious tax-compliance law faces another challenge

Thu, 10/03/2019 - 14:37

WHEN THE Foreign Account Tax Compliance Act (FATCA) was passed by America’s Congress in 2010, it was overshadowed by the jobs bill into which it had been shoehorned as a revenue-raising provision. But of the two, FATCA packed the stronger punch. The law, designed to stop Americans stashing money abroad to evade tax, ushered in a global revolution in financial transparency. It forced banks worldwide to start coughing up, via their tax agencies, information on clients with links to America. And it spawned the Common Reporting Standard (CRS), whereby over 100 countries swap data with each other to discourage cross-border tax dodging.

FATCA’s detractors extend well beyond the tax-shy, however. Sifting clients for “US persons” has given financial firms a compliance headache. Some have refused to serve Americans living overseas for fear of fines under FATCA’s draconian provisions. Many of the roughly 9m Americans based abroad—including “accidental Americans” who have spent most of their lives elsewhere but face tax liabilities in America because they were born there, making them citizens—have formed groups to lobby for less brutal treatment.

Some critics go further, arguing that a principle is at stake. They maintain that FATCA and the CRS have swung too far towards transparency and away from privacy. And they see potential...

Betting on bitcoin prices may soon be deemed illegal gambling

Thu, 10/03/2019 - 14:37

ON SEPTEMBER 24TH the price of a single bitcoin, the best-known cryptocurrency, fell by $1,000 in 30 minutes. No one knows why, and few people cared. There have been similar drops nearly every month since May. Yet for one obscure corner of the market, it mattered. Exchanges that sell “long” bitcoin derivatives contracts, with which traders bet that prices will rise without buying any coin, soon asked punters for more collateral. That triggered a stampede. By the end of the day $643m-worth of bitcoin contracts had been liquidated on BitMEX, a platform on which such contracts trade. Bets on other cryptocurrencies also became toxic.

Crypto-derivative products, which include options, futures and more exotic beasts, are popular. More than 23bn have been traded so far in 2019, according to Chainalysis, a research firm. But tantrums such as last month’s have put them in regulators’ cross-hairs. Japan is considering stringent registration requirements. Hong Kong bars retail investors from accessing crypto funds; Europe has had stiff restrictions since last year. Now the Financial Conduct Authority (FCA), a British watchdog, is proposing a blanket ban on selling crypto-derivatives to retail investors. A consultation ended on October 3rd. Its decision is expected in early 2020.

It would take an earthquake for the FCA not to press...

Wealth taxes have moved up the political agenda

Thu, 10/03/2019 - 14:37

FIVE YEARS ago Thomas Piketty’s “Capital in the Twenty-First Century”, a weighty analysis of rising inequality, flew off shelves and ignited fiery debate. Fans and detractors alike tended to agree on one thing, at least: its proposal to fix inequality—a tax on wealth—was a dud. A half-decade later the mood has shifted. Several candidates for the Democratic presidential nomination promise to tax wealth; Bernie Sanders recently announced a plan to tax fortunes of more than $32m at 1% per year, and those larger than $10bn at 8%. In his latest doorstopper, “Capital and Ideology”, currently available only in French, Mr Piketty suggests taxing the wealth of billionaires at up to 90%. Few economists go so far. But more are now arguing that wealth taxes need not slow growth.

The shifting political climate is not hard to explain: taxes on wealth are popular. An analysis of recent survey evidence, for example, found that Americans favour such levies, especially on inheritance. And the case for taxing wealth has become easier to make. Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley, find that the top 0.1% of taxpayers accounted for about 20% of American wealth in 2012, up from 7% of wealth in 1978 and close to levels last seen in 1929. The vast fortunes of the very rich—for example the more than $100bn controlled by...

Can Kyriakos Mitsotakis ensure the Greek economy starts growing again?

Thu, 10/03/2019 - 14:37

THE AIRPORT at Hellinikon, a few miles south of Athens, closed in 2001. Planes belonging to Greece’s now-defunct national carrier still litter the runway. Nearby a stadium built for the Olympics in 2004 gently crumbles. In the distance, a marina borders the glistening Aegean. In 2011, when Greece was in the throes of a sovereign-debt crisis, the government put the site, which is three times as large as Monaco, up for sale. In 2014 it was snapped up by a consortium that planned to build homes, hotels and a casino. At an expected cost of some €8bn ($8.7bn), it was Greece’s largest investment project.

Five years on, ground has yet to be broken. When Syriza, a left-wing party, formed the government in 2015, it reopened the terms of the sale. Ambivalent ministers held up licences. The authorities demanded numerous archaeological surveys. Locals sued. Apart from boats docking in the marina and the occasional security guard on patrol, the site now lies desolate.

Officials from the IMF and European Union who flew into Athens’s new airport in September are thus not short of examples of the difficulties of doing business in Greece. When the sovereign-debt crisis struck they bailed the country out on condition that it enact deep fiscal cuts and far-reaching regulatory reforms. Last year the EU struck a debt-relief deal, allowing...

Can Germany cool its monetary-policy debate?

Thu, 10/03/2019 - 14:37

NOTHING INSPIRES German newspaper illustrators like the European Central Bank’s monetary policies. Bond-buying is represented as a tsunami of cash. An uptick in inflation becomes a euro-gulping great white shark. After Mario Draghi, the ECB’s outgoing president, pushed deposit-rate cuts and a promise to restart quantitative easing (QE) through its governing council last month, Bild, a tabloid, depicted him cloaked and fanged, as “Count Draghila”.

German complaints are long-standing. The ECB’s Strafzinsen (“punishment rates”) expropriate savers. Banks suffer from negative rates they cannot pass on to customers. Cheap money fuels housing bubbles. The ECB is stealthily extending its mandate beyond price stability to redistribution. This week Oliver Bäte, the boss of Allianz, Europe’s largest insurer, joined the attack, lambasting the ECB in an interview with the Financial Times for “multiplying risk”.

Some fear such attacks risk weakening support for the single currency in its largest economy. But criticism from mainstream German politicians is now more muted than in 2016, when Wolfgang Schäuble, a former finance minister, blamed easy money for the rise of far-right populism. Inside the ECB council, the idea of sometimes using unorthodox monetary tools...

America is preparing to hit $7.5bn-worth of European imports with tariffs

Wed, 10/02/2019 - 20:52

MOST MUSEUM exhibits are beautiful—or at least old. But an exhibition in 2015 at the World Trade Organisation (WTO) included 60 cardboard boxes of documents. The point was to give a sense of the scale of two of the body’s longest and largest legal disputes, over American and European subsidies for aircraft manufacturers. Now the fight is moving out of the paperwork phase. That means tariffs are coming.

On October 2nd the WTO published its decision to allow the Trump administration to put tariffs on $7.5bn-worth of imports from the European Union. That is intended to match the harm done to Boeing, an American manufacturer, by the EU’s subsidies for Airbus, Boeing’s European rival. It is the largest retaliation the WTO has ever approved. Senior officials at the United States Trade Representative (USTR) called the victory “historic”.

The dispute has been long and bitter. In October 2004 America complained to the trade body about loans offered by EU governments to Airbus on easy terms. The following June the EU filed a complaint about the harm to Airbus from subsidies to Boeing, in the form of tax breaks and generous contracts with the Department of Defence. Since then there has been enough legal back-and-forth to bore the most ardent plane-spotter. The WTO ruled against both subsidisers. Each made some adjustments supposed...

A spying furore rocks Credit Suisse

Tue, 10/01/2019 - 17:52

AT NOON ON September 17th, in central Zurich, Iqbal Khan confronted a man he suspected of following him. The suspicion was correct. The incident sparked a criminal investigation, still under way, and a speedy inquiry by Homburger, a law firm, for Credit Suisse, Mr Khan’s former employer. The inquiry led on October 1st to the resignation of Pierre-Olivier Bouée, the bank’s chief operating officer, and Remo Boccali, its head of security.

Until July Mr Khan oversaw Credit Suisse’s wealth-management business outside Switzerland and Asia. He was a star. The chief executive, Tidjane Thiam, was reorienting the bank towards wealth management and away from the riskier bits of investment banking, and after a rocky start the bet was paying off. In the second quarter of 2019 the bank’s return on equity was 9.7%, a shade under the 10% that investors regard as par. Revenues and profits in Mr Khan’s division had grown nicely.

Alas, Mr Thiam and his talented, ambitious protégé had fallen out. Living next door to each other made matters worse. Mr Thiam was reportedly annoyed by Mr Khan’s lengthy building works; Mr Khan, by Mr Thiam’s planting of trees on the boundary. Eventually Mr Khan quit the bank. On August 29th UBS, Credit Suisse’s bigger local rival, said he would become its co-head of global wealth management.

According to...

India’s government delights businesses by slashing corporate tax

Thu, 09/26/2019 - 14:40

INDIAN BUSINESSFOLK have been morose of late. GDP growth is slowing. Corporate earnings and sales have been dismal, with the automotive industry walloped particularly hard. Redundancies are rising, suggesting that a broader downturn is around the corner. Though the government of Narendra Modi has offered a few goodies and pick-me-ups, including abandoning a new levy on foreign investment, India Inc has been sunk in gloom.

On September 20th the malaise lifted, with a surprise announcement by Nirmala Sitharaman, the finance minister, of steep reductions in corporate taxes. There were reports the plan had been cobbled together in a breathless 36 hours—and suspicions that the government hoped to get ahead of further bad economic news. If so, it will have been gratified by the response. Stock trading, which had been lethargic, perked up. The benchmark Sensex index saw its strongest two-day rise in a decade, of 8.3%.

The suddenness was characteristic of Mr Modi’s government, which has a penchant for dramatic moves. It says the tax cuts will leave an additional $20bn, or 0.7% of GDP, in companies’ coffers. Tanvee Gupta Jain, an economist at UBS, puts the figure a bit lower, at $15bn. She adds that the tax cut should raise India’s GDP growth rate by 0.2 percentage points, this year and in the future, by helping to attract...

Can you buy a good second-hand car?

Thu, 09/26/2019 - 14:40

IN 1970 GEORGE AKERLOF penned one of the most famous papers in economics. “The market for lemons” shows how, in markets where sellers know more than buyers, trade can dry up. His example is not fruit but used cars—a “lemon” is one with hidden defects. Buyers want reliable wheels, or “peaches”. Not knowing which they are buying, they shave their offers. That puts off peach-sellers, some of whom exit the market, raising the chance of buyers getting a lemon, pushing prices down still further. It becomes impossible to sell a peach for what it should be worth.

Such “adverse selection” can be found in markets from insurance to education. The paper helped to win Mr Akerlof the Nobel prize. But although it contained path-breaking theoretical insight, it cannot be taken literally, because not all used cars for sale are lemons. A new paper examines the extent to which lemons really are a problem.

Richard Blundell of University College London and four co-authors analysed car prices, administrative data on car ownership and income-tax records in Denmark. They estimated the value of cars in their sample by depreciating sale prices over time. They then calculate how big a discount, according to their model, peach-owners had to accept to sell their car to a (lemon-fearing) dealer.

The results provide clear evidence of market...

Europe’s manufacturing slowdown shows no sign of letting up

Thu, 09/26/2019 - 14:40

“SIMPLY AWFUL” is how Phil Smith of IHS Markit, a data provider, describes the latest survey reading of Germany’s manufacturing output. For months the purchasing-managers’ index has languished below 50, indicating contraction. An early release published on September 23rd showed it had slid to 41.4, signifying the sharpest decline in manufacturing activity since 2009. The services sector also lost momentum—for the first time in over four years, managers said they were winning less new business.

A slowdown in Germany’s economy that started a year ago was initially expected to be short-lived. But the gloom has deepened. Output shrank in the second quarter, and many economists, including those at the Bundesbank, think it is still contracting—satisfying the definition of a recession. As a consequence, the euro zone seems set barely to grow.

Global trade has moderated, and with it industrial activity across Europe. The continent has suffered collateral damage in the trade war between America and China. But there are other reasons for its woes. Take Germany’s exports to both countries, for instance. Carsten Brzeski of ING, a Dutch bank, points out that these have held up better than exports to other markets. Brexit-related uncertainty means that exports to Britain have taken a bigger hit. Even so, researchers at the European...

Pages