The Economist

Subscribe to The Economist feed The Economist
Finance and economics
Updated: 1 hour 31 min ago

Marijuana businesses, excluded from finance, are forced to use cash

Wed, 12/06/2017 - 20:17

MANY marijuana growers in northern California, America’s biggest source of the stuff, had expected this autumn’s harvest to be the largest ever. After all, recreational marijuana becomes legal in the state in January. Instead, wildfires in October—spreading so fast they killed 43 people—burned up half the marijuana growing in the area’s tri-county “Emerald Triangle” alone and new fires now raging will claim more. Some reckon the fires set a record not just for burnt pot, but also for the value of banknotes turned to ash.

Although 29 American states allow sales of marijuana for medical use (or medical and recreational use), federal law still classifies it as a “schedule 1” drug like heroin. Firms handling marijuana proceeds can be prosecuted for moneylaundering. Ned Fussell of CannaCraft, a maker of marijuana products, says that a few firms open a bank account under an alternative identity. But banks almost always find out. So cannabis businesses operate almost exclusively in...

The euro zone’s boom masks problems that will return to haunt it

Thu, 11/30/2017 - 15:56

“WHAT does not kill me makes me stronger,” wrote Nietzsche in “Götzen-Dämmerung”, or “Twilight of the Idols”. Alternatively, it leaves the body dangerously weakened, as did the illnesses that plagued the German philosopher all his life. The euro area survived a hellish decade, and is now enjoying an unlikely boom. The OECD, a club of mostly rich countries, reckons that the euro zone will have grown faster in 2017 than America, Britain or Japan. But, sadly, although the currency bloc has undoubtedly proven more resilient than many economists expected, it is only a little better equipped to survive its next recession than it was the previous one.

Europe’s crisis was brutal. Euro-area GDP is roughly €1.4trn ($1.7trn)—an Italy, give or take—below the level it would have reached had it grown at 2% per year since 2007. Parts of the periphery have yet to regain the output levels they enjoyed a decade ago (see chart). The damage was exacerbated by deep flaws within Europe’s monetary union. Three shortcomings loomed particularly large. First, the union centralised money-creation but left national governments responsible for their own fiscal solvency. So markets came to understand that governments could no longer bail themselves out by printing money to pay off creditors. The risk of default made markets panic in response to bad news, pushing up government borrowing costs and...

Europe’s banks face a glut of new rules

Thu, 11/30/2017 - 15:56

FOR those oddballs whose hearts sing at the thought of bank regulation, Europe is a pretty good place to be. No fewer than five lots of rules are about to come into force, are near completion or are due for overhaul. They will open up European banking to more competition, tighten rules on trading, dent reported profits and boost capital requirements. Although they should also make Europe’s financial system healthier, bankers—after a decade of ever-tightening regulation since the crisis of 2007-08—may be less enthused.

Start with the extra competition. On January 13th the European Union’s updated Payment Services Directive, PSD2, takes effect. It sets terms of engagement between banks, which have had a monopoly on customers’ account data and a tight grip on payments, and others—financial-technology companies and rival banks—that are already muscling in. Payment providers allow people to pay merchants by direct transfer from their bank accounts. Account aggregators pull together data...

As bitcoin’s price passes $10,000, its rise seems unstoppable

Thu, 11/30/2017 - 15:56

MOST money these days is electronic—a series of ones and zeros on a computer. So it is rather neat that bitcoin, a privately created electronic currency, has lurched from $1,000 to above $10,000 this year (see chart), an epic journey to add an extra zero.

On the way, the currency has been controversial. Jamie Dimon, the boss of JPMorgan Chase, has called it a fraud. Nouriel Roubini, an economist, plumped for “gigantic speculative bubble”. Ordinary investors are being tempted into bitcoin by its rapid rise—a phenomenon dubbed FOMO (fear of missing out). Both the Chicago Mercantile Exchange, America’s largest futures market, and the NASDAQ stock exchange have seemingly added their imprimaturs by planning to offer bitcoin-futures contracts.

It is easy to muddle two separate issues. One is whether the “blockchain” technology that underpins bitcoin becomes more widely adopted. Blockchains, distributed ledgers that record transactions securely, may prove very useful in some...

A regulatory tempest lashes China’s markets

Thu, 11/30/2017 - 15:56

IT IS is the kind of company that for years was a safe bet for investors. China City Construction is big, government-owned and focused on building basic infrastructure such as sewers. But the bet, it turns out, was not so safe after all. In November China City missed interest payments on three separate bonds, after failing to refinance its hefty debts. It is one of a growing number of victims of the government’s clean-up of the financial system, or what is known in China as the “regulatory storm”.

The storm has been gathering strength for the better part of a year but its intensity over the past couple of weeks has caught many off-guard. The government wasted little time after an important Communist party meeting in October before taking on some of the riskier parts of the financial system. As a result, China’s risk-free interest rate—ie, the yield on government bonds— has shot up. Overall, it has risen by a percentage point since the start of 2017.

For firms, even those closely tied to the state, the rise in borrowing costs has been even steeper. The yield on ten-year bonds issued by China Development Bank, a “policy bank” that finances state projects at home and abroad, has soared to nearly 5%, the highest in three years (see chart).

...

Brazil puts its state development bank on a diet

Thu, 11/30/2017 - 15:56

Lula spots an Anglo-Saxon

IN 2009, as Brazil was buffeted by the global financial crisis, its president, Luiz Inácio Lula da Silva, was seething. The mess, he complained, was the fault of “blue-eyed white people, who previously seemed to know everything, and now demonstrate they know nothing at all”. For him the crisis was a repudiation of Anglo-Saxon liberalism and a vindication of state capitalism. Like many countries, Brazil cut interest rates and increased spending. Unlike many other governments, however, Brazil’s used its state development bank, BNDES, to funnel subsidised credit to Brazil’s largest companies. Thanks to cheap loans from the Treasury, the bank doubled its lending, which reached a peak of 4.3% of GDP in 2010. For most loans the interest rates were half the level of Selic, the central bank’s benchmark.

The plan worked, for a while. Brazil emerged from the crisis relatively unscathed: after a short recession in 2009 the economy rebounded...

India’s new bankruptcy code takes aim at delinquent tycoons

Thu, 11/30/2017 - 15:56

A SMOOTH bankruptcy process is akin to reincarnation: a company at death’s door gets to shuffle off its old debts, often gain new owners, and start a new life. Might the idea catch on in India? A first wave of cadaverous firms are seeking rebirth under a bankruptcy code adopted in December 2016. In a hopeful development, tycoons once able to hold on to “their” businesses even as banks got stiffed seem likely to be forced to cede control.

India badly needs a fresh approach to insolvent businesses. Its banks’ balance-sheets sag under 8.4trn rupees ($130bn) of loans that will probably not be repaid—over 10% of their outstanding loans. But foreclosure is fiddly: it currently takes over four years to process an insolvency, and recovery rates are a lousy 26%. Partly as a result, bankers have often turned a blind eye to firms they ought to have foreclosed on.

This is bad for the banks and worse for the economy, which has slowed markedly, in part as credit to companies has dried up. The problem festered for years, not...

A flattening yield curve argues against higher interest rates

Thu, 11/30/2017 - 15:56

CENTRAL bankers may control short-term interest rates, but long-term ones are mostly free to wander. They do not always behave. When Alan Greenspan, then chairman of the Federal Reserve, was raising short rates in 2005, he described a simultaneous decline in long rates as a “conundrum”. His successor-to-be, Ben Bernanke, blamed foreign investments in American assets because of a “global saving glut”.

Janet Yellen, today’s (outgoing) Fed chair, faces a similar puzzle. Ms Yellen’s Fed has raised rates twice this year, and will probably make it three times in December. In October the Fed began to reverse quantitative easing (QE), purchases of financial assets with newly created money. Despite all this monetary tightening, yields on ten-year Treasury bonds have fallen from around 2.5% at the start of 2017 to about 2.3% today. As a result, the “yield curve” is flattening. The difference between ten-year and two-year interest rates is at its lowest since November 2007 (see chart).

The...

What cheese can tell you about international barriers to trade

Thu, 11/30/2017 - 15:56

Slicely does it

BEN SKAILES, a British cheesemaker, is busy as Christmas ripens demand for his Stilton. Foreigners make up a third of demand for his dairy, Cropwell Bishop Creamery. This exporting achievement is not to be sniffed at when one considers the barriers to the cheese trade.

Some are natural. Perishable food goes better with wine than long journeys. At least Mr Skailes’s Stilton can survive the three-week trip to America. (His is best eaten within 16 weeks.) Softer cheeses struggle, giving American producers an advantage.

Other hurdles are man-made. Tariffs and quotas are supposed to support domestic dairy industries, and are more onerous than in other sectors. The European Union protects its dairy industry with a 34% average duty, compared with an overall average of 5%. In America it is 17%, compared with 3.5%. Stilton escapes American quotas, but full “loaves” are taxed at a 12.8% rate, or 17% if they arrive sliced. (Unprocessed...

A purge of Russia’s banks is not finished yet

Thu, 11/23/2017 - 15:52

Elvira’s mad again

WHEN Elvira Nabiullina took over the governorship of the Russian Central Bank (CBR) in 2013, she faced a bloated and leaky finance sector with over 900 banks. Since then, more than 340 have lost their licences. Another 35 have been rescued, including, in recent months, Otkritie, once the country’s biggest private lender by assets, and B&N Bank, its 12th largest. The costs have been steep. According to Fitch, a ratings agency, over 2.7trn roubles ($46bn, some 3.2% of GDP in 2016) have been spent on loans to rescued banks and payments to insured depositors. Fitch reckons another few hundred banks could go before the clean-up concludes. More large private banks are whispered to be among them.

The CBR has rightly been praised for preventing a wider crisis and undertaking a clean-up during a punishing recession. Non-performing loans are at a manageable level, of around 10%. Bringing Otkritie and B&N under CBR stewardship calmed panicked markets. Yet nationalisation also raises...

Italy’s new savings accounts fuel a boom in stockmarket listings

Thu, 11/23/2017 - 15:52

ITALY seems an unlikely place to be enjoying a boom in new listings on the stockmarket. It is full of family-run small and medium-sized enterprises (SMEs) that mostly rely for their finance on banks; and Italy’s banks are notorious for the bad debts still lingering on their balance-sheets. But Borsa Italiana, Milan’s stock exchange, has already seen 33 share issues so far this year, of which 24 have been full-fledged initial public offerings (IPOs). The number of listings so far already equals that seen in previous boom years in 2007 or 2015. With more expected before January, the exchange is likely to achieve the highest number of listings since the height of the dotcom bubble in 2000 (see chart).

A big reason for the surge is the Italian government’s roll-out in February of new individual savings accounts, known as PIRs, which offer favourable tax treatment. These have done better than expected. Asset managers have amassed €7.5bn ($8.3bn) in new PIR funds in the first three quarters of...

The craze for ethical investment has reached Japan

Thu, 11/23/2017 - 15:52

JAPAN is prone to fads—usually in fancy desserts or fashion ripe for Instagram. A less photogenic one has hit finance: investing in assets screened for ESG (environmental, social and governance) factors. In 2014-16 funds invested in ESG assets grew faster in Japan than anywhere else (and not just because of better reporting and a low base).

Today Japan’s sustainable-investment balance is $474bn, or some 3.4% of the country’s total managed assets—low compared with Europe or America, but high for Asia. The shift is driven from the top down, rather than, as elsewhere, by ethically minded individual investors.

When he returned to power in 2012 with a plan to revitalise the economy Shinzo Abe, Japan’s prime minister, wanted to reform Japan’s conservative business culture. A code for institutional investors was introduced in 2014, followed by one on corporate governance a year later. The government’s aim is not only to get firms to distribute some of their vast piles of...

Ethical investors set their sights on index funds

Thu, 11/23/2017 - 15:52

The revolutionary vanguard

VANGUARD, an American fund-management giant, promises “the highest standards of ethical behaviour”. Its low fees, helpful call centres and lack of scandal give the claim credence. It is by far the largest mutual-fund group, with $4.8trn under management. It receives more than half of all the new money going into American mutual funds. Most ends up in its passively managed offerings that track indices.

So you might think its shareholder meetings would be pious celebrations. Instead, Vanguard tries to avoid them. On November 15th it held its first since 2009, to satisfy a legal requirement that two-thirds of fund directors are elected rather than appointed. It held the meeting near its Arizona satellite office, far from its Philadelphia-area headquarters. Only 200 of its 20m clients showed up, trudging through metal detectors and tight security.

Vanguard may have been pleased by the small turnout. Among those dogged 200 who attended were representatives of an...

Buying local is more expensive than it looks

Thu, 11/23/2017 - 15:52

RANDY KULL, a businessman based in Illinois, sells traffic signs. His products have international appeal, with signs for anglophones (STOP), Spanish-speakers (ALTO) and horses (WHOA). But for some customers, he must stay local. When America’s Department of Transportation is involved, he must use American-made sign-mounting brackets, and fill in a form confirming their source. Mr Kull’s supplier in Arkansas is happy, but he himself is dubious. “We live in a global economy,” he scoffs. The weight of the evidence backs his instinctive scepticism.

To many, buying local seems sensible—wholesome, even. Keeping money close to home is supposed to foster thriving communities and generate jobs. To the administration of President Donald Trump, it is a source of national strength. Around the world, such sentiments are gaining ground. Global Trade Alert, a watchdog, has picked up 343 examples of new local-content requirements imposed since November 2008. In America, it estimates that the share...

In a pre-Brexit skirmish with the City, Eurex takes on LCH

Thu, 11/23/2017 - 15:52

SEEN from the continent, it just isn’t right. LCH, a firm mostly owned by the London Stock Exchange (LSE), dominates the clearing of interest-rate derivatives. Each day it clears $3.4trn-worth, counting both sides of a trade. (The simplest variety is a swap of fixed and floating rates, allowing counterparties to reduce or increase their exposure to changes in rates.) In euro-denominated derivatives, the biggest category after dollars, LCH’s market share comfortably exceeds 90%, according to Clarus Financial Technology, a research firm.

Eurex, the derivatives arm of Deutsche Börse, owner of the Frankfurt Stock Exchange, wants to change that. So do European Union politicians and regulators, once Britain quits the EU. On November 20th Eurex’s clearing division said that so far around 20 banks, including lots of heavyweights, had joined a “partnership programme” to boost its interest-rate business. (The most notable absentees are Goldman Sachs and two big French banks, BNP Paribas and Société Générale.)

Though...

How to survive as a bank in Afghanistan

Thu, 11/23/2017 - 15:52

ECONOMISTS think of the opportunity cost of money as one reason to hold a bank deposit: rather than skulk under a mattress, cash could earn interest. In volatile, war-torn Afghanistan, neither option appeals. Money has to be kept secure somehow, but a bad bank might make off with its depositors’ money. In 2010 Kabul Bank collapsed after a spree of insider loans to shareholders, including a brother of the then president. A central-bank bail-out cost nearly 7% of GDP. Much of the nearly $1bn stolen has not been recovered.

A bank that customers trust, though, is in a strong position. So Afghanistan International Bank (AIB) does not pay any interest on its deposits, says Anthony Barned, its British chief executive. AIB was set up by the Asian Development Bank and private investors in 2004, and is the largest private bank in Afghanistan, holding $790m in deposits, around one-fifth of the country’s deposit base. It is also the most profitable.

As the only private institution with a dollar-clearing facility with big...

Sustainable investment joins the mainstream

Thu, 11/23/2017 - 15:52

IN 2008, when she was in her mid-20s and sitting on a $500m inheritance, Liesel Pritzker Simmons asked her bankers about “impact investing”. They fobbed her off. “They didn’t understand what I meant and offered to screen out tobacco,” recalls the Hyatt Hotels descendant, philanthropist and former child film star. So she fired her bankers and advisers and set up her own family office, Blue Haven Initiative. It seeks investments that both offer market-rate returns and have a positive impact on society and the environment. “Financially it’s sensible risk mitigation,” she says. “Our philanthropy becomes far more efficient if we don’t need to undo damage done in our investment management.”

Such ideas are gaining ground, particularly among the young. Fans of “socially responsible investment” (SRI) hope that millennials, the generation born in the 1980s and 1990s, will drag these concepts into the investment mainstream. SRI is a broad-brush term, that can be used to cover everything from...

Does Hong Kong’s Octopus card have too many tentacles?

Thu, 11/23/2017 - 15:52

Your extensible friend

IN 1997, two months after Hong Kong reverted to Chinese sovereignty, it acquired a cutting-edge payment technology. People could rush through turnstiles with a wave of their colourful Octopus cards—stored-value cards pre-loaded with cash. Its latest advance, however, is risibly low-tech. On October 30th Octopus launched an extensible pole with a plastic hand to help drivers pay at toll booths. Critics of Hong Kong’s cautious approach to fintech snorted in derision. Meanwhile, a government official was quoted as blaming Octopus for stifling the city’s shift to cashlessness. Both criticisms are unfair. Hong Kongers enthusiastically embrace electronic payments and do well from the fierce competition between different platforms.

The Octopus card, designed for journeys on Hong Kong’s trains, buses, trams and ferries, soon stretched its tentacles into shops. In 2016 the company generated revenues of HK$956m ($122m) for its owners (mostly...

Wealth inequality has been widening for millennia

Thu, 11/23/2017 - 15:52

THE one-percenters are now gobbling up more of the pie in America—that much is well known. This trend, though disconcerting, is not unique to the modern era. A new study, by Timothy Kohler of Washington State University and 17 others, finds that inequality may well have been rising for several thousand years, at least in some parts of the world. The scholars examined 63 archaeological sites and estimated the levels of wealth inequality in the societies whose remains were dug up, by studying the distributions of house sizes.

As a measure they used the Gini coefficient (a perfectly equal society would have a Gini coefficient of zero). It rose from about 0.2 around 8000BC in Jerf el-Ahmar, on the Euphrates in modern-day Syria, to 0.5 in around 79AD in Pompeii. Data on burial goods, though sparse, point to similar trends.

The researchers suggest agriculture is to blame. The nomadic lifestyle is not conducive to wealth accumulation. Only when humans switched to farming did...

Who needs America?

Thu, 11/16/2017 - 15:58

REVIVING the original Trans-Pacific Partnership (TPP), a trade deal between 12 countries around the Pacific Rim, is technically impossible. To go into force, members making up at least 85% of their combined GDP had to ratify it. Three days into his presidency, Donald Trump announced that America was out. With 60% of members’ GDP gone, that deal was doomed.

But on November 11th, another began to rise in its place, crowned with a tongue-twisting new name: the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP). Ministers from its 11 members issued a joint statement saying that they had agreed on its core elements, and that it demonstrated their “firm commitment to open markets”. The political symbolism was powerful. As America retreats, others will lead instead.

The CPTPP is still far from finished, however. This inconvenient truth is unsurprising. Resuscitating the deal without its biggest member was always going to be hard. Without America, uncomfortable concessions made in the old...

Pages