The Economist

Subscribe to The Economist feed The Economist
Finance and economics
Updated: 1 hour 10 min ago

Rules on bank lending in poor neighbourhoods are being rethought

Thu, 08/30/2018 - 14:15

THE document is dry, dusted with references to “benchmarks”, “performance evaluation” and “a metric-based framework”. But the 25 pages published on August 28th by the Office of the Comptroller of the Currency (OCC), one of America’s federal bank regulators, may start a protracted dispute over lenders’ obligations to poor neighbourhoods and hence to racial minorities.

The OCC is inviting responses to 31 questions about putative changes to the rules implementing the Community Reinvestment Act (CRA), which was passed in 1977 with the best of intentions: maintaining lending and bank branches in America’s poorest areas; and combating “redlining”, the denial of loans to people in certain districts as a disguised means of racial discrimination. The CRA obliges regulators to assess not only banks’ financial soundness but also their lending to poor customers and small businesses, and their commitment to “community development” in the areas where they operate. The results can determine whether banks are...

Informal trade is ubiquitous in Africa, but too often ignored

Thu, 08/30/2018 - 14:15

Fair exchange, sometimes robbery

“THE border is like a river,” says Ronald Sembatya, “where somebody can come to get fish.” He is resting beside his wheelchair in the muddy no-man’s land between Uganda and Kenya. His disability makes it hard to find work elsewhere. But here he earns his “fish” by shuttling goods across the border, slotting a bag of flour or carton of eggs beneath the seat of his chair. Scores of other wheelchair-users trundle back and forth, their loads rarely inspected by officials. The local police commander says he has orders not to touch them. Stop a wheelchair, sighs a customs officer, and “people will lynch you”.

Informal trade is ubiquitous in Africa, but often, like Mr Sembatya’s wheelchair, tactfully ignored. He passes on a potholed track a few hundred metres from the main border post at Busia, a town straddling the frontier. Kenyan women tramp through the same puddles to buy cheap Ugandan tomatoes. Some traders deal in charcoal; other hoist...

A draft deal clarifies what populist trade policy means in practice

Thu, 08/30/2018 - 14:15

“IT’S a big day for trade, a big day for our country,” boasted President Donald Trump on August 27th. The cause of this jubilation was progress in renegotiating the North American Free Trade Agreement (NAFTA), a deal between America, Mexico and Canada. Enrique Peña Nieto, Mexico’s president, confirmed that Mr Trump had managed to secure a bilateral “understanding” with Mexico. According to the White House’s spin doctors, Mr Trump had kept his pledge to renegotiate NAFTA and had produced a “mutually beneficial win for North American farmers, ranchers, workers and businesses”.

The deadline for publishing a more concrete version of the deal is August 31st, when the American administration plans to notify Congress of Mr Trump’s intent to sign. The rush is to enable Mr Peña to sign before December 1st, when he will be replaced by Andrés Manuel López Obrador, a firebrand leftist. Both men are keen to have the deal wrapped up by then, Mr Peña to make it part of his legacy and Mr López Obrador so he...

KPMG is caught up in scandals but its woes are not existential

Thu, 08/30/2018 - 14:15

AUDITORS are often accused of being too lenient on the companies they scrutinise. After all, those companies pay the bills. The four that dominate the market—Deloitte, EY, KPMG and PwC—also offer lucrative services like consulting and tax advice. Concerns have long swirled that conflicts of interest risk deterring auditors from challenging dodgy accounting.

Recent controversies have centred on KPMG, the smallest of the Big Four. In Britain lawmakers have criticised it for signing off the accounts of Carillion, a public-sector contractor that later went bust. A regulatory investigation is under way. Last week regulators fined it for misconduct in its audits of Ted Baker, a clothing retailer.

In America three former partners face criminal charges for alleged involvement in the theft of confidential information about the regulator’s plans to inspect KPMG audits. In South Africa KPMG is under investigation for its work for companies owned by the Gupta family, which has been accused...

Markets bash Argentina’s and Turkey’s currencies again

Thu, 08/30/2018 - 14:15

THE first YouTube video, posted in 2005, showed the site’s 25-year-old co-founder standing in front of elephants at the San Diego zoo. One of its most recent videos is a little different: it shows Argentina’s president, Mauricio Macri, explaining why he needs the IMF to stand in front of the bears destroying his country’s currency.

The peso fell by more than 7% on August 29th, capping another difficult month. Its fall will make it harder for the central bank to meet next year’s inflation target, further undermining the institution’s credibility and the currency’s appeal. Argentina must also roll over or replace about $50bn of debt falling due over the remainder of 2018 and 2019. The financial markets worry that the government will struggle to secure both refinancing and re-election, since the sky-high interest rates required to attract creditors may further repel voters in the October 2019 elections.

On YouTube, Mr Macri asked the IMF to speed up disbursement of the $50bn loan it had...

What a rising current-account surplus means for the euro area

Thu, 08/23/2018 - 14:53

GREECE’S third bail-out programme came to an end on August 20th. A look at the causes of the country’s near-decade of crisis illustrates how external imbalances can reflect underlying troubles. Gaps in public finances, as well as investments in property, were financed by borrowing from Germany and other northern European countries. Wages and costs were pushed up, making exports less competitive—within the euro zone, there can be no currency devaluation—and further widening Greece’s current-account deficit. When foreign lending seized up, the government needed bailing out and the banks crumbled. Portugal (chiefly because of its public finances), Spain and Ireland (blame private-sector housing bubbles) have similar tales to tell.

As those four countries have stabilised or recovered, they have wholly or partly reversed their current-account deficits (see chart). But if the periphery has adjusted, the same is not true of the euro area’s creditor countries. Surpluses in Germany and the Netherlands have...

Are you a stock or a bond?

Thu, 08/23/2018 - 14:53

IMAGINE two college friends whose careers have taken different paths. Simon is an investment banker. He works long hours, especially when his bank is advising on a big merger. His pastimes include potholing and skydiving. Chris works as a senior civil servant. Early each evening the lights in his office dim to remind his colleagues of the importance of work-life balance. His spare time is spent on long country walks, playing golf and going to the theatre.

How should they invest their money? More specifically, how much of their savings should go to bonds and how much to shares? Textbook theory says it depends on how tolerant Simon and Chris are towards risk. If either can bear the sometimes violent ups-and-downs of stockmarkets, he should hold more shares, which have higher rewards to go with the extra risk. Should such price swings keep him awake at night with worry, he should tilt the mix of his investments towards safer government bonds.

A risk-lover such as Simon is happy to...

Global unease, from commerce to currencies, rattles raw materials

Thu, 08/23/2018 - 14:53

THEY make an intriguing posse: about 160 “scouts” in jeans and muddy boots, jumping out of cars with ropes in hand, plunging deep into corn (maize) and soyabean fields across the American Midwest. They are not just farmers. They include commodity traders and hedge-fund managers. Their quest: to predict this year’s harvest by using ropes as a measure and counting, to the last ear of corn and soyabean pod, the yield in a given area. “We have a really beautiful crop. I think this is going to be a record,” says Ted Seifried, a market strategist at Zaner Group, a commodities brokerage in Chicago, during a stop in Nebraska on August 21st. The mud on his boots is a reassuring sign of ample moisture in the soil.

But when he gets back into the car with others on the Pro Farmer Midwest Crop Tour, the talk turns to darker subjects, such as trade tensions, collapsing currencies and what he calls the start of an “economic cold war” between America and China. “While we’re driving the 15-25 miles from field...

The business of insuring intangible risks is still in its infancy

Thu, 08/23/2018 - 14:53

THE development, hundreds of years ago, of ship and cargo insurance was revolutionary. It marked the start of commercial insurance; protection against loss from looting, fire and the perils of the high seas fostered global trade. But in the 21st century the value of companies consists less of solid objects, such as boats and buildings, than of weightless, intangible elements, such as intellectual property (IP), data and reputation. “Today the most valuable assets are more likely to be stored in the cloud than in a warehouse,” says Inga Beale, chief executive of Lloyd’s of London.

As Western economies have shifted from making...

America’s stockmarket passes a milestone

Thu, 08/23/2018 - 09:48

ON AUGUST 22nd America’s bull market in equities turned 3,453 days old. Since hitting a low of 666 in March 2009, the S&P 500 index has increased more than fourfold, driven by strong corporate profits, low inflation, stable economic growth and a boatload of central-bank stimulus. Despite five corrections of at least 10%, the index has never entered bear territory, defined as a drop of at least 20%. Most commentators are declaring this to be the longest bull market in history.

Whether it is a record-breaker is disputed. Some contend that because a fall of 19.9% in 1990 did not quite reach the technical threshold, the bull market that ended in 2000 actually lasted a whopping 4,494 days and is the true champion. Others note a drop of 19%-plus in 2011 (and declines of 20%-plus in other share-price indices).

Whatever its precise status, the bull market is curiously unloved by investors. Ken Fisher, a fund manager, has called it the “most joyless” in history. In the boom...

The contrarian case for emerging markets

Thu, 08/16/2018 - 09:48

TWENTY years ago, on August 17th 1998, the Russian government devalued the rouble, defaulted on its domestic debts and suspended all payments to foreign creditors. It was one of the most dramatic days of a year-long emerging-market crisis that began with the devaluation of the Thai baht. South Korea and Malaysia would suffer brutal recessions. President Suharto of Indonesia was forced to resign after 32 years that May. But it was Russia’s default that shook the world.

Talk of rich-world recession was soon in the air. The Federal Reserve would cut interest rates three times before the year was out. The MSCI index of emerging-market stocks, which had lost 40% of its dollar value in the year leading up to August 1998, dropped by more than a quarter in that month alone.

Emerging-market assets are not as scorned now as they were then. The panic resulting from Turkey’s crisis is not anything like as acute. But there is no shortage of reasons for investors to be wary.

Unloved asset...

Turkey’s crisis is not fundamentally contagious

Thu, 08/16/2018 - 09:48

IN 1546 Girolamo Fracastoro, a doctor and poet, published an elegant theory of contagion. Infections spread in three ways, he argued: by direct contact, via an intermediary, or at a distance, through the air. In medicine, his theory is now considered quaint. In economics, however, it still works pretty well.

On August 10th President Donald Trump sent a pathogenic tweet, announcing a doubling of tariffs on Turkish steel and aluminium. It followed earlier sanctions on two Turkish ministers involved in detaining Andrew Brunson, an American pastor, on dubious charges. The lira, which had already lost 38% of its value since the start of the year, shed another eight percentage points in the tweet’s aftermath.

Early medical scholars believed gluttons were more susceptible to disease than cleaner-living folk. Similarly, Turkey has become vulnerable to financial disorder through macroeconomic intemperance. Businesses have borrowed heavily in foreign currencies. The government, which has...

African governments let too many taxpayers off the hook

Thu, 08/16/2018 - 09:33

A stitch in time

TAX collection in Africa resembles an exasperating fishing expedition, in which the big fish wriggle into tax havens and the tiddlers hide in the informal sector. It is made even harder by a self-inflicted problem. Governments give out a range of exemptions, thereby poking holes in their own nets.

Consider “tax expenditures”, a measure of the revenue lost by deviations from usual tax rates. Taxmen in Kenya and Uganda let about 5% of GDP slip through their fingers in this way, according to the World Bank. In the few African countries where data are available, governments forgo revenues worth a third of those they actually collect. The cost is felt in crowded classrooms and on rutted roads.

Not all that money should, or could, be recouped. The figures include concessions for items like textbooks and medicines. And not every tax expenditure is a giveaway, argues Maya Forstater of the Centre for Global Development, a think-tank. For...

New software helps uncover Mafia crime masked as ordinary business

Thu, 08/16/2018 - 09:33

The code breaks the silence

FOR an inkling of how hard it is for Italian authorities to identify Mafia activity, consider how mobsters disguise the pizzo, or protection payments, they extort. The owner of a business may find that customers have been scared off by a menacing stranger. Within days a mysterious man visits. He may request a regular donation for a poor family, or ask a business to switch to a new supplier. Owners put two and two together, says Daniele Marannano, an anti-Mafia activist in Palermo: “There’s no need for further explanations.”

Such concealment is more common than in decades past, when payments were often collected monthly in cash. That has made it harder to spot extortion by analysing a business’s books, says Antonio Basilicata of the Anti-Mafia Investigation Directorate (DIA) in Rome. But software developed by Crime&tech, a firm in Milan, can still help identify companies with probable Mafia links by crunching...

Life-insurance policies with perks make it to America

Thu, 08/16/2018 - 09:33

PEOPLE only contact their insurers when things go wrong and they need to make a claim. This generally means losses for the insurer. It also means stress and hassle for the customer. In order to mitigate both problems, insurers increasingly offer extra services alongside their bog-standard policies.

Aviva, a British insurer, for instance, installs sensors on customers’ water pipes to detect even minuscule leaks, so that these can be repaired before causing greater damage. This spares Aviva the cost of a bigger claim, and the client the misery of a flooded basement. Other benefits are intended mainly to foster customer loyalty. Porto Seguro, a Brazilian insurer, offers access to locksmiths, electricians and taxi services.

Life insurers have so far been slower to catch on. But that is changing. Often ancillary services nudge people to live more healthily. AXA, a French insurer, gives its customers access to check-ups. Union Life, a Chinese one, guarantees policyholders a place in an...

Australia’s lauded private-pension system is under scrutiny

Thu, 08/16/2018 - 09:33

High fees down under

PAUL KEATING, a former prime minister of Australia, calls the country’s superannuation system “the envy of the developed economies”. In many ways, it is. The “super”, as Aussies call their private-pension provision, was a crowning achievement of Mr Keating’s premiership. In 1992 he made it compulsory for employers to set aside 3% of all but the very lowest-income workers’ wages. The payment has since crept up to 9.5%, and, by law, will rise further in 2021.

Today 15m working Australians are sitting on a nest-egg for retirement. With assets of about A$2.6trn ($1.9trn), their private-pension pot has grown into one of the largest in the world. It is almost universal, which should relieve pressure on the means-tested public-pension system. Australia, in other words, has less reason to panic about supporting retiring baby-boomers than most other countries.

Yet pride is not the only emotion the system evokes. In December 2017, prompted...

How to design carbon taxes

Thu, 08/16/2018 - 09:33

ECONOMISTS view pricing greenhouse-gas emissions as an elegant way to reduce them. There are more than 70 national and regional schemes, covering perhaps a fifth of global emissions, which charge polluters for the carbon dioxide they belch out. But that leaves an awful lot of the world to be convinced of the merits of such schemes. Sceptics point to the lacklustre decarbonisation record of places that already price carbon. Higher charges would help; but then the politics also has to add up.

Governments have two ways to price carbon. They can levy a tax on each tonne of CO2 emitted, an approach pioneered by Finland in 1990. Or they can issue a fixed number of pollution permits to companies, which can then trade the permits with others. The European Union (EU), a handful of American states and, starting this year, China have opted for some version of this “cap-and-trade” approach. These schemes have tended to be limited to a few carbon-intensive industries, such as power generation,...

Litigation finance offers investors attractive yields

Thu, 08/16/2018 - 09:33

CONTINGENT fees, in which clients pay lawyers only if a case is won, have long been a feature of America’s legal system. Many other countries used to bar them, wary of importing America’s ambulance-chasing culture. But a belated acceptance of their benefits means they are now widely allowed. “No-win, no-fee” arrangements help shift risks from parties to a suit to their lawyers, and make it less likely that a would-be plaintiff decides not to press a strong case for fear of a big financial loss. 

Around a decade ago, some lawyers took the principle of risk-shifting further. They accepted money from third parties to fund cases in exchange for some of the winnings. Litigation finance has since taken off. Fortune 500 companies and New York’s elite law firms increasingly tap outside capital when pursuing multi-million-dollar suits.

Funds that invest in litigation are on the rise. In the past 18 months some 30 have launched; over $2bn has been raised. Last year Burford Capital, an...

Why the largest group of American corporate bonds is a notch above junk

Thu, 08/09/2018 - 14:50

BY HIS own account Christopher Hitchens, an author who died in 2011, was a poor student. He left Oxford with a third-class degree. This was not for want of ability. Hitchens would become a prolific essayist and fearsome debater. Rather, it was a choice. His tutors warned him about neglecting his studies. But he preferred to divide his time between his social life, political protests, books (other than the prescribed ones) and lively debates with other thinkers.

As Hitchens’s counterexample demonstrates, it is possible to regret the opportunities missed while striving for top grades. It is a lesson that many of America’s biggest companies have grasped. At one time, the sort of company that could tap the bond market for capital would be given an A-grade as a matter of course. These days the typical corporate-bond issuer has a credit-rating of BBB, only a notch above a junk rating (see chart).

That might seem to imply that business has become less efficient or lucrative. Yet profits have...

Is China losing the trade war against America?

Thu, 08/09/2018 - 14:50

WHEN Donald Trump tweeted on August 5th that tariffs were working “big time”, American media sprang into action to test the claim (see article). In China, editors were more circumspect. No major Chinese-language newspaper reported his tweets. One of his claims—that China’s stockmarket has fallen 27% in the past four months—was an exaggeration. But why would any self-respecting propagandist in Beijing dwell on that? Chinese stocks have indeed fallen sharply (see chart), which officials do not wish to emphasise.