The Economist

Subscribe to The Economist feed The Economist
Finance and economics
Updated: 2 hours 48 min ago

Green bonds channel private-sector funding to the climate

Thu, 06/08/2017 - 14:46

WHEN Donald Trump announced America’s withdrawal from the Paris climate agreement on June 1st, he spelled out that it would no longer contribute to the Green Climate Fund. This is a UN initiative to use rich countries’ money to bring climate finance to developing ones. But even if the fund were going swimmingly, public-sector finance would only be able to provide a small part of the cash needed by poor countries, and indeed the world.

Private markets, however, are mobilising—notably that for “green bonds”, which tie the proceeds of bond issues to environmentally friendly investments. The market started a decade ago with issues from municipalities and multilateral development banks, worth just a few hundred million dollars annually.

By 2016 issuance had grown to $97bn, of which $32bn came from China alone; SEB, a Swedish bank, reckons volumes may hit $125bn this year. Public-sector issuers together accounted for only around 30% of the total last year. The largest portion, over 35%, was issued by financial institutions; around 20% came from other companies. Investor demand, too, is booming. Zurich Insurance, a Swiss insurer, has already invested over $1.2bn in green bonds, with plans to reach $2bn; BlackRock and other asset managers have set up dedicated green-bond funds.

As for the proceeds, over 40% is used to finance clean energy; nearly 25%...

Global monetary policy is not tightening as expected

Thu, 06/01/2017 - 14:45

AT ITS outset, 2017 seemed likely to mark a turning-point for global monetary policy. The Federal Reserve had just raised its main interest rate by a quarter-point and was expected to add three such increases this year—or perhaps even more, if a new Republican Congress could agree on tax cuts with a new Republican president. In that case, low interest rates would no longer be the “only game in town” in terms of policy stimulus. The European Central Bank (ECB) would begin to wind down its programme of quantitative easing, or QE, probably by mid-year. The Bank of Japan would cut back on QE, too. In September it set a target yield for ten-year bonds, of 0.0%, which would probably require fewer asset purchases. Of the global giants, only China seemed likely to keep its policy settings as loose as in 2016.

In this context, the ECB’s meeting on June 7th and 8th was not long ago eyed as pivotal. The bank’s staff would produce new, upbeat economic forecasts. Many ECB-watchers (and maybe...

Sweden’s economy is thriving, so why is monetary policy so loose?

Thu, 06/01/2017 - 14:45

ON A recent balmy day, people thronged the parks and promenades of central Stockholm. Swedes have much to feel sunny about. Real economic growth, at a heady 3.2% in 2016, has averaged 2.8% annually since 2009, compared with the euro area’s 1.1% per year. In April, Swedish inflation was close to the target of 2% aimed at by the Riksbank, Sweden’s central bank. Yet it decided not only to maintain the main policy rate at -0.50%, where it has been since February 2016, but to increase the amount of asset purchases under quantitative easing (QE) by a further SKr15bn ($1.7bn) during the second half of 2017.

One explanation for keeping policy so loose is that the inflation figure is deceptive. Johan Javeus of SEB, a bank, points out that some of the increase was driven by one-off factors, such as rises in air fares and energy prices. After raising rates prematurely in 2010 and 2011, the Riksbank is loth to do so again.

But also, it is hemmed in by the European Central Bank (ECB)....

Goldman Sachs is criticised for buying Venezuelan bonds

Thu, 06/01/2017 - 14:45

BONDS are bought and sold every second of every day without attracting attention. But it is not often that the seller is the central bank of a brutal, cash-strapped regime faced with protests; the buyer, a bulge-bracket American investment bank; and the size of the deal in the billions of dollars. A report in the Wall Street Journal on May 28th that Goldman Sachs had bought bonds with a face value of $2.8bn issued by Venezuela’s state-owned oil company, PDVSA, for 31 cents on the dollar (ie, for $865m) caused a stink.

Julio Borges, an opposition politician and president of the National Assembly, lambasted Goldman on May 29th in an open letter to its chief executive, Lloyd Blankfein, for its decision to “aid and abet Venezuela’s dictatorial regime”. For all its sins, that regime has met its obligations to bondholders. Mr Borges vowed to advise future Venezuelan governments not to repay the bonds in question. Protesters gathered outside Goldman’s...

Eastern Bank: a 199-year-old lender becomes a tech pioneer

Thu, 06/01/2017 - 14:45

LIKE other local bankers, Bob Rivers is counting the cost of red tape. At the end of 2015 and 2016 Eastern Bank, a Boston lender of which he is the chief executive, held its balance-sheet below $10bn by briefly parking some deposits elsewhere. Now Eastern—America’s oldest and largest mutual bank, founded in 1818—has crossed the threshold. It will thus become subject to a limit on the debit-card fees retailers pay to bigger banks, and lose $9m of revenue, Mr Rivers says. Other rules will also kick in, costing $6m. The $15m total is one-sixth of Eastern’s pre-tax earnings.

At least, unlike America’s many much smaller lenders, Eastern has the wherewithal to tackle another costly burden: information technology. It is just small enough to be called a “community bank”, but also just big enough to invest in IT. Being a mutual is essential too, Mr Rivers says: he does not have to answer to shareholders about quarterly profits.

In 2014 Eastern set up an incubator,...

Will President Trump rescue failing pension funds?

Thu, 06/01/2017 - 14:45

TO THE exasperation of budget hawks, Donald Trump has long made clear that he will not reform Social Security (public pensions). But maintaining these entitlements does not fully protect workers’ retirement income. For many, pension promises from their employers are more important. These can shrink or vanish when firms fail. And, like Social Security, the programme that protects retirees against such losses—the Pension Benefit Guaranty Corporation—is going bust.

The PBGC levies premiums on defined-benefit pension plans in order to bail out those that fail (up to a maximum payout per worker). On current trends, one of its insurance schemes will probably run dry by 2025. The problem is so-called “multi-employer” funds (see chart). These involve multiple firms, usually under an agreement with an industry-wide union. They cover about 10m Americans, roughly 1m of whom are in a plan that admits it is probably broke. The biggest struggler is the Central States fund, which covers about 400,000...

America’s community banks hope for lighter regulation

Thu, 06/01/2017 - 14:45

A FEW weeks ago Standard Financial, a bank with assets of just $488m and a mere nine branches, merged with Allegheny Valley Bancorp, a slightly smaller neighbour in the suburbs of Pittsburgh. The main reason for the deal, says Tim Zimmerman, Standard’s chief executive, was the rising cost of regulation—though competition from PNC, a $371bn colossus based in the city, also played a part. “Without the regulatory overreach…since the crisis,” Mr Zimmerman says, “we’d probably both have gone along on our own, I think.”

Standard is one of America’s 5,400 community banks: local lenders, funded chiefly by deposits, who pride themselves on knowing their turf by the inch and their customers by name. Their size can range up to $10bn in assets, but most are much smaller: over 5,000 banks and savings institutions have less than $1bn and more than 1,500 under $100m. They account for 92% of federally insured banks. Though they make only 16% of all loans, they provide 43% of small-business loans....

The race to become Islamic banking’s fintech hub

Thu, 06/01/2017 - 14:45

FOR all the sophistication of some of its financial centres, and despite the ubiquity of smartphones, the Middle East has been a late adopter of financial technology, or fintech. Of more than $50bn in fintech investment globally since 2010, according to Accenture, a consultancy, only 1% has gone to the Middle East and north Africa.

Khalid Al Rumaihi, head of Bahrain’s Economic Development Board, blames institutional foot-dragging and a lack of infrastructure and venture capital. Yet he insists innovation is inherent to Islamic financial tradition. The modern cheque derives from an Arabic instrument, a written vow to pay for goods on delivery, to avoid carrying money on dangerous journeys. “In the 9th century”, he says, “a Muslim businessman could cash a cheque in China drawn on his bank in Baghdad.”

Several cities are now jockeying to establish themselves as fintech hubs. Last year Cairo launched two “accelerators”—schools to nurture startups. Abu Dhabi...

The super-rich are different: they pay less tax

Thu, 06/01/2017 - 14:45

OF LIFE’s two certainties, death cannot be dodged even by the well-to-do. Taxes are another matter. Quantifying quite how much they manage to keep from the taxman, however, has always been tricky. One common approach governments take is to conduct randomised audits of tax returns. This methodology can give regulators a rough sense of overall tax revenues lost. But it is far from ideal. For instance, studies based on randomised tax audits are usually both too small and too crude to reflect accurately the financial shenanigans of the most egregious tax-dodgers: the super-rich.

A new study by Annette Alstadsæter, Niels Johannesen and Gabriel Zucman, three economists, tackles this problem by investigating two recent financial-data hoards: the “Swiss leaks”, a record of bank accounts held at HSBC in Switzerland; and the “Panama papers”, files that document the use of offshore accounts and shell companies by clients of Mossack Fonseca, a law firm in Panama. By matching the leaked information with wealth data from Denmark, Norway and Sweden, the authors are able to construct the most detailed estimate to date of the extent of tax evasion.


In Donald Trump’s America, the left rethinks its economics

Thu, 06/01/2017 - 14:45

DEMOCRATS thought they knew the boundaries of acceptable economic discourse. Then came Donald Trump, who trashed them, yet won the presidency. He upended Republican positions on trade, and exposed the vulnerability of the Democratic Party on its home economic turf: the well-being of American workers. He also seems to have liberated the left to think big ideas—and confront hard questions.

Since 1992 Democratic economic policy has been rooted in technocratic centrism, meant to smooth the rough edges of the market. “We reject both the do-nothing government of the last 12 years and the big-government theory that says we can hamstring business and tax and spend our way to prosperity,” read the party platform in 1992. “Instead we offer a third way.” This was a desperate effort to escape the political wilderness. Yet it also reflected intellectual trends in economics. Inflation and falling productivity in the 1970s seemed to bear out the views of economists such as Milton Friedman, that...

Taiwan’s economy has defied the pessimists

Thu, 06/01/2017 - 14:45

Tsai takes the flak

TAIWAN’S president, Tsai Ing-wen, has had a tough first year in office. Her popularity has plummeted as she has struggled to find a path through thorny policy debates. Hope that she might have a staunch ally in Donald Trump has receded. China has ratcheted up pressure, leaving Taiwan more isolated internationally. Less noticed is that Ms Tsai has, for now, won over one important group: investors. Cash inflows from abroad have made Taiwan’s stockmarket and currency among Asia’s best performers. Foreign direct investment in the electronics industry has also surged.

The government, to be sure, cannot take too much credit. A revival in global trade is the main reason for Taiwan’s improved fortunes. Exports rose 15% in the first quarter, the fastest rate in six years. The big gains for Taiwan’s stockmarket—up 40% in dollar terms since Ms Tsai’s inauguration—are about the same as those in South Korea, another economy whose growth is fuelled...

One bitcoin is worth twice as much as an ounce of gold

Thu, 05/25/2017 - 14:49

Fans of bitcoin, a crypto-currency, have long called it digital gold. Now this sounds like an insult: continuing its stellar rise, and adding more than 30% to its value in just a week, one bitcoin is worth more than $2,600, over twice as much as an ounce of gold. As The Economist went to press all bitcoins in circulation were worth over $43bn. A sum of $1,000 invested in bitcoins in 2010 would now be worth nearly $36m. Other crypto-currencies are also marching upward: together this week they were worth $87bn. But if the history of gold is any guide, what goes up will come down—and then go up again.

How becoming a Hong Kong pensioner can save you tax

Thu, 05/25/2017 - 14:49

Not dodging but shuffling

THE global war on tax evasion rumbles on. What began as an American onslaught, with the Foreign Account Tax Compliance Act (FATCA) of 2010, has been joined by more than 100 countries through an initiative called the Common Reporting Standard (CRS). Under this, governments will exchange tax information on their financial firms’ clients on a regular, “automatic” basis, without having to be asked for it, starting this year. Holdouts such as Panama, the Bahamas and Lebanon have, one by one, been frogmarched into line.

But tax-dodgers and their advisers are enterprising sorts, eager to clamber through the smallest loophole—and gaps in the CRS there are. One involves becoming a pensioner in Hong Kong.

The territory, home to a big financial centre, has a type of pension known as an ORS (for Occupational Retirement Scheme). The beauty of ORS from a tax evader’s point of view is that anyone can get one and they are not...

A new code aims to clean up the foreign-exchange market

Thu, 05/25/2017 - 14:49

FINANCIAL-MARKET traders have earned a pretty shocking reputation in recent years. From manipulating LIBOR, a benchmark interest rate, to rigging the daily fix of foreign-exchange (FX) rates, traders have shown themselves ready not just to stretch the rules, but to collude in outright illegality.

A global code of conduct for the FX market, unveiled on May 25th, aims to put things on a sounder footing. Drawn up over the past two years by a coalition of central bankers, known as the FX Working Group (FXWG), and supported by a panel of industry participants, the code’s 55 principles lay down international standards on a range of practices, from the handling of confidential information to the pricing and settlement of deals.

Such standards seem long overdue in the massive FX market. Roughly $5trn is traded every day (see chart). Many companies, pension funds and money managers depend on banks to hedge their exposure to currency fluctuations. Yet in the past traders colluded with one...

A trade deal between the EU and east Africa is in trouble

Thu, 05/25/2017 - 14:49

Magufuli advises Museveni on how to tilt at colonialism

THE winds that waft along the Swahili coast change direction with the seasons, a boon to traders in times past. Shifts in the political winds are harder to predict. Last July a proposed trade deal between five countries of the East African Community (EAC) and the EU was thrown into disarray when Tanzania backed out at the last minute. An EAC summit, scheduled for months ago, was meant to find a way forward. Held at last on May 20th in Dar es Salaam, after many postponements, only two presidents showed up. The deal is in the doldrums.

The pact is one of seven “Economic Partnership Agreements” (EPAs) the EU wants to sign with regional groups in Africa, the Caribbean and the Pacific. The first was agreed with the Caribbean in 2008; southern Africa followed suit last year. But progress in west Africa has also stalled, with Nigeria raising objections. The EPAs were promoted as a new breed of trade deal,...

Machine-learning promises to shake up large swathes of finance

Thu, 05/25/2017 - 14:49

MACHINE-LEARNING is beginning to shake up finance. A subset of artificial intelligence (AI) that excels at finding patterns and making predictions, it used to be the preserve of technology firms. The financial industry has jumped on the bandwagon. To cite just a few examples, “heads of machine-learning” can be found at PwC, a consultancy and auditing firm, at JP Morgan Chase, a large bank, and at Man GLG, a hedge-fund manager. From 2019, anyone seeking to become a “chartered financial analyst”, a sought-after distinction in the industry, will need AI expertise to pass his exams.

Despite the scepticism of many, including, surprisingly, some “quant” hedge funds that specialise in algorithm-based trading, machine-learning is poised to have a big impact. Innovative fintech firms and a few nimble incumbents have started applying the technique to everything from fraud protection to finding new trading strategies—promising to up-end not just the humdrum drudgery of the back-office, but the...

To forecast share returns, count buy-backs as well as dividends

Thu, 05/25/2017 - 14:49

WHAT is the point of buying shares? Ultimately investors must hope that the cash they receive from the company will offer an attractive long-term return.

Over the long run, reinvested dividends rather than capital gains have comprised the vast bulk of returns. But since the 1980s American firms have increasingly used share buy-backs, which have tax advantages for some investors. Buy-backs have been higher than dividend payments in eight of the past ten years.

In a buy-back, investors receive cash for a proportion of their holdings. A new paper* in the Financial Analysts Journal argues that adding this to dividend receipts to calculate a total payout yield gives a better estimate of future returns than the dividend yield alone. It also reveals a much better match between stockmarket performance and overall economic growth.

Using data going back to 1871, the authors find that the average dividend yield has been 4.5% and the total payout yield 4.89%. Since 1970 the dividend yield has dropped to 3.03%, but the total payout yield has averaged 4.26%. Looked at on that basis, the overall income return from shares has been not that far below historical levels.

The return from shares can be broken down into three components: the initial income yield; growth in the income stream; and any change in valuation. (If shares...

What the German economic model can teach Emmanuel Macron

Thu, 05/25/2017 - 14:49

IT IS heartening that the euro area has a knack for surviving near-fatal crises. Yet confidence in the durability of the single currency might be stronger if it suffered fewer of them. Europe dodged its latest bullet on May 7th in France, when Emmanuel Macron, a liberal-minded (by local standards) upstart centrist, defeated Marine Le Pen for the presidency. Even so, an avowed nationalist and Eurosceptic captured 34% of the vote, leaving Mr Macron with five years to assuage widespread frustration with the economic status quo. An obvious model lies just across the Rhine, where the unemployment rate—below 4%, down from over 11% in 2005—is testimony to the potential for swift, dramatic change. Yet Germany’s performance will not be easy to duplicate.

It would be unfair to call France the sick man of Europe; half the continent is wheezing or limping. Yet there is certainly room for French improvement. Real output per person has barely risen in the past decade. Government spending stands at 57% of GDP, outstripping the tax take; France’s budget deficit, at 3.4% of GDP, is among the largest in the euro area’s core. The biggest worry, however, is the labour market. The unemployment rate, now 10.1%, is stubbornly high. Nearly a quarter of French young adults are unemployed. Worklessness...


Thu, 05/25/2017 - 14:49

The Economist invites applications for the 2017 Marjorie Deane internship. Paid for by the Marjorie Deane Financial Journalism Foundation, the award is designed to provide work experience for a promising journalist or would-be journalist, who will spend three months at The Economist writing about economics and finance. To apply, write a covering letter and an original article of no more than 500 words suitable for publication in the Finance and economics section. Applications should be sent by June 2nd to For more information, please visit

Is efficient-market theory becoming more efficient?

Thu, 05/25/2017 - 14:49

BUILD a better mousetrap, the saying goes, and the world will beat a path to your door. Find a way to beat the stockmarket and they will construct a high-speed railway. As investors try to achieve this goal, they draw on the work of academics. But in doing so, they are both changing the markets and the way academics understand them.

The idea that financial markets are “efficient” became widespread among academics in the 1960s and 1970s. The hypothesis stated that all information relevant to an asset’s value would instantly be reflected in the price; little point, therefore, in trading on the basis of such data. What would move the price would be future information (news) which, by definition, could not be known in advance. Share prices would follow a “random walk”. Indeed, a book called “A Random Walk Down Wall Street” became a bestseller.

The idea helped inspire the creation of index-trackers—funds that simply buy all the shares in a benchmark like the S&P 500....