Author: Helen

US court rules in Argentina’s favour

Posted on by Helen

A New York court has ruled in Argentina’s favour following a decade-long dispute with so-called ‘holdout’ bondholders. Led by US billionaire Paul Singer’s Elliott Management firm, the holdout bondholders refused to accept a haircut on debt obligations after one of Argentina’s numerous defaults in 2001.

The new ruling should see Argentina once again able to raise capital on international credit markets.

These holdout bondholders had previously attempted to pursue their claims in US courts, which initially ruled in their favour, saying that the holdouts were entitled to be repaid the full face value of the held bonds. However, while sovereign immunity laws had prevented attempts to seize Argentinian assets in order to recover loses, the dispute had essentially locked Argentina out of international capital markets.

A 2014 US court ruling decreed that Argentina could not service any international debt or raise new credit without first servicing those of the holdout bondholders. It refused to do so, and so the country faced another default on its debt in 2014.

However, US District Judge Thomas Griesa has now ruled that the order barring Argentina from international capital markets should be dropped, so long as Argentina repeals its own law that had barred it from making any repayment to holdout bondholders.

Under the previous Argentinian government of Cristina Kirchner, laws barred the nation from repaying back of any debt to holdout bondholders, whom she termed as “vultures” and “financial terrorists”. Argentina’s new president, Mauricio Macri, has shown a more conciliatory approach to the dispute, previously announcing that he intends to reach a compromise with the holdout creditors.

Italy makes ‘bad bank’ deal with EU

Posted on by Helen

After months of agonising back-and-forth negotiations, Italy and the European Commission have finally come to an agreement on the country’s non-performing loans (NPLs). The deal will help to ease market pressure on the financial sector by unloading €350bn of ‘bad’ loans, with a government guarantee to reduce the risk of doing so. Amounting to around 17 percent of Italy’s total loans, NPLs have hindered the ability of banks to generate capital and new credit, threatening the strength of Italy’s economy.

On 26 January, Italian Finance Minister, Pier Carlo Padoan, and Margrethe Vestager, the European Commissioner for Competition, held a meeting in Brussels to finalise the decision. Abiding by state aid laws, which prohibit favouritism or assistance that undermines competition, the deal introduced government guarantees that will facilitate the sale. The terms of the guarantees, which the banks can obtain by paying a fee to the government, are that they will only be provided for the safest loans. The guarantees also aim to incentivise investors to purchase the loan, with the government liable for the debt.

Bringing back profits

To prevent the guarantees from violating EU rules on state aid, Vestager insisted that the loans would be set no higher than market price. Furthermore, the Italian Ministry of Economy and Finance claimed that “this intervention will not create any burdens for our public finances”. The statement added, “The budget is neutral: in fact, the fees to be received are expected to be higher than costs and will therefore generate net revenues.”

After finally making the bad bank deal, there is renewed optimism between Italy and the European Commission. In an interview with Global Business, Padoan said, “This will bring back profits to banks. And as the economy grows more rapidly, this will reflect positively on banks, balance sheets and all of the economy.”

According to the Financial Times, Vestager commented, “Together with other reforms undertaken and planned by Italian authorities, it should further improve banks’ ability to lend to the real economy and drive economic growth.”

Their confidence in the deal isn’t unfounded: unloading these loans is essential in improving capital and economic growth. Before the deal was made, concerns over the bad loans hit capital markets, and the index of Italian banks was down nearly 25 percent since the start of the year. With the assistance of government guarantees, investors can rest assured that the debt will be sold at a higher price. The deal reduces the gap between what investors are willing to pay and what banks need to accumulate in order to avoid losses.

Too little, too late

However confident the Italian Finance Ministry and the European Commission are feeling, the deal isn’t without hurdles to be overcome. Filippo Alloatti, Senior Credit Analyst at Hermes, said, “The optimism part of my brain hopes this is the answer to some of the problems of Italian banks, but we have had false dawns in the past.”

The deal reduces the gap between what investors are willing to pay and what banks need to accumulate in order to avoid losses

Fabrizio Spagna, Managing Director at Axia Financial Research, said, “There are definitely advantages for the banks… but it is far from being the panacea for bad loans.”

One concern is that the deal doesn’t go far enough to allow the banks to recover. Previous efforts from those in Spain and Ireland forced banks to sell part or all of their bad loans at a set price to a government-backed bad bank, but Italy’s approach is more easy-going: the Wall Street Journal reported that a note from Citi analysts said, “The Italian scheme is a much lighter version, and as such it is likely to have a more muted impact on banks’ balance sheets.”

For instance, the government guarantee only covers the safest NPLs, and so analysts expect that the poorest-quality loans will remain largely unsold. If this is the case, this mechanism could later force banks to record sizable write-downs on their bad loan portfolios. Barclays’ analysts estimate that even with the guarantees, the six largest Italian banks could experience combined losses of between €6bn and €28bn.

Regardless of the speculation, Italy could not hold off on a decision any longer. In the aftermath of the financial crisis, other European countries, such as Spain, acted promptly, setting up bad banks to quickly remove soured loans from their balance sheets. Italy, however, felt that its banks were more robust and such measures were not necessary. Since then, NPLs have continued to pile up: according to research firm Imprese Lavoro, 75,000 firms went bust between 2009 and 2014, adding copious amounts of debt.

Changing landscape

The most common concern among analysts is not whether it’s the right approach, but whether it has been implemented too late. European countries that took action soon after the financial crisis were allowed more lenient economic policies in order to salvage their loans. In 2009, Ireland scooped bad credit off its banks’ balance sheets and into an asset management vehicle, and Spain followed suit in 2011, laying the foundations for stronger economic growth. Now the system in Europe has changed.

To prevent state aid that could effectively distort the market and competition, the European Commission is now taking a more severe approach: under new rules approved by the EU in 2013, shareholders and bondholders must bear the cost of bank failures before taxpayer money can be used in any rescue – including the creation of state-backed bad banks. Italy finds itself in a position that prohibits it from implementing the policies needed to recover the financial sector.

Last September, Padoan said, “Maybe this country realised a little late that something should have been done when European legislation still permitted it. The legislation on these things is much more restrictive since 2013, because of state aid rules.”

 

Few retail investors are studying fund information

Posted on by Helen

Recent research carried out by Instinct Studios, a design-led FinTech company, found that among the 500 retail investors they surveyed, 27 percent of women said they studied the fund information they received in detail. Conversely, only 21 percent of men said they did the same.

But when the same sample group was asked if they fully understood the information, 19 percent of women were confident that they did, compared to 25 percent of men.

“Our research adds to previous studies in the sector that show that there is a material difference between how men and woman absorb and act on financial information presented to them”, said Founder and CEO of Instinct Studios, Majid Shabir. “It is difficult to say whether this is due to differences in their respective appetites towards risk or familiarity with the financial terminology.

“Regardless of reasons, the fact that so few investors – both men and women, with large and small investment pots – are reading and understanding the fund information they receive, should ring alarm bells for advisers and fund managers.”

The research suggests that men are far more confident in their ability to understand fund information than women, but it is important to realise that the confidence found in men may not necessarily be warranted.

“With the FCA [Financial Conduct Authority] indicating that it is prepared to take action against firms that use jargon and asking the industry to look at communicating with their customer more simply, it’s surely time to review the way fund information is presented and overhaul it, radically”, added Shabir. “Using technology to filter information and provide contextual insight in a much more visual and intuitive way will allow fund managers to help both men and women make better investment decisions.”

Money must be removed from politics, says OECD

Posted on by Helen

In a recent report, the OECD revealed how private interest groups are able to abuse regulatory loopholes, using methods such as loans, membership fees and third party funding, in order get around spending limits. Such an arrangement is having a negative impact on the fairness of the entire political process.

The international organisation has urged governments to apply tighter regulations and to enforce them more thoroughly in order to restore public faith in the political process.

“Policy-making should not be for sale to the highest bidder”, said OECD Secretary General, Angel Gurría. “When policy is influenced by wealthy donors, the rules get bent in favour of the few and against the interests of the many.

“Upholding rigorous standards in political finance is a key part of our battle to reduce inequality and restore trust in democracy,” he added.

In its report, the OECD outlined a number of areas where advanced economies can act in order to make the political party funding and campaign donations process fairer, as well as more transparent.

It argues that countries need to “strike a balance” between public and private political financing, realising that relying solely on public or private funding is not possible, but rather a blend of the two.

The OECD also recommends that rather than developing and implementing a brand new set of rules, advanced economies should simply work harder to enforce existing regulations in order to ensure compliance.

Campaign finance has once again been a hot topic throughout the US presidential nomination process, with Democratic hopeful Hillary Clinton coming under fire recently for the donations that she received from the investment bank Goldman Sachs after she delivered a speech to its employees.

Former US president Jimmy Carter has made his feelings known about the damage that campaign finance has done to the American political process, labelling it “legalised bribery”. He even called the landmark 2010 Citizens United court decision, which declared that campaign spending is a form of free speech, an “erroneous ruling”.

“I didn’t have any money,” Carter said during an interview on BBC Radio 4’s Today Programme. “Now there is a massive infusion of hundreds of millions of dollars into campaigns for all the candidates. Some candidates like Trump can put in his own money, but others have to be able to raise a $100m to $200m just to get the Republican or Democratic nomination. That’s the biggest change in America.”

 

 

Why African leaders like Chinese aid

Posted on by Helen

Western media and Western donors are often critical to the role that China plays in Africa. China is said to use its foreign aid to curry favour with political leaders in order to get access to natural resources, and to undercut political, social and environmental conditions of Western donors.

Many African political leaders, however, like Chinese aid. A prominent example is Uganda’s long-running president Museveni: he is of the opinion that “[t]he Western ruling groups are conceited, full of themselves, ignorant of our conditions, and they make other people’s business their business, while the Chinese just deal with you as one who represents your country”.

The negative views of Western media and Western donors, and the positive views of Museveni and his colleagues, may both go back to Beijing’s principle of non-interference into internal affairs and its respect for the autonomy of recipient governments to manage their own development policies. This approach gives political leaders in aid-receiving countries more discretion to choose where to implement development projects compared to the approach of Western donors (despite the Western donors’ lip service to ‘country ownership’ in development cooperation).

Museveni and many of his colleagues like the flexibility of this ‘aid on demand’ approach, while many Western donors are at unease with it – they worry that it may enable the aid-receiving countries’ political leaders to site projects according to their personal or political needs, rather than according to the needs of the recipient population.

The truth behind China’s motives

In a recent working paper with Axel Dreher, Andreas Fuchs, Brad Parks, Paul Raschky and Michael Tierney, we test this claim by comparing the subnational allocation of Chinese and World Bank development finance in Africa.

A major challenge is to get data on Chinese development finance: official data on the amount of Chinese aid does not exist, and collecting the data is difficult due to the often-blurred boundary between investment and aid, resulting from China’s involvement in large-scale investment projects.

Fig. 1: This map shows the amount of Chinese development finance given to all subnational administrative regions within Africa. Source: AidData
Fig. 1: This map shows the amount of Chinese development finance given to all subnational administrative regions within Africa. Source: AidData

AidData has nevertheless assembled a project-level dataset of Chinese development finance to Africa. For our working paper we have geocoded 1,955 Chinese development finance projects from this dataset for the years 2000-2012. These geo-coded figures, which are also freely available on AidData’s webpage, allow us to track the amount of Chinese development finance given to all subnational administrative regions within African countries. The attached map (See Fig. 1) shows the amount of aid that comes with these projects.

As can be seen, China is active across the African continent. The only African countries not receiving Chinese aid are those that officially recognise the Republic of China (Taiwan). More importantly, this figure also documents significant variation, not only across but also within countries — a difference that previous research could not track.

We have then used our geocoded data to investigate where Chinese aid goes within African countries. Our empirical results demonstrate that a disproportionate share of Chinese official financing goes to the birth regions of African political leaders. This is true even after controlling for a large number of other factors that might affect the location of a project. Specifically, our results indicate that the average African leader’s birth region receives nearly four times as much (270 percent more) financial support from China during the period of time when he or she is in power.

Interestingly, financial support to a politician’s birth region drops quickly when the politician gets out of power. These results suggest that the subnational allocation of Chinese aid is driven to a considerable degree by politics, rather than by poverty or economic potential. They confirm that African political leaders misuse Chinese “aid on demand” approach.

East versus West

To see whether aid from Western donors suffer from the same type of politically driven subnational aid allocation, we have replicated our analysis with data from the World Bank. The World Bank is one of the largest sources of development finance in Africa, and the only Western donor for which subnational data is available for the entire African continent during our sample period.

The results suggest that the subnational allocation of Chinese aid is driven to a considerable degree by politics, rather than by poverty or economic potential

We do not find a similar pattern of politically driven subnational aid allocation for World Bank development projects. World Bank projects are no more or less likely to end up in the home region of the political leader than any other region in the country. A possible reason is that the World Bank grants less discretion to recipient governments and evaluates proposed projects more rigorously.

Hence, while Beijing’s principle of non-interference and its ‘aid on demand’ approach may be motivated by good intentions, they seem to make Chinese aid particularly vulnerable to misuse by African political leaders. This misuse may obviously come at the disadvantage of people living in communities with greater need, and might have detrimental developmental effects.

In a follow-up project, my co-authors and I will therefore compare the regional growth impacts of Chinese and World Bank development projects. The results will be interesting and are hard to foresee. Sure, the fact that politics drives the subnational allocation of Chinese aid is likely to hamper its growth impact. But Chinese aid may also turn out to have a more positive growth impact, given that China often focuses on infrastructure projects and is well known for actually getting projects done.

One practical way to encourage need-based targeting of Chinese (and other) aid is through greater transparency. Development finance institutions can do much more to publicly disclose where they are situating their aid projects and investments. Indeed, careful scrutiny of China’s ‘aid on demand’ approach to foreign aid will become even more important in future years, as China scales up its own bilateral aid program and assumes a leadership position in new development finance institutions, including the Asian Infrastructure Investment Bank and the New Development Bank.

Did the Hound of Hounslow cause the 2010 flash crash?

Posted on by Helen

Navinder Singh Sarao may not have been behind the 2010 flash crash. According to a new study by academics at various US universities, the so-called Hound of Hounslow, as the press dubbed him, may not have been so instrumental in causing the 2010 trillion-dollar equity crash after all.

Sarao is currently facing multiple charges by US prosecutors, primarily for spoofing markets. According to the US Government, his market spoofing, achieved through the use of automated trading, significantly contributed to the flash crash. And while the academic study does not dispute or establish whether or not Sarao is guilty of manipulating markets, it casts doubt on how important he was as a contributor to the event.

Through the use of information flows from “a variety of data feeds provided to market participants during the flash crash”, the report sets to explore the actual cause of the crash. According to the study, “It is highly unlikely that… Sarao’s spoofing orders, even if illegal, could have caused the flash crash, or that the crash was a foreseeable consequence of his spoofing activity.”

The crash, the study suggests, “could have occurred even without Sarao’s presence in the market”. The academics made use of a simulation model that demonstrated “the existence of a market instability when liquidity thins”.

Within such instability, the report notes, “algorithmic traders act in concert to drive a rapid, linear decline in price that is very similar to what was observed on May 6, 2010. Such declines are exacerbated by large sell orders, such as the one placed by Waddell & Reed, and are arrested by the entrance of fundamental buyers to the market.”

Disputing this link – even if not exonerating Sarao of wrongdoing – is “significant from a public policy perspective”. If Sarao’s spoofing is concluded to have caused the havoc on stock markets in 2010, it may result in lawmakers believing that “increased prosecution of certain forms of trading activity is socially beneficial, precisely because it decreases the probability of a future flash crash.”

Seperating Sarao’s alleged market manipulation from the flash crash could also mean that, if convicted, he will get a lighter sentence. US sentencing guidelines take into account “the reasonably foreseeable pecuniary harm that resulted from the offense” in cases such as Sarao’s. Therefore, if the Hound of Hounslow’s alleged illegal trading practices are not seen as having contributed or caused the crash, his potential sentence will not be enhanced.

The study, a collaborative effort by Eric M Aldrich and Gregory Laughlin, both from the University of California, Santa Cruz and Joseph Grundfest of Stanford University’s Law School, was published on January 25 2016.

Japan shocks markets with negative interest rates

Posted on by Helen

Financial markets were stunned on 29 January when the Bank of Japan (BOJ) announced that it has moved its benchmark rate for the first time since 2010 to -0.1 percent.

With a 5-4 vote in favour of the bold move, the BOJ hopes to discourage saving and prompt institutions to lend more. As such, by charging commercial banks to hold their money, rather than paying them interest, the BOJ indicates a new, more drastic strategy to boost Japan’s lagging economy and reach its two percent inflation target.

Similar to the policy adopted by central banks in Switzerland, Sweden and Denmark, a tiered system has been introduced, whereby the current account of financial institutions will be split into three categories – negative, zero and positive; one for each type of interest rate.

The change, which will take place on February 16, will be applied initially to reserves worth between JPY10trn and JPY30trn. According to Bloomberg’s sources, the tiered system will only be introduced to newly deposited reserves.

The BOJ’s board of governors made it clear that the decision was made as a result of the current state of the global economy, as opposed to domestic conditions. In a statement published by the central bank, it stated that China’s slowdown was of particular concern: “Global financial markets have been volatile against the backdrop of the further decline in crude oil prices and uncertainty such as over future developments in emerging and commodity-exporting economies, particularly the Chinese economy. For these reasons, there is an increasing risk that an improvement in the business confidence of Japanese firms and conversion of the deflationary mind-set might be delayed and that the underlying trend in inflation might be negatively affected”.

Deutsche Bank reports biggest loss since financial crisis

Posted on by Helen

In a press release published on January 28, Germany’s biggest bank announced a €2.1bn loss for the fourth quarter of 2015 and a total net loss of €6.8bn. Deutsche Bank’s first full-year loss since the 2008 financial crisis can be attributed to restructuring and severance costs, in addition to the mounting legal fees it faced in 2015 amid a tumultuous financial climate.

“In 2015 we made considerable progress on the implementation of our strategy. The much-needed decisions we took in the second half of the year contributed to a net loss for the fourth quarter and full year”, said Co-Chief Executive Officer John Cryan in the press release.

Cryan added, “We know that periods of restructuring can be challenging. However, I’m confident that by continuing to implement our strategy in a disciplined manner, we can and will transform Deutsche Bank into a stronger, more efficient and better-run institution.”

Since joining Deutsche Bank last July, Cryan has implemented a strategy to boost capital levels and profitability by reducing the company’s debt-trading arm, as well as selling its retail business, Deutsche Postbank. The cost of doing so has weighed heavy on the bank, as severance packages amounted to €800m in Q4 2015. What’s more, Deutsche Bank lost a further €100m when Postbank was sold for 60 percent less than the value stated on its books as a result of market pressures.

In addition to splitting the firm’s investment branch into two, Cryan also abolished the bank’s Group Executive Committee, together with 10 other management committees, as part of the organisational restructuring.

In 2015, Deutsche Bank was accused of rigging benchmark interest rates as part of a global shakedown on Libor rate rigging. So even as the bank’s drastic overhaul took place, its litigation costs reached €1.2bn for the last quarter, bringing the total up to €5.2bn for the year.

While there have been heavy losses for Deutsche Bank over the past year, Cryan’s aim to streamline the organisation and cut unnecessary expenses could prove successful in a global financial market that is still reeling from the calamity of 2008. As such, it would seem that Cryan is making the bank and its organisation more robust than ever before in order to withstand the pressures ahead – something that evidently involves some sacrifices in the process.

Venezuela nears default

Posted on by Helen

Nearly two years after world oil prices began their steady and prolonged decline, Venezuela may become the first major oil-producing country to fall victim to the price collapse. Venezuelan bonds have been progressively falling in price, while yields on long-term bonds have soared, raising fears of a default.

While fears over Venezuela’s ability to service its debts having been growing for some time, a recent sell-off has raised the yield of benchmark 2026 dollar bonds to over 29 cents. The Financial Times reported that, according to Barclays, a “credit event” is likely, unless oil prices rises – an improbable prospect.

Venezuela currently holds a CCC credit rating from Standard & Poor, and around $120bn of external debt. With 96 percent of the country’s export earnings coming from the sale of oil, it has been hit hard by the decline in price, which now stands at less than $30 a barrel. As a result, Venezuela has been relying on foreign exchange reserves to service its debt, but these are rapidly running out.

According to Forbes, “Figures released Wednesday by the Central Bank of Venezuela show that foreign currency reserves were just around $20 billion in the third quarter, but by the end of November they hit just $14 billion, the lowest ever”. Venezuela will have to pay $10.5bn in external debt over the next year.

The problems surrounding Venezuela’s economy, however, go further than plunging oil prices – although they are no doubt exacerbating the issues. In 2015, Venezuela also saw its economy contract by 10 percent, and the IMF predicts a further negative growth rate of eight percent in 2016. Furthermore, inflation has reached triple digits: between September 2015 and the year-end, the country saw an inflation rate of 141 percent, according to figures from the government. However, the IMF predicts that in 2016 consumer inflation will skyrocket to 720 percent.

Venezuela’s embattled President Maduro has attempted to calm investors, claiming that despite low oil prices, the country will be able to service its debt obligations. “How many countries of the world can sustain oil production at $22 a barrel? Few, or almost none”, the President said at a recent national address, according to the Wall Street Journal. “Venezuela has ethics, morals and commitments, first with the people and the fatherland, but also has the commitments that the republic has honoured and will continue honouring.”

There is also the fear that, in the event of a default, the Venezuelan Government will reverse course and refuse to service certain debt obligations. This could result in the country becoming locked in a messy legal battle with creditors, as has been the case with Argentina and its holdout bondholders.

Top 5 ways to shrink income inequality

Posted on by Helen

A recent Oxfam report showed that the 62 richest billionaires own as much as half of the world’s poorest people. On top of that, the wealth of the richest 62 has increased more than half a trillion dollars, while the gap between the wealthiest one percent and the rest of the planet has increased by approximately $1.5trn in the last five years.

As the inequality crisis escalates, so do the concerns shared by world leaders. And yet, regardless of the policies already implemented to combat inequality, the gap continues to widen. Mark Goldring, Chief Executive of Oxfam GB said in the report, “Ending extreme poverty requires world leaders to tackle the growing gap between the richest and the rest which has trapped hundreds of millions of people in a life of poverty, hunger and sickness.”

World Finance has complied five ways in which global inequality can be significantly reduced.

Eliminate tax avoidance
Tax havens have had a significant role in starving government coffers. The amount of individuals and multinational companies illicitly transferring their money into offshore accounts has nearly quadrupled between 2000 and 2014. Oxfam estimates that a total of $7.6trn has been placed in offshore accounts during this time. If this amount had been taxed accordingly, an extra $190bn would have been available to governments every year. Additionally, Global Financial Integrity recorded a total loss of $6.6trn in illicit financial flows from developing countries from 2003 to 2012.

International collective action has recently been taken to reduce illicit outflows of capital. In 2013, finance ministers from the G20 group backed plans to tackle international tax avoidance – but since then, the amount of aggressive tax avoidance has continued to rise. A far greater transnational effort, focusing on the harmonisation of tax policies between states, would create more transparency by introducing country-by-country reporting.

Increase investment in public services
The argument put forward by select European governments is that austerity will foster economic growth and therefore benefit all parts of society. Governments often wield the fear of debt and deficits to justify cuts. However, history has proven that in reality austerity has failed – fiscally, economically and politically.

A large part of Europe’s coping mechanism for the financial crisis was to implement rigorous austerity measures. In contrast, the US resorted to financial stimulus, and is now reaping the benefits. Many of the European economies that adopted austerity are stagnant and struggling to repay their debts. Not only does austerity hinder economic growth, but it has also resulted in increased income inequality by putting the poorer parts of society at an even greater disadvantage.

Many economists have argued that investment in public services is a favourable alternative, and boosts private output, investment and employment.

Raising wages
The core issue of income inequality is that while the income of the select few continues to increase rapidly, the lion’s share of the global population is in work and still below the poverty line. In many countries, inequality starts in the labour market. The IMF claims that “the erosion of minimum wages is correlated with considerable increases in overall inequality”.

According to the International Labour Organisation (ILO), developed countries are most vulnerable to income inequality, while emerging economies have witnessed the largest declines in inequality, applying more equitable distribution of wages and paid employment. Even in the most advanced economies, minimum wages remain stagnant.

Businesses are often reluctant to raise wages, as a simple calculation would suggest that higher wages equals less profits. However, raising wages has proven benefits: better paid workers result in greater productivity, a fall in absenteeism and a decrease in turnover. Additionally, higher wages boost demand for goods and services.

International recognition of the living wage (a calculation according to the basic cost of living) would reap both societal and economic benefits, and employers could be incentivised to voluntarily raise wages to a basic living standard. Simultaneously, world leaders can be making collective efforts to implement a compulsory living wage for the near future.

Better access to capital
Despite the select few success stories of prosperous start-ups, the truth is that since the financial crisis, investors have largely avoided small companies. The risk of investing in small companies only benefits large enterprises and seriously hinders the ability of SMEs to source capital. Developed and developing economies alike are short on capital for entrepreneurs, thus preserving a cycle of dependency, lost productivity and increased inequality.

SMEs have a positive knock-on effect, from owners down to employees, customers and communities. Better access to capital would provide the required support to entrepreneurs on little or no income, and give them the capacity to become self-sufficient. Governments need to encourage investors to provide capital for small businesses, which can be done through public and private lending programmes.

Transparency of economic policy
A fundamental issue, especially in developing countries, is a lack of transparency when it comes to economic policy. A system lacking in transparency tends to breed high levels of corruption.

According to Transparency International, there is a strong negative correlation between corruption and the level of GDP per capita. Corruption prevents necessary government spending, which impacts social welfare and creates mass inequality.

In an IMF working paper, the organisation established the considerable impact of corruption on income inequality, where one standard deviation point increase in corruption resulted in an income reduction for the poor of 7.8 percentage points a year. The paper argues that lower economic growth, a biased tax system favouring the wealthy and well-connected, lower levels of social spending and unequal access to education and public services are all devices that increase inequality. Greater transparency could enhance government accountability, public understanding, reduce corruption, and thus significantly reducing income inequality.

Argentina seeks compromise with holdout creditors

Posted on by Helen

Argentina’s recently elected new government hopes to end its long-running legal dispute with US hedge fund creditors. Speaking at Davos, Argentina’s finance minister, Alfonso Prat-Gay, said that his country would honour the debts that it owes to bondholders while pursuing a compromise on costs of accumulated interest.

Known as holdout creditors, these government bondholders, led by Paul Singer’s Elliott Management Corporation, have rejected the reduced repayments of bonds.

The dispute has been ongoing since Argentina’s debt restructuring, following its financial crisis in the early 2000s, and has included a number of debt swap options to bondholders. While most creditors accepted the debt swap, a minority – seven percent – refused, demanding to be repaid by the beleaguered economy in full. Since then, other hedge funds have purchased the disputed bonds, allowing them to continue pressing forward with recovering Argentinian debts.

Holdout bondholders have attempted to pursue their claims in US courts. While courts have ruled that the holdouts were entitled to be repaid the full face value of the bonds they held, sovereign immunity laws have prevented attempts to seize Argentinian assets in order to recover loses.

The dispute, however, has resulted in Argentina being effectively barred from international credit markets. While the previous Argentinian administration under leftist president Cristina Kirchner had vowed to not to pay what she termed ‘vulture funds’ any more than the amount that the majority of creditors accepted in the restructuring debt swap options, the nation’s new centre-right administration hopes to reach a compromise.

Prat-Gay has said that he wants “to put an offer on the table” with the creditors, offering to “discuss the interest bill” that has accumulated. At present, creditors are asking for 350 cents on the dollar in accrued interest: Argentina is offering 120 cents. A meeting is due to take place between creditors and Argentinians officials in New York on February 1, according to the Financial Times.

 

 

CEOs acknowledge climate change risks

Posted on by Helen

PricewaterhouseCoopers’ (PwC) 19th Annual Global CEO Survey has shown that business leaders are finally beginning to acknowledge the importance of key issues that go beyond profit, and are willing to adjust their strategies accordingly. The world’s largest professional services firm surveyed 1,409 CEOs from 83 countries and found that exactly half of respondents believe that climate change is a threat to their growth prospects.

The findings represent something of a departure from last year, when the issue of climate change failed to make it into the 19 leading risks identified by chief executives. This year the issue made it to number 11, triggered mostly by COP21 and a string of extreme weather events. A recent World Economic Forum (WEF) survey of 750 experts, however, placed the issue at number one. Writing in the WEF report, Cecilia Reyes, Chief Risk Officer at Zurich Insurance Group, said, “Climate change is exacerbating more risks than ever before in terms of water crises, food shortages, constrained economic growth, weaker societal cohesion and increased security risks”.

More than a quarter of respondents said that their customers were looking for a relationship with companies that address wider societal issues, while 59 percent believed that their employees were more inclined to work for companies that shared their social values. “In the future it seems clear that CEOs believe customers will put a premium on the way companies conduct themselves in global society”, according to the PwC report. “It’s long been assumed that only a small percentage of consumers seek out ethical and sustainable products and services. There’s growing evidence, however, that this is changing.”

The PwC report also found that 66 percent of CEOs see more threats today than in the previous year, and 76 percent believe that business success is about more than financial profit. Irrespective of the focus on climate change, particularly at COP21 and at Davos, over-regulation and geopolitical instability are seen as the biggest threats, which goes to show that short-term concerns still take priority over the longer term.

To read more about corporations’ relationship with climate change, stay tuned for a special report in the next issue of World Finance.

Barclays to close branches and cut jobs worldwide

Posted on by Helen

In a bid to boost sales and streamline costs, Barclays’ new Chief Executive, Jes Staley, orders 1,200 job cuts worldwide, the Guardian has reported. The British bank is also pulling out of several Asian countries, including South Korea, Taiwan, Malaysia, Indonesia, Thailand and the Philippines.

Under Staley, who took to the helm at the end of last year, Barclays will also withdraw from Australia and Russia, although banking services will still be offered for these countries from other locations.

The lender’s latest announcement comes after it axed a further 7,000 jobs in 2015.

Furthermore, Barclays will wind down on its equity sales worldwide by withdrawing from several countries in Europe, the Middle East and Asia Pacific, while in Brazil it plans to cease onshore markets coverage.

That said, offices in Asian hubs Singapore, Japan, Hong Kong, India and China will be kept open in order to maintain the bank’s prime brokerage and derivatives business in the region. Moreover, according to Reuters, the bank also aims to explore precious metal markets in the coming year.

Given the ongoing challenging global environment facing financial institutions in 2016, lenders continue to slash jobs across the board, with the number now exceeding 130,000 since last June in Europe alone. Unstable equity and commodity markets have also prompted this drastic response as profits continue to disappoint in these business lines.

Barclays has not yet confirmed the total number of jobs it plans to axe, however more information will be given regarding the bank’s new strategy when end of year results are published on March 1.

New Basel rules may be a burden on banks

Posted on by Helen

A series of recently finalised banking regulations may end up costing banks tens of millions of euros each to implement.

The new standards, set by the Basel Committee on Banking Supervision and designed to reduce the risk among banks buying and selling client securities, could, according to a report by the consultancy group Oliver Wyman, cost each financial institution between €40m and €120m each to implement.

The rules are intended to dampen the chances of banks taking on too much risk to their own books when buying or selling securities from clients. This will require banks to increase their market risk capital in the hope of staving off the potential for financial collapse.

The requirements, in following much more stringent previous drafts of the regulation, have been seen as less draconian than previously feared. Whereas in late 2015, some were predicting that banks would be required to increase their market risk capital by an average of 74 percent, that number, in the finalised draft of the new regime, would only require banks to boost capital requirements by a median rise of 22 percent, according to the Basel Committee.

However, according to the Oliver Wyman report, the impact of the new regulations has been severely underestimated. According to Oliver Wyman Partner Rebecca Emerson, “It’s one of the most expensive regulatory programmes that banks are currently dealing with,” reported the Financial Times. Emerson also noted that, based on conversations with clients, banks have largely diverging estimates for how much it will cost to implement the newly minted rules.

Part of the reason why the regulation will be so costly is due to it requiring banks using internal risk models to have them approved by regulators desk-by-desk, rather than being able to have them agreed on a business-wide basis.

 

 

Iran to buy 114 Airbus aircraft

Posted on by Helen

With Western economic sanctions against Iran now lifted, the country has embarked on a new strategy to boost its flagging economy. In what is expected to be one of its first major deals, Tehran is seeking to purchase 114 civilian planes from the Airbus Group, the Minister of Transportation, Abbas Akhoundi, revealed on January 16. According to Bloomberg, the purchase will include both new and old A320 aircraft, as well as several A340 planes, which are no longer in production.

Commercial talks with Airbus have not yet begun, but the purchase is estimated to be worth around $10bn. The potential is therefore huge, and underscores several other opportunities now present for the market.

As part of the nuclear deal made with six world powers last July, Iran agreed to scale back its development activities in exchange for easing sanctions on several of its industries, including banking, transportation, insurance, medicine and consumer goods.

Since the agreement was first made, world powers have allowed the sale of aircraft parts and training manuals to Iran, thereby providing much relief to its ageing fleet and the associated safety concerns. Akhoundi’s announcement thus marks Tehran’s first big step to renovate its national airline carrier, Iran Air, and boost its fleet in order to meet domestic demand and expand its international travel potential.

Naturally, there are various challenges that lie ahead as Iran enters into a new stage in its economic development: Tehran must swiftly address its undeveloped legal system and high levels of corruption, as well as push for greater flexibility in its labour market. Other concerns include the state’s indebted financial sector, as well as the possible reintroduction of sanctions, should Iran’s compliance slip.

With a population of 78.5 million and a GDP of more than $400bn, as estimated by the World Bank, Iran is the largest economy to re-enter the global system since the collapse of the Soviet Union. As such, the impact to the global economy will be considerable – and aviation is just the start.