The cost of confusing shareholder value and short-term profit

The world economy needs bold investments: $57tn in the next 15 years on infrastructure alone, according to the McKinsey Global Institute. Yet, for a typical large road project in the US, it takes more than six years to get through permitting and construction — roughly the time it takes, on average, to build a profitable new line of business, according to our research.

Capitalism may be the greatest engine of prosperity ever devised. But it requires taking a long view to really deliver. Yet corporate leaders know all too well that any action that negatively affects income statements in the next few quarters risks bringing down the wrath of investors — even if it is likely to create more wealth over time. Far safer to ward off activist investors by buying back shares, using some of the $1.3tn in excess cash currently sitting on US corporate balance sheets.

We all pay the price for short-termism. Researchers at Stanford University have concluded that pressure to meet quarterly earnings targets may be reducing research and development spending, and cutting US growth by 0.1 percentage points a year. Others have found that privately held companies, free to take a longer-term approach, invest at almost 2.5 times the rate of publicly held counterparts in the same industries. This persistent lower investment rate among America’s biggest 350 listed companies may be reducing US growth by an additional 0.2 percentage points a year.

It need not be this way. The vast majority of capital ultimately belongs to individual savers who want it to grow over the decades. Pension and insurance funds could use their long investment horizons to profit from big countercyclical investments. But in many jurisdictions they are constrained; for instance, by requirements to book losses on assets when their market values fall, even if they have no intention of selling.

Much of the problem stems from the way the vast majority of asset owners pay the people who manage their money. On average, 74 per cent of remuneration is paid in cash, and tied to outperforming an annual stock market benchmark. The result is an obsession with next quarter’s earnings rather than the next 10 years’.

The best-run funds tie managers’ compensation to performance over much longer spells — 25 years, in one case. They assess performance against absolute return targets, or benchmarks that reflect long-term, risk-adjusted fundamentals . More funds should follow this approach.

The biggest financial rewards should be reserved for managers who deliver long-term value, not just a quick pop in the stock. And boards should make this clear. Many chief executives say their own boards are the biggest source of pressure to focus on the short term.

It should not take an activist hedge fund attack to prompt executives to lay out their strategy for long-term value creation. Holding them to their promises will require more focused metrics than quarterly earnings per share. For instance, a pharmaceutical company should consider tracking such things as: manufacturing quality; employee recruitment, development and retention; drug safety; and affordable pricing.

Creating value for shareholders is not the same as maximising short-term profits. Companies that confuse the two put both shareholder value and stakeholder interests at risk. At a recent gathering in New York of 120 leading investors and chief executives, guests agreed that corporate leaders and big investors must speak and act more boldly on behalf of greater long-term capitalism. Doing so will not quiet the noisy crowd clamouring for immediate results overnight. But it is the only place to start.




Dominic Barton and Mark Wiseman are managing director of McKinsey & Company and chief executive of the Canada Pension Plan Investment Board




Fonte: FT

Greek morals and German maths must find common ground

By origin, “enigma” is a Greek word. By chance, it is also what confronts Germans these days when their thoughts turn to Greece. Neither Angela Merkel, the German chancellor, nor Wolfgang Schäuble, her finance minister, knows for sure what Alexis Tsipras is up to. Is it blackmail? Poker? Or political suicide?

Last Monday, Ms Merkel spent about seven hours talking to the Greek prime minister. The atmosphere was less tense than expected but there was only marginal progress on matters of substance. Mr Tsipras still challenges the letter and the spirit of almost every agreement signed by previous Greek governments. With money running out, he and his fellow cabinet members have isolated their country in an unprecedented way. Eurozone leaders, liberal or Keynesian, stand united against the demands of the Syriza-led government in Athens.


Things do not look promising for Mr Tsipras but they might work out better than you would think. His primary opponent, caught in a very German dilemma, is politically weaker than she seems. True, the chancellor’s influence over senior European leaders means that whether or not Greece stays inside the eurozone is in effect for her to decide. Yet while this is a powerful card, sensitivity surrounding Germany’s history makes it one that is almost impossible to play.

Like all her predecessors, Ms Merkel seeks to avoid any impression of German Führung (leadership) or Ubermacht (dominance). But doing so is becoming far harder. France, traditionally a counterweight to Berlin, has lost much of its economic clout. Germany is indisputably the eurozone’s formidable economic force. For all the incipient troubles that cloud its horizons — an ageing population, decaying infrastructure, the recent reversal of some labour-market reforms — it is for now a beacon of prosperity.

Paradoxically, Ms Merkel also draws strength from her country’s past weakness. Germany’s painful adjustment at the start of the past decade helped Ms Merkel to push her main point: no state should be bailed out without agreeing to lower deficits and structural reforms.

Here she has indeed been able to set the terms. Against fierce opposition, she insisted that the International Monetary Fund should have a supervisory role in troubled eurozone countries such as Greece.


The European Commission was sidelined; instead, most of the rescue mechanisms took the form of intergovernmental agreements so that responsibility for negotiating and enforcing them would reside squarely in national capitals rather than the more pliable Brussels body. All of this added to the impression that Germany was in charge.

Ms Merkel occupies a commanding position that is unprecedented for a postwar German leader. But she dislikes being seen that way. More than once, she has stressed that decisions on Greece are taken collectively by the eurozone’s 19 members. Germany, she suggests, is merely one among equals.

That is a myth, as Mr Tsipras ceaselessly points out. He is turning a crisis of the Greek economy and the eurozone’s monetary institutions into a showdown between two nations, pitching his own as a righteous warrior against Germany’s arrogant Goliath. It is a canny attempt to influence governments and voters across the continent. Greek pleas for forbearance are portrayed, not as the ungrateful demand of a nation that has already been rescued twice, but the last stand of a country victimised by a mighty Germany that might soon visit its wrath on other nations, too. To surrender to Ms Merkel, the Greek prime minister suggests, would be to concede a German victory over all of Europe.

This rhetoric is as powerful as it is preposterous. The Greek narrative is moral; the German one is maths. That leaves little common ground on which to reach the kind of pragmatic compromise at which the EU generally excels. And when a country’s economy is at risk of disintegration, maths is a cold thing to sell, no matter who is responsible for the deplorable state of Greek governance.


Progress, then, will be impossible un­less one side or both give in. That may not take long. When senior politicians and officials from Ms Merkel’s grand coalition talk about Greece, they increasingly shun the dry lexicon of economics for the more evocative language of geopolitics. Greece, they say, is Nato’s crucial outer flank. A buffer against refugees from the Middle East and a cornerstone of European security, it is too important to be left alone. This is clearly an attempt to prepare the ground for a third rescue package, which would be impossible to defend using the usual rhetoric.

It will draw heavy fire, and not only from the notoriously excitable headline writers of the Bild tabloid newspaper. More than 100 parliamentarians from Ms Merkel’s own party have signalled their reluctance to offer further concessions. Their resolve will probably be tested by the end of the summer. Then we will learn the true limits to Ms Merkel’s power, and Germany’s.

It will be a fraught moment for a politician who knows her influence but has never been entirely comfortable with her position as Europe’s most powerful leader. Yet there is one thing the chancellor is more afraid of than the impression of German Ubermacht — and that is being held responsible for precipitating a Greek exit.


Nikolaus Blome is head of Der Spiegel’s Berlin bureau and a member of the editorial board




Fonte: FT

Missteps and miscalculations that could cost Greece the euro

Despite having lots of the economic logic on their side, the newly-elected Greek government is slipping further behind in its goal of restoring economic dynamism, jobs and financial viability. As a result, both Greece and its European partners risk losing control of the one thing they seem to unanimously agree on — namely, maintaining the country within the eurozone. Understanding the five main reasons why this is happening also sheds light on what needs to be done.

The new government led by the leftwing Syriza party was elected with a manifesto that contains three policy changes that many economists agree on: reducing excessive austerity, revamping structural reforms to unleash broader economic dynamism, and removing crippling debt overhangs that undermine existing productive activities and discourage the stimulus that comes with new investments.


But in translating intentions into actions, Greek officials with little or no governing experience have mishandled five issues that now risk eroding their credibility. First, they opted to negotiate with their European partners, and Germany in particular, in an overly public and confrontational manner.

Second, angered by European intransigence, they ended up politicising what should have been the technocratic work of specialist economic negotiators. Any chance of reaching an understanding was undermined by competing political narratives and noisy nationalistic accusations. In such an environment, good economics had no chance to prevail.

Third, Athens has few allies within the eurozone. Other peripheral debtor countries — such as Ireland, Portugal and Spain — have distanced themselves from their Greek counterparts. In part this reflects their hesitation to see hard-fought economic progress being leapfrogged by Greece if it secures more lenient terms from creditors. In part it reflects the threat that non-traditional parties, such as Podemos in Spain, pose to governments throughout Europe.

Fourth, Greece has no credible Plan B. It does not want to walk away from membership in the eurozone; it is unable to secure other sources of funding; and it cannot survive for much longer without exceptional external support.
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Fifth, rather than focus the negotiation on the one goal that all parties claim to share — keeping a rehabilitated and dynamic Greece inside the eurozone — Greek politicians have become stuck in the quicksand of some particularly controversial microeconomic measures. In addition to constantly generating uncomfortable headlines that fuel nationalism at home and abroad, this has prevented the negotiating parties from picking the low hanging fruit.

The longer all this prevails, the greater the risk that Greece and its eurozone partners will lose control of the country’s economic, financial and institutional destiny. Already, public disagreements recently have fuelled deposit withdrawals from Greek banks, sucking more oxygen out of a system that is already gasping for air; and increasing the country’s dependence on an increasingly hesitant European Central Bank.

It is time for the Greek government to rethink less the substance and more the process of its negotiation with its European partners. It must start by toning down its political rhetoric and re-establishing a technocratic negotiating foundation. It can then undertake confidence building steps — beginning with the implementation of structural reforms.

Such a course correction would reduce the probability that Syriza ends up presiding over the disorderly exit of Greece from the eurozone. But it is already too late to reduce this risk to zero. As such, the government’s immediate “to do” list also includes the highly-delicate formulation of a Plan B — for life outside the eurozone — that it would only deploy if the more orderly Plan A were to fail.


Mohamed El-Erian is chief economic adviser to Allianz




Fonte: FT

Growth alone will not stabilise Europe

Europe is in a race against time. After six years of economic crisis, extremist political parties are well-entrenched across the continent. Set against that, the European economy is in better shape than for some years. The question is whether economic optimism can return quickly enough to prevent the bloc’s politics slithering over the edge.

The signs of political rot are very evident. In France this weekend the far-right National Front (FN) notched up about 25 per cent of the vote in regional elections, confirming its strong performance in last year’s European parliamentary elections. Prime Minister Manuel Valls has warned that Marine Le Pen, leader of the FN, could actually win the presidential election in 2017. That same year, Britain could vote to leave the EU. And by then the single currency could also be well on the way to disintegration, with Greece out and Italy heading for the exit.

But while the political signals are still bleak, there are grounds for economic hope. Spain and Ireland, two of the countries that have suffered worst from debt crises and austerity economics, are finally recovering. Spain is expected to grow at 2 per cent this year and unemployment in Ireland will drop below 10 per cent soon. Even Greece, before the latest twist in the crisis, had experienced a return to economic growth. More broadly, the combination of lower oil prices, a falling currency and monetary easing by the European Central Bank should deliver a considerable stimulus to the EU economy this year.

A return to growth might give Europe some breathing space and head off the chance of political disaster. The difficulty is that, although there is clearly a connection between economic hardship and political extremism, the relationship is not precise. The collapse of the political centre can be a delayed reaction to economic trouble — and can kick in just as the economy is recovering. To choose a particularly doom-laden example: the Nazis took power in 1933, after the worst of the German depression was over.

A depression, or a very prolonged recession, does more than create economic hardship. It also serves to discredit mainstream ideologies and to whip up anger against political elites — and those effects can last well beyond the point where the economic figures show some improvement.

Furthermore, a sense of economic crisis is only one source of the support for the political extremes in France. Fear of immigration and anger about elite corruption have bolstered the FN — and driven the rise of fringe political movements in Italy, Germany and the UK.

A return to growth is also unlikely completely to address the sense of economic malaise in the EU. Across Europe there is a fear that whole nations have been living beyond their means and may have to accept a permanent downward adjustment in living standards. In countries such as Greece, Portugal and Ireland, that adjustment took place in a fairly swift and brutal fashion because of the financial crisis — and has resulted in cuts in nominal wages and pensions.


But even countries that escaped the worst of the crisis are going through an adjustment in living standards that is hitting the young particularly hard. Rates of youth unemployment are frighteningly high in some countries: above 50 per cent in Spain, nearly 40 per cent in Italy, 23 per cent in France and 17 per cent in the UK. In all these countries, there is a fear that the rising generation will live less secure lives than their parents.

As a result, even when governments can boast about relatively strong growth, there is disillusionment with the political establishment. In Britain’s general election in May, it is likely that there will be a record low share of the vote for the parties that have dominated postwar politics, the Conservatives and Labour, and strong gains for nationalist parties in Scotland and England.

Britain’s political problems are relatively mild compared to those of many of its neighbours. In Italy all of the leading opposition parties are now in favour of pulling Italy out of the euro — a remarkable trend in a country that has traditionally been fervently committed to the European project.

Hungary is governed by a semi-authoritarian administration and has an overtly racist party, Jobbik, on the rise.


But it is France that matters most. If Britain left Europe or Greece quit the euro, the European project would stagger on. But the election of Ms Le Pen as French president would in effect spell the end of the EU.

In an effort to avoid ratcheting up political tensions in the country, Brussels has just allowed the French government once again to break EU rules on budget deficits. The fact that the FN has not made a decisive breakthrough in this weekend’s elections will feed the hope that the cavalry of an economic recovery will arrive, just in time, to stabilise the country.

But ultimately France and the rest of the member states need more than a modest uptick in growth to restore the health of their political systems. They need mainstream politicians that can paint a convincing and optimistic picture of the future. So far, there is not much sign of that.

Gideon Rachman


Fonte: FT

China is the unlikely gainer from Ukraine conflict

A year ago Crimea became a part of Russia, causing a long stand-off between Moscow and the west. The conflict over Ukraine is a belated salvo of the cold war, provoked on both sides: by the euphoria of the west, which viewed its success in the confrontation of the late 20th century as proof of its moral and political supremacy, and by Russia’s desire to take revenge for its dramatic fall from the height of a superpower to barely short of a second-grade crippled state.

The Ukraine crisis is a play-off of the old game. But in a global context it is pushed to the sidelines because the centerpiece of international politics is moving to Asia.

The crisis shows how insignificant much of Russia’s relations with the west have become even though a couple of decades ago they were the backbone of global politics. An overwhelming majority of nations are unaffected by the events in Ukraine. People in Africa, East Asia or South America may watch with interest how the Russia-US “test of strength” ends, and whether Russian rebellion agains us-led world will be successful, but the issue is clearly at the bottom of their priorities.

There is, however, one reason why Ukraine may be important in terms of the change in the global balance of power: its impact on a possible division of Europe. This is not a territorial division, but the future of the “European heritage” where Europe may stop existing as a separate factor in world politics.

The Ukrainian conflict has put an end to hopes for a “Greater Europe” from the Atlantic to the Pacific, which was discussed as a possibility after the end of the cold war. This is not because Russia and the EU have split for good — the history of Europe shows that the bitterest enemies can find common ground. It is because the current stand-off is happening at a critical moment in global alliances.

On the one hand, talks on the US-proposed Transatlantic Trade and Investment Partnership are going full steam ahead and if the US and EU succeed in building a vast free trade area the Old World will be firmly fastened to the course of the New World, closing possibilities for a Russia-EU entity independent from the US (as was the dream of some anti-American forces in Russia and Europe). But there is another, less obvious, side: China is turning west and this may have significant consequences for Europe.

It is quite symbolic that President Xi Jinping announced the Silk Road Economic Belt initiative at a time (the autumn of 2013) when Russia and the EU were nearing a crucial point in their stand-off over Ukraine. China has distanced itself from competition with other powers for spheres of influence and offered a project that potentially embraces all the countries in Eurasia and may even economically absorb them. In fact, there is hardly any country that could rival it in terms of the resources it can commit.

While all the other players (Russia, the EU and the US) use mainly political instruments in Eurasia, thereby raising tension in the region, China offers ready cash and is indifferent to what kind of regime and national priorities its target has.

One of the objectives of the Silk Road project is to use the opportunities the European confusion is opening up in the west. The old Silk Road stretched to southeastern and southern Europe and the Middle East. Its recreation would bring China’s economic influence to depressed regions (from Greece to Iraq), where problems persist despite attempts by Brussels and Washington to solve them. China is not going to assume political responsibility, but it is quite willing to make use of these regions’ needs.

China is moving westward partly because its expansion in the Asia-Pacific region clearly invites confrontation with the US, which Beijing wants to avoid — at least for the time being. However, by advancing its interests to Europe China will have to face the US.

The controversy generated by the big European countries’ desire to join the Asian Infrastructure Investment Bank is just the first sign of China’s looming competition with the US in the new area. For example, Germany is China’s biggest trading partner and technology exporter in Europe, and its second largest trading partner outside the EU after the US. It ranks second (after Britain) among European countries on investment in China.

China’s turn westwards and Europe’s gravitation towards China as a market and trading partner in big projects, creates a new situation for Moscow. On the face of it, it is beneficial for Russia, which serves as a natural link between the two. But it promises no immediate gains. The Ukraine crisis has changed things for the Russian-led Eurasian Economic Union, and China’s Silk Road concept encompasses countries that Russia would like to see in the union. But Beijing is not talking about integration and political compromises; it simply wants to invest large amounts of money on its own terms.

China taking the position of a leading Eurasian power is the main unexpected outcome of the Ukraine crisis. Russia has yet to understand what role is left for it in Eurasia; Europe must realise that China is no longer somewhere in the distant east, but is actually next door; and the US should think about the fact that a country which has already surpassed it as the world’s largest economy is growing ever stronger. Amid these developments the fate of Ukraine, unfortunately, appears rather insignificant.

Fyodor Lukyanov




Fonte: FT

Yellen battles Draghi in euro-dollar drama

Janet Yellen, Fed chairwoman, on Wednesday voiced the pain the stronger dollar was causing on the other side of the Atlantic, noting how it was hitting US exports. Her comments, together with lower growth and inflation forecasts as well as projections of a much slower pace of Fed monetary policy tightening than previously, may have succeeded in braking the dollar’s advance.

Nevertheless, bafflement over why the euro had fallen so fast against the dollar highlights the disruptive potential of central bank actions; the volatility and uncertainty created by transatlantic divergences is in itself damaging — to economies as well as investors.

The ECB started buying bonds on March 9. Even though its intentions were well known in advance — and could have been priced in — the euro still dropped 4 per cent against the dollar over the next five days, increasing to almost 25 per cent the single currency’s decline since May last year. Falls on such a scale cannot reasonably be considered normal for advanced world economies — but they have become a feature of 2015. The Swiss franc rose as much as 40 per cent against the euro when the prospect of eurozone QE forced Switzerland’s central bank to abandon its cap on the currency in January.

Using estimates of how the euro would have moved if it had existed before 1999, recent falls were greater even than during the early 1990s crisis in the European exchange rate mechanism — the “fixed but flexible” system that was the precursor to the euro. A better comparison are the big currency moves in the early 1980s that led to the Plaza accord, struck 30 years ago at New York’s Plaza hotel, to halt the dollar’s appreciation.

In the 1980s such international agreements had a degree of success in smoothing economic adjustment processes. These days such an approach is unlikely, partly because in the post-2007 crises world the previously abnormal seems normal. More practically, massively expanded capital markets make intervention by central banks in the biggest foreign exchange markets much less likely to succeed, especially if their interests are not aligned.

Central banks around the world are instead engaged in “competitive easing”; Sweden’s Riksbank, for example, this week pushed its main interest rate even deeper into negative territory. Behind the dollar’s recent rise against the euro has been a widening transatlantic interest rate gap. The “spread”, or difference between the yield on 10-year US Treasuries versus German equivalents, had also smashed through levels not seen since the 1980s.

Along with escalating worries about Greece, the trigger for the euro’s unexpectedly dramatic plunge ahead of this week’s Fed meeting may have been a realisation that the ECB was serious about an aggressive QE programme, which would drive an increasing volume of eurozone government bond yields even deeper into negative territory. “It was almost as if markets decided that the starting gun had been fired,” says one currency strategist.

With the Fed meeting helping to narrow transatlantic interest rate differentials, the euro on Wednesday saw its biggest one day jump against the dollar since 2009, before falling back again on Thursday.

Optimists could argue that this year’s trend decline in the euro has been a healthy normalisation process. During its early years, the euro was driven higher as managers of official reserve funds diversified away from the dollar. More recently, it was supported by the ECB’s tardiness in launching QE or — seen from the eurozone hawks’ perspective — the Fed’s tardiness in raising US interest rates. Now, the euro is back to early 1999 levels.

Pessimists, however, will worry about the whiplash moves in the euro-dollar rate, the mesmerising grip central banks hold over financial markets and the abrupt movements they can trigger — with the magnitude of the swings as great as ever as the Fed moves, gingerly, towards policy normalisation.

Ralph Atkins

Fonte: FT

Dalio warns Fed of 1937-style rate risk

Ele tem razão: o risco existe e não é nada desprezível.

The US Federal Reserve risks causing a 1937-style stock market slump when it finally moves to raise interest rates, one of the world’s most powerful hedge fund managers has warned.

Ray Dalio, founder of the $165bn hedge fund group Bridgewater Associates, said in a note to clients and followers that he was avoiding large bets on the financial markets for fear that the Fed’s expected change of policy could have unintended consequences.


The note emerged as Christine Lagarde, head of the International Monetary Fund, warned on Tuesday that US rate increases could trigger instability in emerging markets, leading to a re-run of the Fed-induced “taper tantrum” of 2013.

The comments frame a high-stakes Fed meeting at which the central bank’s policy makers are expected to open the door to the first US rate rises in nearly a decade.

The Fed is on Wednesday expected to remove pledges to be “patient” before lifting rates when it concludes two days of deliberations. Market expectations are for it to raise rates either in June or September, but the soaring value of the dollar and several soft economic indicators have muddied the waters going into the meeting.

In Mr Dalio’s note, the stark tone of which has led it to be widely circulated around the industry, he and his co-author urge the Fed to proceed with caution and to set out a public plan B, in case monetary tightening goes wrong.

“We don’t know — nor does the Fed know — exactly how much tightening will knock over the apple cart,” Mr Dalio and Mark Dinner, his colleague, wrote. “What we do hope the Fed knows, which we don’t know, is how exactly it will fix things if it knocks it over. We hope that they know that before they make a move that could knock over the apple cart.”

“We are cautious about our exposures,” they added: “For the reasons explained, we do not want to have any concentrated bets, especially at this time.”

The note likens financial conditions today to those in 1937, eight years after the 1929 stock market crisis and at the end of four years of money printing that had led to surge in equity valuations. Premature tightening by the Fed led to a one-third slump in the Dow Jones Industrial Average in 1937 and the sell-off continued into the following year.

Today, many analysts fear the knock-on effect any Fed tightening will have, particularly on emerging markets, especially when combined with a strong dollar.

Messrs Dalio and Dinner wrote: “If one agrees that either a) we are near the end of the developed country central bankers’ ability to be effective in stimulating money and credit growth or b) the dollar is the world’s reserve currency and that the world needs easier rather than tighter money policies, then one would hope that the Fed will be very cautious about tightening.”



Although Bridgewater’s investment style is computer-driven, Mr Dalio’s investment commentary has long been valued by investors. His Pure Alpha fund, with $80bn in assets, is among the top performing funds on record, according to a 2014 survey from LCH Investments.

Many emerging market corporations, such as Chinese property companies, have borrowed dollars , despite their lack of dollar revenues, with few anticipating how strong the US currency would become.

Ms Lagarde said in Mumbai that she feared “spillover” effects from rate rises could lead to a re-run of the crisis that engulfed developing economies nearly two years ago, after then-Fed chairman Ben Bernanke hinted at an early end to its “quantitative easing” bond purchasing programme.

“I am afraid this may not be a one-off episode,” Ms Lagarde said.

Officials from Asia and South America have repeatedly urged the Fed to take international conditions into account when they formulate monetary policies. Fed officials stress that they watch global developments closely when reaching policy decisions on US rates — even if their formal mandate focuses on US employment and inflation.


That message was underscored in January when the Fed included wording to emphasise it was watching “international developments” when deciding monetary policy.

Stanley Fischer, vice-chairman of the Fed, said in October he recognised that it was “not just any central bank” and that it took account of feedback effects between the US and the rest of the world. He added, however, that the most important contribution it could make to the health of the global economy was to “keep our own house in order”.

Mr Fischer also said that a gradual exit by the Fed from ultra-easy monetary policy should prove “manageable” for emerging markets, and that the Fed was doing all it could to avoid upsetting markets with policy surprises.




Fonte: FT

Martin Wolf: Strong currents that keep interest rates down

Why are interest rates so low? The best answer is that the advanced countries are still in a “managed depression”. This malady is deep. It will not end soon.

One can identify three different respects in which interest rates on “safe” securities in the principal high-income monetary areas (the US, the eurozone, Japan and the UK) are exceptionally low. First, the short-term intervention rates of central banks are 0.5 per cent or lower. Second, yields on conventional long-term government bonds are extremely low: the German 30-year bond yields 0.7 per cent, the Japanese close to 1.5 per cent, the UK 2.4 per cent and the US 2.6 per cent. Finally, long-term real interest rates are minimal: UK index-linked 10-year gilts yield minus 0.7 per cent; US equivalents yield more, but still only plus 0.4 per cent.

If you had told people a decade ago that this would be today’s reality, most would have concluded that you were mad. The only way for you to be right would be if demand, output and inflation were to be deeply depressed — and expected to remain so. Indeed, the fact that vigorous programmes of monetary stimulus have produced such meagre increases in output and inflation indicates just how weak economies now are.

Yet today we hear a different explanation for why interest rates are so low: it is the fault of monetary policy — and especially of quantitative easing, the purchase of long-term assets by central banks. Such “money printing” is deemed especially irresponsible.

As Ben Broadbent, deputy governor of the Bank of England, has argued, this critique makes little sense. If monetary policy had been irresponsibly loose for at least six years — let alone, as some have argued, since the early 2000s — one would surely have seen inflationary overheating, or at least rising inflation expectations. Moreover, central banks cannot set long-term rates wherever they wish. Empirical analysis of the impact of quantitative easing suggests it might have lowered bond yields by as much as a percentage point. But note that yields remained extremely low even well after QE ended, first in the UK and now in the US.

The price level is the economic variable that monetary policy influences most strongly. Central bankers cannot determine the level of real variables — such as output, employment, or even real interest rates (which measure the return on an asset after adjusting for inflation). This is especially true over the long run. Yet the slide in real interest rates is longstanding. As measured by index-linked gilts, they fell from about 4 per cent before 1997, to about 2 per cent between 1999 (after the Asian financial crisis) and 2007, and then towards zero (in the aftermath of the western financial crisis).

There is a more convincing story about why interest rates are so low. It is that the equilibrium real interest rate — crudely, the interest rate at which demand matches potential supply in the economy as a whole — has fallen, and that central bankers have responded by cutting the nominal rates they control. Lawrence Summers, former US Treasury secretary, has labelled the forces “secular stagnation” — by which is meant a tendency towards chronically deficient demand.

The most plausible explanation lies in a glut of savings and a dearth of good investment projects. These were accompanied by a pre-crisis rise in global current account imbalances and a post-crisis overhang of financial stresses and bad debt. The explosions in private credit seen before the crisis were how central banks sustained demand in a demand-deficient world. Without them, we would have seen something similar to today’s malaise sooner.

Since the crisis, central banks have not chosen how to act — their hands have been forced. Events in the eurozone provide a powerful example. In early 2011, the European Central Bank raised its intervention rate from 1 to 1.5 per cent. This was wildly inappropriate, and in the end the ECB had to cut rates again and embark on QE. If central banks are to be a stabilising force, they have to move interest rates in an equilibrating direction — and that direction is not something they can choose.

Rising risk aversion might be another reason why real interest rates on safe securities have fallen. The idea is that the crises increased the appeal of the safest and most liquid assets. This is part of the explanation for ultra-low yields on German Bunds. But it does not seem to be the dominant explanation over the longer run. The gap between the interest rate on treasuries and US corporate bonds has not been consistently wider since the crisis, for example.

We should view central banks not as masters of the world economy, but as apes on a treadmill. They are able to balance demand with potential supply in high-income countries only by adopting ultra-easy policies that have destabilising consequences down the line.

When will we see an enduring rise in real and nominal interest rates? That would require a marked strengthening of investment, a marked fall in savings and a marked decline in risk aversion — all unlikely in the near future. China is slowing, which is likely to depress interest rates further. Many emerging economies are also weakening. The US recovery might not withstand significantly higher rates, particularly given the dollar’s current strength. Debt also remains high in many economies.

Ultra-low interest rates are not a plot by central bankers. They are a consequence of contractionary forces in the world economy. While upward moves in rates seem ultimately inevitable from current levels, it is likely that historically low rates will be with us for quite a while. Those who bet on jumps in inflation and a bond-market rout will continue to be disappointed. The depression has been contained. But it is a depression, all the same.

Fonte: FT

An ultra-low interest rate show that could run and run

This week, all eyes have been fixed on the relationship between the euro and the dollar. No wonder. A year ago, the eurozone was running a tighter monetary policy than the US.

This week, however, the European Central Bank embarked on a massive new round of quantitative easing, even as American monetary policy officials such as James Bullard, head of the Reserve Bank of St Louis, signalled that they want to raise American interest rates soon.

So it is no surprise that the spread between dollar and eurozone interest rates has widened as the dollar has strengthened. “It is all about the dollar and euro [now],” Bill Blain, an analyst at Mint Partners in London argued, noting that “surveys suggest that more than 50 per cent of market participants think the euro will reach parity against the dollar before Easter”.

Investors who are obsessively watching that euro-dollar rate risk missing another, equally interesting shift under way in the markets — this time between yen interest rates and euro rates.

Over the past decade, eurozone interest rates have traded well above those in Japan. Back in March 2004, for example, the 15-year forward swap rate for euros and yen (which indicates the relative difference in yields) was about 300 basis points, and four years ago the gap was still around 150 basis points. That (obviously) reflected the fact that Japan has been mired in deflation, economic stagnation and ultra-low interest rates for more than a decade.

But the picture has suddenly — and dramatically — reversed as the yield on eurozone bonds has fallen below that of yen bonds. Right now, for example, 15-year euro-yen swaps imply that eurozone rates are 77 basis points lower those of Japan. Meanwhile, the current 10-year Bund yield is a mere 22 basis points, compared with 41 basis points in Japan, and for 30-year bonds the yields are 71 basis points and 149 basis points respectively. To put it another way, as a demonstration of Alice-in-Wonderland economics, Japan is no longer the only (or best) example. The pattern in the eurozone looks even more extreme in terms of ultra-low rates.

A UBS note to clients notes that: “Yen interest rates have been used for a long time as a benchmark for how low eurozone interest rates can go and the term ‘Japanification’ has been loosely used for a convergence of Japan’s and Eurozone’s economies as well as interest rates.” It goes on to suggest “we should probably now switch to a new term: ‘Europification’”.



It is possible that “Europification” will just be a temporary blip. One reason why eurozone rates have swung so violently this month is that the launch of the ECB’s QE programme has left the central bank with a shortage of assets to buy, pushing the price of sovereign bonds higher, with a corresponding decline in yields.

It is, however, also possible to imagine a scenario where eurozone yields remain ultra low for some time. After all, the eurozone (like Japan before it) is hovering near deflation, marred by a woeful lack of demand and fragmented political structures that seem unable to promote rapid structural reform.

If “Europification” becomes the new buzz phrase, there are at least three points that investors need to consider. First, and most obvious, ultra-low interest rates have a nasty habit of distorting markets in all manner of unexpected ways, all over the world. To understand why investors are flooding into US activist funds, angel investments, laying down wine or jumping into the art market, for example, a good place to start is by looking at ultra-low rates.

Second, such rates have a habit of breeding cynicism about market signals and mechanisms in a broader sense. Or as the late Masaru Hayami, a former governor of the Bank of Japan, observed 15 years ago, the crucial problem with zero interest rates is that they create a “zombie” mentality, removing market discrimination. (One way to make sense of the recent surge in index fund investing is as a response to ultra-low rates.)

The third key point is that once low rates become ingrained into the consumer and corporate psyche, they also become increasingly hard for policy makers to remove. It is possible that the US will buck this trend, and the reason why people such as Mr Bullard are now pushing for the Fed to act is precisely to avoid that Japanification fate.

For the moment, though, investors in global markets are confronted with a low interest rate world that looks increasingly peculiar. And potentially very volatile if, or when, this era of Japanification-cum-Europification finally comes to an end.

Gillian Tett


Fonte: FT

Why the business of risk is booming

The west has a new industry. It is the booming business of calculating geopolitical risk. Glance around the world at the fires burning in the Middle East, at Russia’s march into Ukraine and the tensions in East Asia fuelled by China’s rise, and it is easy to see why. These conflicts and collisions are more than an unhappy coincidence. The end of history has made way for the era of systemic disorder.

Sitting in the other day at a conference organised by two leading think-tanks — Aspen Italia and Chatham House — it occurred to me that when historians cast around for a title for the present chapter in global affairs, they might do worse than opt for “the great unwinding”. The backdrop for the gathering of business leaders and policy makers was the glorious tranquillity of Venice. The talk was about the ruptures that have brought down the post-cold war order


The optimism in the west that greeted the collapse of communism was rooted in a clutch of organising assumptions. The world has become a more dangerous and unpredictable place during the intervening 25 years because most of these suppositions have now unwound.

The first was the permanence of the Pax Americana. Remember the breathless commentary about the impregnable hegemony of the US? At the turn of the millennium Washington assumed, and most experts concurred, that the sole superpower would set the terms of international relations for most of the 21st century. There would be adjustments to accommodate the new powers, but the US would continue to act as guarantor of the peace.

The historians no doubt will debate when precisely the illusion was shattered. The chaos that followed shock and awe in Iraq is a good a point as any. The wars in Afghanistan and Iraq ultimately drew the limits of US power, and did so just at the moment that China, India and the rest were rising fast. The war on terror did more than delineate the shortcomings of military might. Abu Ghraib and Guantánamo shattered the notion that America would always act as a benign hegemon.

US declinism can be overdone. In an excellent new essay asking Is the American Century Over?, the Harvard scholar Joseph Nye points up America’s enduring strengths — economic, demographic and geographic as well as military. It is also salutary to note how quickly the shale revolution has overturned many predictions of ebbing US power. What is true, though, is that the US of the 21st century is unlikely to possess the capacity or the will to shape the geopolitical order in the way it did in the 20th. For all the noise now being made by Republicans in Congress, future presidents will be obliged to follow President Barack Obamain recognising the constraints of a multipolar world.

The second unwinding has been in Europe. The creation of the euro was intended to complete the work of the EU’s founding fathers, replacing the deep scars of competing nationalisms with a postmodern model of deep integration. Europe’s borders had been fixed in perpetuity and the continent had said goodbye to war.


The thought, too, was that Europe’s postwar model would be exported, first to the EU’s neighbours in the east and then as a template for the rising world. For a while it worked: a procession of once-communist states queuing to join the democratic club testified to the potency of normative power. There was something to be said for playing Venus to America’s Mars.

And now? The euro has been exposed as a half-finished project, a statement of intent that lacks vital political and economic underpinnings. Even after the crisis of recent years, and I am still not convinced Greece can remain in the euro, governments are reluctant to pool sufficient sovereignty to assure the single currency’s long-term future. The resurgence of nationalism is not confined to arguments about debt and deficits. Populists of left and right have prospered across Europe by demanding governments slam the door against the alleged depredations of globalisation.

There lies the third unwinding — of the assumption that economic interdependence would soften national competition and that global supply chains would beget more effective global governance. Instead we have seen the return of nationalist competition, in Russian President Vladimir Putin’s revanchism, and in theterritorial disputes between China and its neighbours in the East and China seas.

If the Europeans are having second thoughts about postmodern integration, most of the rising — and in Russia’s case, declining — powers never signed up to the idea of sharing national sovereignty. The threat in the Middle East and parts of Africa comes from collapsing states; in Asia it is rooted in competition between states.

So how should business respond to this increase in political risk? Many still choose to ignore it: they worry instead about competitors’ pricing, economic growth and regulation. Investors in, and exporters to, Russia have learnt that complacency can carry a cost.

As they operate their multi-nation supply chains and just-in-time production processes, businesses should understand that the world has changed. The cold war era was dangerous but stable. The great unwinding has created a world that is dangerously unpredictable. If there is money to be made in calculating geopolitical risk, there is money to be saved in understanding it.




Philip Stephens


Fonte: FT

Far from dying, Abenomics may yet be coming up roses

Is Abenomics a busted flush? To sceptics it must certainly look that way. Japan’s growth has faltered. A downward revision this week showed the economy expanded at an annualised rate of 1.5 per cent in the fourth quarter. That may not sound too bad for a mature economy that has not exactly dazzled in recent years. However, it comes after two quarters of sharp contraction. Output actually shrank in 2014, albeit by a minuscule 0.03 per cent. Negative growth, however minor, is hardly the “escape velocity” economists say Japan needs to shake off 20 years of deflation.

Banishing deflation was supposed to be the core of Abenomics, introduced by Prime Minister Shinzo Abe in December 2012. Here again, news looks bad. Haruhiko Kuroda, the central bank governor, promised to hit 2 per cent inflation within “about two years” of April 2013. He is now fudging. In the language of central bankers, apparently, “about two years” can mean three years or more. So much for transparency. Core inflation, which includes energy, is running at just 0.2 per cent. Unless oil prices stage a sudden rally, Japan could soon find itself back in deflation. Abenomics without inflation is like Hamlet without the ghost.

Weak inflation puts pressure on the Bank of Japan to undertake yet more quantitative easing after its surprise second salvo last October. If it does not act, it could lose credibility both with markets and with a public that needs convincing inflation is here to stay. Low inflation stems in part from a policy blunder: last year’s three point rise in consumption tax just when consumers were being asked to spend. Instead, they snapped their wallets shut.

All this makes it hard to argue that things are going to plan. And yet the picture is more positive than it appears. The bigger reason for disinflation is the low oil price. That may present the BoJ with a quandary — but for the economy overall it is excellent news. Japan is a huge energy importer, more so since it closed its nuclear reactors after a tsunami struck the Fukushima plant four years ago. Cheap oil ought to do wonders for demand. It should also allay concerns about current account deficits. This year, Japan’s surplus should hit a robust 3 per cent.

Crucially, disinflation may be a prelude to demand-led inflation. How might this work? After Abenomics was launched, inflation rose quickly to about 1.5 per cent on the back of high oil prices and a weak yen. While economists celebrated, consumers wondered where their spending power had gone. This year, precisely the opposite should happen. Corporate profits have never been higher. Exports are strong. Even sunset industries such as shipbuilding are making a comeback. As a result, companies — under intense pressure from the Abe government — may raise base wages in this month’s annual pay talks by up to 2 per cent. Even before this basic pay in January — excluding bonuses — was up 0.8 per cent on the previous year, the steepest rise in 15 years. A combination of flat or falling prices and higher wages could produce a mini-consumer boom.

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Nor is that potentially rosy scenario just down to cheap oil. The labour market is the tightest it has been in years. That is partly because, in spite of last year’s two weak quarters, output has been rising at above trend rate for more than two years.

Demographics are also playing a part. As the workforce shrinks, by about 300,000 each year, businesses from builders to care homes find themselves short of staff. Since Abenomics started, nearly 1m women have joined the workforce. Most have taken on lower-paid work but even this may be changing. There are tentative signs that companies are starting to put contract workers in better-paid full-time jobs, says Jesper Koll, director of research at JPMorgan. Japan, he adds, could be the only wealthy nation that is actually increasing the size of its middle class.

None of this means Mr Abe can breathe easily. There is still a looming debt problem even if, largely thanks to booming tax revenues, bond issuance has been cut below Y40tn for the first time since 2009. Even If a shrinking workforce provides a short-term fillip, in the medium term Japan will have to grapple with how to finance the needs of an ageing population. Those who put their faith in structural reforms also complain that “third arrow” of Abenomics has not yet left the quiver.

Yet, for all these concerns, the economy may well defy the pessimists this year and next. Certainly, it would be premature to declare victory. But neither is Abenomics dead and buried just yet.


David Pilling


Fonte: FT

Martin Wolf: India has a real chance to excel on growth

The most significant economic story of the past three and a half decades has been the rise of China. The second most significant story has been the rise of India. A big question is how fast the latter can grow. The answer is that it has an excellent chance of being the fastest-growing large economy in the world. But this requires significant improvements in policy and its implementation. The government of prime minister Narendra Modi, elected last May, has at least made a start.

Between 1980 and 2014 China’s average gross domestic product per head grew 17 times, according to the International Monetary Fund. In the same period India’s GDP per head grew fourfold. That is a huge gulf. But India’s achievements are significant. Hundreds of millions of Indians have experienced identifiable improvements in their living standards.

Furthermore, the country has many strengths: a legitimate political system; a youthful population; substantial technological and entrepreneurial resources; and, not least, room to catch up on the world’s richest economies.

According to the IMF, India’s GDP per head at purchasing power parity was 11 per cent of that of the US in 2014. China passed that mark a decade earlier. This lag is an opportunity. Growth is not everything. But, for a country as poor as India, it is necessary for alleviating mass destitution and widening opportunity.

The immediate conjuncture is also favourable for a shift to higher growth. This year’s government Economic Survey of India waxes lyrical, arguing that the country has reached “a sweet spot — rare in the history of nations — in which it could finally be launched on a double-digit medium-term growth trajectory”.

The international environment is favourable, particularly low oil prices and recovery in the US and Europe. As the survey notes, the deceleration in growth has ended and the economy appears to be recovering. Moreover, it adds, “challenges in other major economies have made India the near-cynosure of eager investors”.

Yet the idea that India is on the verge of 10 per cent growth is vainglorious. The slowdown after 2010 punctured a similar euphoria. True, in 2008, gross investment reached 33 per cent of GDP, before falling to 28 per cent last year. Yet even 33 per cent is likely to be insufficient to drive growth at a sustained 10 per cent a year. When China grew that fast, its investment rate was over 35 per cent of GDP and in many years far higher. Also, as the Indian budget recognises, shortage of physical capital, particularly infrastructure, remains a binding constraint. Without big changes, 8 per cent is a likely upper bound to the growth rate. (See charts.)

How far, then, has the new government improved the economic prospects? A part of the answer is that it has been fortunate: the collapse in the price of oil has been a pure windfall. Another is that Mr Modi’s election has improved confidence. As an IMF paper has argued, the sharp slowdown in investment that was the proximate cause of India’s recent decline in growth, was partly due to rising uncertainty ahead of the election.

But a final part of the answer is that the government is making sensible reforms, though, as was to be expected in India’s complex democracy, these have fallen far short of a pro-market “big bang”. Yet note that the World Bank’s Doing Business ranking places India 142 out of 189 countries. Given this, modest reforms might deliver significant improvements in performance.

Which of the changes announced before the budget and within it are likely to be important? Deregulating the price of diesel was a good signal, though the opportunity afforded by low oil prices made it quite easy. So, too, is the shift towards open auctions of licences to mine coal. Plans to move towards direct cash transfers to the poor could reduce the costs of in-kind benefits and subsidies. Unfortunately, the budget did not make substantial reforms to wasteful expenditures.

Important, too, is the decision to move towards a national goods and services tax. This is a vital step towards creating a single market, something that India still lacks.

Also significant is the new “monetary policy framework agreement” with the Reserve Bank of India, which takes the country towards a modern relationship between government and central bank. Another big (and controversial) reform would make land acquisition less onerous, thus easing development.

From the economic point of view, the most important near-term requirement must be a massive improvement in infrastructure. That should also promote private sector entrepreneurship and investment. The government decided to delay fiscal consolidation, in order to finance public investment. If the investment is efficient, this makes good sense. An economy where nominal GDP is likely to grow by at least 12 per cent a year in the medium term can run a sizeable fiscal deficit while keeping its public debt well under control. In India, fiscal deficits matter to the extent that they crowd out private investment, which is not much of a concern at present, or are used to fund wasteful spending. Consolidation is not a particularly high priority right now.

In its presentation of the Economic Survey, the office of the chief economic adviser, Arvind Subramanian, refers to the possibility that “a persistent, encompassing and creative incrementalism” might add up to quite a bang. Whether such incrementalism will be delivered is still unclear. But, provided the government persists with reforms and keeps the scale of the opportunity in mind, the economy should now revive. Sustained growth of 7-8 per cent a year is certainly possible. More is at least conceivable. The change within India and in its relationship with the world will also be incremental. But a new force is rising.

Greece, Russia and the politics of humiliation

Just before Alexis Tsipras was elected Greek prime minister in January, he made a vow to the voters: “On Monday national humiliation will be over. We will finish with orders from abroad.”

Anyone tempted to dismiss this stress on national humiliation as a Greek eccentricity should look around the world. When I think about the four international issues that I have written most about over the past year — Russia, the eurozone, the Middle East and east Asia — a theme that links all of them is the rhetoric of national or cultural humiliation.


One of Mr Tsipras’s first acts as prime minister was to visit a memorial to Greek resistance fighters executed by the Nazis in the second world war. This gesture was all about national pride: reminding voters of past heroism while inflicting a little return humiliation on the Germans, who led the pack of eurozone creditors.

The Greek government came into office promising to slash the country’s debt and ditch economic austerity. But even though Syriza’s confrontational approach did very little to achieve these goals, voters enjoyed the show of defiance. Syriza’s poll ratings went up, even as deposits in Greek banks shrank.

Russia’s confrontation with the west, like Athens’ clash with its creditors, feeds off a sense of wounded national pride. President Vladimir Putin and his generation of leaders once served a larger and more powerful nation — the Soviet Union. Now Mr Putin insists modern Russia should continue to be treated as a “great power”. While the ostensible reasons for intervention in Ukraine are all about the defence of concrete interests — naval bases, markets and borders — Moscow’s rhetoric seethes with a sense of national humiliation. Russia, it insists, can no longer be slighted and ignored.

The Russians will show that they cannot be bullied by the arrogant Americans. Mr Putin reaches back into the past to summon the spirits of his nation’s finest hour: the Great Patriotic War of the 1940s. And officials boast about Russia’s nuclear arsenal as a totem of their great-power status and a reason for others to fear them.

A sense of national humiliation is also central to China’s approach to the outside world. History textbooks and the national museum in Beijing dwell on the “century of humiliation” — lasting from its first encounter with western imperialism in the 1840s through to the defeat of Japan in 1945. The message drummed into young people is that a weak
China was humiliated and exploited by foreign powers. Modern China, they
are told, will never be pushed around.


President Xi Jinping calls for a “new type of great power relations” — a demand that China should be treated as an equal by the US.

Islamic fundamentalists also trade on the idea that the west has humiliated and oppressed Muslims. In 2003 Tom Friedman, a New York Times columnist, noted a speech on this theme by Mahathir Mohamad, then prime minister of Malaysia, and argued that the “single most under-appreciated force in international relations is humiliation”. Mr Friedman suggested that a sense of humiliation was driving both the Palestinian revolt against Israel and the armed rebellion against the American occupation of Iraq.

When revolutions broke out across the Middle East in 2011, it seemed that many Arabs had decided it was their own governments that were the real causes of their misery and humiliation.

Since then, however, it has once again become fashionable to blame outsiders and the west. The government of Iran and the jihadis of Islamic State of Iraq and the Levant (Isis) loathe each other but they share a rhetoric that promises to reject perceived humiliation by the west — whether it is Iran insisting on its right to have a nuclear programme or Isis preaching against western values.

Across the years, various theorists and philosophers have written about the role of pride and humiliation in human affairs. Jean-Jacques Rousseau, the Enlightenment philosopher of the 18th century, argued that the source of man’s corruption lay in the human desire to be acknowledged as superior to others. Status anxiety (as Rousseau did not call it) was the root of much evil. Centuries later, “realist” theorists of international relations argued that states were driven by many of the same emotions as people. The realists stressed the state’s lust for power. The reverse side of that emotion is a desperation to avoid powerlessness and the humiliation that goes with it.

The implication of all this is that solving international conflicts may involve thinking as much about emotions as about interests.

Sometimes the concession required to address a sense of national or cultural humiliation may be impossible. Nobody is going to concede a caliphate to tend to the wounded feelings of Isis.

But sometimes the gestures required to restore a sense of national pride may be relatively minor. Greece does not seem to have extracted significant concessions from its creditors. Nonetheless, a display of national defiance, combined with some linguistic and technical changes, appears to have mollified the Greeks for now. As the west contemplates a dangerous conflict with Russia and the ambitions of China, it might remember that symbols can sometimes matter almost as much as substance.




Gideon Rachman


Fonte: FT

China and India need to make their growth numbers add up

One thing is certain about the global economy: a slowdown is under way. What we do not know is how big the problem is because the official numbers from China and India, the biggest emerging markets, do not add up.

At the National People’s Congress, the annual parliamentary session starting on Thursday in Beijing, China lowered its official growth target to “around 7 per cent” but that number is 2 to 3 percentage points higher than many independent estimates of the current growth rate. Last month, India’s government used a new method to claim its economy would grow 8 per cent this year, reaffirming its boast that it is growing faster than China. Many outsiders doubt India’s claim too.

The problem in both countries is that the official growth number is much higher than the sum of its parts. Economic growth is the total of growth in investment, trade and spending by consumers and government; many investors are doing the maths and finding that those parts do not add up to a 7 per cent pace for China or India. China’s economy is driven mainly by investment, which has slowed sharply. India’s is driven by consumers and consumption of everything from motorbikes to restaurant meals has been falling.

Official data do not tally with what companies are reporting either. In a boom, corporate revenues tend to grow faster than the economy but today revenues are growing at an inflation-adjusted rate of 4.5 per cent in China and 6.4 per cent in India. In China, few sectors (online retail, for example) are growing as fast as 7 per cent. So how could these economies be growing at 7 per cent plus? Many economists accept the official line to avoid antagonising Beijing and New Delhi but investors with real money on the line do not.

Questions about “funny numbers” have dogged China for years. Sceptics say Beijing manages its data to make growth appear both high and steady to prevent social unrest. More likely, the numbers are managed only when China’s growth falls below the official target, which in the recent past has happened twice: in 1998 during the Asian financial crisis; and since mid-2012.

By contrast, India’s latest growth data look less like the work of a calculating political machine than the result of bungling. Delhi recently reformed its data collection to tap broader sources, which made sense. The subsequent data revision was so sloppy, however, that many now question the credibility of the numbers. This is a classic example of how Indian bureaucrats can take something that is not broken and fix it until it is.

The new numbers raise the Indian GDP growth rate for 2013 to 6.9 per cent, from the estimate of 5 per cent and show a further acceleration to 7.4 per cent for last year . It’s hard to see how India’s economy could have been accelerating when the government was restraining its spending, investment was weak and credit was barely growing.


The irony is that, even by independent estimates, India and China are growing at perhaps twice the average of all other emerging countries, which is 2.5 per cent. They are not stagnating, like Brazil, or contracting, like Russia. Delhi has no reason to exaggerate the numbers. By overstating growth, they risk their own credibility.

India’s government would be smart to follow the lead of its central bank, which has repeatedly expressed scepticism about the revised numbers. China would be well advised to follow the lead of Shanghai, the first province to scrap its official growth target.

It is tough to say how fast the world is growing without reliable data for China and India, which together account for more than a third of global GDP growth. That is why investors are churning out guesstimates. For anyone with a real stake in these numbers, it is better to be roughly right than precisely wrong.


Ruchir Sharma


Fonte: FT

Why ECB risks running out of ammunition

The European Central Bank’s quantitative easing programme announced in January has been well received by financial markets. Its size (€60bn a month) and open-endedness have positively surprised.

The fact that 80 per cent of the bond purchases will not be subject to loss sharing between national central banks has rightly been seen as the price worth paying to get a bigger programme and a wider consensus within the ECB governing council. Indeed, this so-called risk-sharing issue has been overemphasised since all the monetary claims created by the programme will remain a joint and several liability of the eurosystem, whatever the loss-sharing arrangement on asset holdings.


Having said that, the ECB is now close to running out of ammunition. The true constraints on further ECB intervention lie in the 25 per cent issue limit and 33 per cent issuer limit on its sovereign bond purchases.

These limits are not arbitrary and could not be easily raised or removed: they are the byproducts of the conditions set in January by the European Court of Justice Advocate General in its opinion on the legality of outright monetary transactions (OMTs), the sovereign bond-buying backstop revealed by Mario Draghi, ECB president, in 2012 after he promised to do “whatever it takes” to bring order to sovereign debt markets.

Except for Greek debt, the 25 per cent and 33 per cent caps should not prove binding in a scenario where the ECB keeps its monthly asset purchase pace of €60bn. However, the limits could be reached in worst-case scenarios where the ECB would have to boost the size of its QE programme or implement OMTs targeted on specific sovereigns.

The first type of worst-case scenario would be a new global deflationary shock. It might be triggered by faltering US growth or a sharper than expected slowdown in China. The consequence would be fiercer currency wars with balance sheet expansion races among central banks.

In this competition, the ECB would be handicapped: it would not have much room to significantly increase the size of its bond purchase programme. For instance, if monthly purchases had to be raised to €100bn, the 25 per cent issue limit would be reached after only eight months in the case of German government debt.

Given the narrow size of the eurozone corporate bond market, any substantial further expansion of the asset purchase programme would then have to include equities. But this could prove controversial within the ECB governing council.


Another option would be for the ECB to take its policy rates deeper into negative territory, especially if there was upward pressure on the euro exchange rate. Indeed, compared with recent actions by Swiss, Danish and Swedish monetary authorities, the ECB still has some room below zero, although it has said the lower boundary was reached after the September cut. Nevertheless, there is a limit to how far below zero interest rates can go, due to arbitrage with physical currency holdings.

The second type of worst-case scenario would be the return of the redenomination risk premium in certain peripheral sovereign bonds, for instance in the event of a Greek exit from the euro becoming a serious threat.

There is little doubt that the introduction of an alternative currency in Greece would lead markets to reinterpret the euro as a fixed exchange rate arrangement rather than as an irrevocable monetary union.


As recently restated by Mr Draghi, the QE programme does not alleviate the need to make recourse to OMTs in order to remove this redenomination tail-risk in specific stressed countries.

However, contrary to its initial design, the OMT programme could no longer be seen as “unlimited”. In the case of Portugal, for instance, the 25 per cent and 33 per cent limits leave barely any room for OMT purchases in addition to the planned QE purchases.

The new ECB asset purchase programme further lowers the probability of these worst-case scenarios. But investors would be ill advised to fully dismiss them: should they happen, their impact might prove even more damaging and persistent as the ECB would have exhausted all its room for manoeuvre.

Governments would be wise to use the time bought by the ECB to make the future of the euro area less dependent on monetary policy alone.




Olivier Garnier is group chief economist at Société Générale




Fonte: FT

Obama pushes power of weaponised finance to its limits

George Washington carried a musket. Franklin Roosevelt sent in heavy bombers. But for President Barack Obama, who must reconcile a weary American public with the demands of an increasingly unstable world, the armament of choice has been a weaponised form of finance.

To hear enthusiasts describe them, economic sanctions are trusty swords. By excluding hostile governments and their senior officials from western financial markets, America and its allies can pursue diplomacy with a streak of coercion. The number of US sanctions programmes has doubled in recent years, and they now target the personal assets of a rogue state’s political and economic elite.


Jack Lew, US Treasury secretary, has called this “a new battlefield for the United States, one that enables us to go after those who wish us harm without putting our troops in harm’s way”. Yet sanctions cannot solve as many problems as their champions appear to believe, and overusing them is risky.

While economic penalties deliver punishment, there is little evidence that they do much to change behaviour. Since Iranian banks were excluded from critical areas of the global financial infrastructure the ayatollahs have despatched negotiators to the nuclear bargaining table — but Iran has not accepted a deal. A defiant Russian President Vladimir Putin continues to enjoy popular support, and has become even more aggressive in Ukraine in recent weeks. The lesson is that these measures tend to be used against states that care less than most about access to US markets because they prioritise other issues over any jolt of economic pain.

Furthermore, there have been excruciating consequences for western companies based in countries that are US allies. Last year, the US fined BNP Paribas nearly $9bn for failing to comply with US sanctions on Sudan, Iran and Cuba — a penalty that provoked outrage in France. American authorities are investigating whether Commerzbank violated US sanctions against Sudan, Iran and Cuba, as well as North Korea and Myanmar. If sanctions are imposed, they must be enforced. But this stokes anger in Europe, and could make it easier for Mr Putin to drive a wedge between America and the EU.

America’s first foreign policy priority is to manage relations with China. Here, the weaponisation of finance will never be a useful tool. The size of China’s economy makes it impossible to isolate, and Beijing has the means to fight back. China is also more than happy to expand trade and investment ties with partners seeking to protect themselves against punitive US action.

Finally, Washington’s ability to deny others full access to the financial system is valuable mainly because there is no alternative to it. Exclude too many people from it, and you give your rivals an incentive to create one.

Then there is the dollar, which is used in about four-fifths of international trade finance. (The US economy, by contrast, accounts for less than a quarter of world economic output.) This enables America to settle its accounts in a currency it can produce at will. It also allows Washington to tie access to payment systems to compliance with US geopolitical goals. China would dearly like to strip Washington of its ability to use the dollar to impose its will. Many Europeans would like an end to dollar dominance, too. And rogue states such as Russia might respond to the American weaponisation of finance with newly aggressive cyber attacks on US financial institutions.

In short, Washington has good reason to use financial as well as political and military muscle. But there is a clear limit to what it can accomplish, and the cost of using it will only increase.




Ian Bremmer is president of Eurasia Group and global research professor at New York University




Fonte: FT