Central bank monetary arsenal is increasingly ineffective

“Don’t fight the Fed” is a key commandment for every trader on Wall Street. Underlying it is the assumption that central bankers rule financial markets and can move prices, wiping out anything in their way. The recent Chinese stock market rout and the global sell-off that followed have called this dogma into question.

In an attempt to boost confidence and prop up share prices, Chinese authorities cut interest rates and bank reserve requirements, eased regulation on broker accounts and bought stocks. But despite the extraordinary effort, they lost control. Markets have now stabilised, yet one question remains: are central bankers running out of ammunition and credibility?


Several signs suggest loose monetary policy is increasingly proving ineffective, and central banks are failing to generate enough cyclical upswing to win against the structural forces constraining growth and inflation. Monetary stimulus alone cannot fix debt overhangs, low productivity, persistent unemployment, stagnant demographics and a lack of reforms and fiscal stimulus.

In the US and UK, where quantitative easing is deemed most successful and interest rates are expected to be lifted sooner than anywhere else, wage growth remains weak despite rising GDP growth and falling unemployment. Companies and households, which reduced excess debt during the crisis, are starting to borrow again. Nearly a quarter of mortgage borrowers in Britain are taking on loans of four times their gross income, despite the red flags raised by the Bank of England. In both countries the recovery appears deeply uneven, as financial centres like London or New York pull further ahead of other areas.

The eurozone faces more complex challenges. The rebound generated by the European Central Bank’s QE programme in the first quarter is losing momentum and inflation expectations are almost back to where they were before QE was announced.

The transmission of credit to small and medium-sized firms remains impaired. Banks are still deleveraging, and with €1tn of non-performing loans on their balance sheets, or more than 10 per cent of GDP, they are hardly able to lend.

The good news is that policymakers are moving in the right direction by cleaning up banks, harmonising regulation and deepening capital markets. But this will take years. Meanwhile, fiscal stimulus remains insufficient and the Juncker plan for investment is still in its infancy.

China’s situation is perhaps the most alarming. Chinese authorities have implemented the most aggressive multi-pronged stimulus plan globally. Yet, reform efforts aimed at transforming China’s growth model to a more balanced mix of consumption and production remain unclear.
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On the one hand, the government has tightened regulation on shadow banks and local governments, both key drivers of excess investment in real estate. On the other hand, easy policy is fuelling even larger debt overhangs: corporate, household and local government debt has doubled since 2007 to more than 200 per cent of GDP.

Banks that were cleaned up and recapitalised are now seeing bad debts rising again, as property prices keep falling in peripheral cities. While authorities still have dry powder available to soften the landing, a failure to reduce excess industrial capacity and address debt overhangs may result in deflationary pressures and larger economic losses down the road.

What should central bankers do? Many are calling for the Federal Reserve to delay its planned 2015 interest rate lift-off. The reality is that, like other central banks, the Fed does not have much choice. Raising rates this year may safeguard its credibility, but inflation is falling and the chances of a policy mistake are rising. This makes any path to normalisation limited and shortlived.

Monetary stimulus kick-started a recovery in the US and the UK and bought the eurozone time to implement reforms. But it is not sufficient for a durable recovery. The solution is a co-ordinated government effort to address the structural constraints to growth and inflation. Without this, policymakers will keep using the same ineffective monetary anaesthetic against future crises.

A prolonged loop of loose policy carries dangerous side-effects for the economy and for society: potential asset bubbles, over-allocation of resources to leverage-heavy industries and rising inequality. Central bankers increasingly appear to be parading in the emperor’s new clothes.




Alberto Gallo is head of macro credit research at RBS




Fonte: FT

Gillian Tett: Welcome to a wild world of robot investing

This week’s turbulence in the markets was not just a reminder of the ever -growing importance of China’s economy; it was also testimony to how computers dominate the workings of the west’s stock exchanges.

Never mind that the Dow Jones index plunged by 1,000 points in just a few minutes on Monday morning (before later rallying). What was more startling was that the share price of stalwart American companies such as Apple, Home Depot or General Electric gyrated even more dramatically in minutes. * Meanwhile, the value of some exchange traded funds tumbled more than 30 per cent. So much for the idea that such funds are boring.


While it may take weeks before regulators understand why the plunges occurred, one reason for the swing is that automated computer programs have changed how markets function. The use of similar programs — such as high-frequency trading strategies — has expanded so rapidly that these are now estimated by the Securities and Exchange Commission to represent more than half of all US stock trades, and a big chunk of other asset markets.

Orders are being executed at lightning speeds in huge volumes. But there is another, often overlooked implication: these machines are being programmed to link numerous market segments together into trading strategies. So when computer programs cannot buy or sell assets in one segment of the market, they will rush into another, hunting for liquidity.

Since their algorithms are often similar (or created by computer scientists with the same training) this pattern tends to create a “herding” effect. If a circuit breaks in one market segment, it can ripple across the system faster than the human mind can process. This is a world prone to computer stampedes.


Some financiers insist this does not matter. Financial history amply shows that panic selling often occurs with humans too (the US stock market lost almost 90 per cent of its value in the three years after the 1929 crash). The good news about 21st-century computer stampedes is that while they are violent, they tend to be shortlived. By Tuesday the price gyrations seen on Monday had largely died down; similar recent wild bursts of volatility in bond markets also vanished fairly rapidly.

But the bad news is that when these computer stampedes do occur, small players and retail investors tend to suffer most. We do not yet know precisely who lost and gained most this week. But Douglas Cifu, head of Virtu, the world’s largest high-frequency trader, has revealed that Monday was one of the most lucrative days his firm has ever seen; other high-frequency traders have echoed this. Conversely, many of the investors who were trying to sell exchange traded funds at tumbling prices via their brokers on Monday were almost certainly retail players.


Little wonder that Jim Cramer, the CNBC television host who is popular with small investors, presented his show on Monday under the tag “Rage Against the Machine”; nor that Michael Lewis’s critical book about high-frequency traders was a best seller last year. For many western investors, this week’s events showed there is a yawning inequality in modern markets.

There are no easy solutions. In the past, banks smoothed trading flows by acting as market makers. But they have partly withdrawn from that role due to a regulatory squeeze. And nobody seems ready to kick computing trading programs out of the market, since in normal times they appear to provide the liquidity that banks no longer offer. Without high-frequency traders it would probably be more costly for investors of all sizes to trade.

In response, policymakers are now trying to make algorithmic trading more transparent and robust. After a market “flash crash” in 2010, the New York Stock Exchange introduced new circuit breakers, which temporarily stop trading when stocks gyrate too much. While these can sometimes calm markets, on Monday they may have created more panic: one reason the prices of exchange traded funds swung so bizarrely was that there were no prices available for the underlying stocks.

The result is that policymakers — and investors — are in a bind. Nobody wants to get rid of the robots — just this week BlackRock announced that it was purchasing a so-called “roboadviser”, to tap into swelling consumer demand for automated portfolio management. But nobody quite understands what the robots are doing to markets, let alone trusts them. What is crystal clear is that wild gyrations of the sort seen this week are now a central feature of our modern, robot-dominated markets. Human investors, stand warned.




Gillian Tett




Fonte: FT

To be rational about Tesla is to miss the point

Look at the numbers; they are borderline insane. For every car it had sold by the end of last year, Tesla Motors had burnt through about $40,000 in research, development and capital expenditure. The company is worth about half as much as BMW, which makes 35 times as many vehicles. Tesla has never made an annual profit, yet investors keep pouring money in.

In early spring, Elon Musk delivered an analysts’ call for the ages. With most companies, these calls are death marches through the footnotes of an earnings report, but the Tesla founder announced that his company would be spending “staggering amounts on capex” and would be worth $700bn, around the same asApple, in 10 years. Here is how: revenue of $6bn this year, growing at 50 per cent a year for a decade, making a 10 per cent profit margin and valued at 20 times earnings. You hear that in Munich?

It was sweet of Mr Musk to bother with a cash flow valuation exercise, but he may have been patronising his audience. The idea of applying the same valuation to Tesla as you might to Ford makes little sense. This looks more like a venture investment. You do not buy Tesla because you think you know what profits it will make. You buy the stock because you think some new technology such as Tesla’s will change the world in ways that invalidate any such estimate. This is a play on the looming changes in the car and energy industries. To profit from the electric car race, you have to back the winner. Missing out is costlier than backing a few losers along the way.

It is all prone to risk: the novel technology, the competitive threat, the danger of its charismatic founder falling under a bus, taking Tesla’s mojo with him. Hedge funds love the stock because it is so volatile. No one can make up their mind whether it is for real. All that seems certain is that, a decade hence, the company’s value will be nowhere near its current market capitalisation of $28bn. If Mr Musk fails to realise his bold vision, the company might be worthless. If you buy Tesla now and the company delivers, you will have hit a giant home run.

Mr Musk stands at a crossroads of three industries that have always been rich in swashbucklers and hype: energy, cars and technology. Energy has its wildcatters, oil and gas men who build great fortunes starting with nothing but a wide-brimmed hat and a hole in the ground. The car industry has long attracted adventurers. William Durant sold cigars and carriages before founding General Motors and hiring Alfred Sloan to run it. During the 1920s, he became a major player on Wall Street. But he was ruined in the crash of 1929 and ended his life invalided by a stroke and managing a bowling alley in Flint, Michigan. In the late 1970s, John DeLorean, a GM executive who made his name building muscle cars, raised money from his celebrity friends and a British government desperate for an industrial manufacturing success to build the DMC-12, an all-steel, rustproof sports car with gull-wing doors. The venture imploded in 1982 when DeLorean was arrested with 55 pounds of cocaine and charged with trying to sell it to finance his flailing company. His car may have been a clunker, but it was immortalised as a time travel machine in the 1985 movie Back to the Future.


Then there is the technology industry, which rewards absurdly big thinking. You do not get to a Tesla-sized valuation by playing coy. Investors, employees and customers all want to hear you say you are going to be massive. Facebook, Google, Apple massive. That is what attracts the talent and the money.

Mr Musk has done a remarkable job in proving that electric cars can be gorgeous. When you are slung low in one of the Model S’s curving seats, see the giant touchscreen which stands in for all the footling dials on ordinary cars, start it up and hear the murmur of its electrical system stirring to life — when you do all that, you might not mind taking a one-way trip over the financial rapids.

The Tesla chief’s dynamism has hurried along an entire industry. He is keeping Mercedes up at night, as well as an already sleep-deprived Detroit. But to think that he can grow at the rate he proposes and gobble up the car market the way Apple did with smartphones is to misunderstand how cars are bought and sold. People crave choice. As Henry Ford discovered to his detriment, they did not want their cars just in black. They wanted them in lots of colours, with fins, and floating suspensions and giant grilles.

Still, if you try to be rational, you are missing a big point in Mr Musk’s favour. Silicon Valley is currently obsessed with cars. More than that, those who mutter about the lessons of the last dotcom crash could be missing out on the next Amazon. If you had written off Jeff Bezos’ hubris, you would have missed one of the great investments of our age. You buy Tesla today so that in years to come, you can say you were there.


Philip Delves Broughton is author of ‘What They Teach You at Harvard Business School’

Fonte: FT

Martin Wolf: Why worries about China make sense

I am neither intelligent enough to understand the behaviour of “Mr Market” — the manic-depressive dreamt up by investment guru, Benjamin Graham — nor foolish enough to believe I do. But he has surely been in a depressive phase. Behind this seem to be concerns about China. Is Mr Market right to be anxious? In brief, yes.

One must distinguish between what is worth worrying about and what is not. The decline of the Chinese stock market is in the second category. What is worth worrying about is the scale of the task confronting the Chinese authorities against their apparent inability to deal well with the bursting of a mere stock market bubble.

Stock markets have indeed been correcting, with the Chinese market in the lead. Between its peak in June and Tuesday, the Shanghai index fell by 43 per cent. Yet the Chinese stock market remains 50 per cent higher than in early 2014. The implosion of the second Chinese stock market bubble within a decade still seems unfinished. (See charts).

The Chinese market is not a normal one. Even more than most markets, this is a casino in which each player hopes to find a “greater fool” on whom to offload overpriced chips before it is too late. Such a market is bound to be extremely volatile. But its vagaries should tell one little about the wider Chinese economy.

Nevertheless, events in the Chinese market are of wider significance in two related ways. One is that the Chinese authorities decided to stake substantial resources and even their political authority on their (unsurprisingly unsuccessful) effort to stop the bubble’s collapse. The other is that they must have been driven to do so by concern over the economy. If they are worried enough to bet on such a forlorn hope, the rest of us should worry, too.

Nor is this the only way in which the behaviour of the Chinese authorities gives reason for concern. The other was the decision to devalue the renminbi on August 11. In itself this, too, is an unimportant event, with a cumulative devaluation against the US dollar of just 2.8 per cent so far. But it has significant implications. The Chinese authorities want room to slash interest rates, as happened this Tuesday. Again, that underlines their concerns about the health of the economy. Another possible implication is that Beijing might seek a revival of export-led growth. I find this hard to believe, since the global consequences would be devastating. But it is reasonable at least to worry about this destabilising possibility. A last possible implication is that the Chinese authorities are preparing to tolerate capital flight. If so, the US would be hoist by its own petard. Washington has sought capital account liberalisation by China. It might then have to tolerate a destabilising short-term consequence: a weakening renminbi.

Recent events must be seen in the context of a deeper concern. The question is whether the Chinese authorities can and will secure a shift from an investment-led economy to a consumption-dominated one, while sustaining aggregate demand. If they can, the economy will also sustain growth of 6-7 per cent. If they cannot, economic and political instability threatens.

China’s economy has already slowed. The talk of a “new normal” recognises this reality. But Consensus Economics has brought together alternative growth forecasts. The mean of these new forecasts shows growth of only 5.3 per cent in the year to the fourth quarter of 2015 (see chart).

Suppose something like this were true. According to official figures, gross fixed investment was 44 per cent of gross domestic product in 2014. Figures for investment are more likely to be correct than those for GDP. But does it make economic sense for an economy to invest 44 per cent of GDP and yet grow at only 5 per cent? No. These data suggest ultra-low, if not, negative marginal returns. If so, investment could fall sharply. That might not lower potential growth, provided wasteful investment were cut first. But it would cause a collapse in demand. Everything the Chinese authorities have been doing suggests they are worried about just that.

This worry about deficient aggregate demand is not new. It has been a big concern ever since the west’s financial crisis, which devastated demand for China’s exports. This is why China then embarked on its own credit-fuelled investment boom. Remarkably (and worryingly), the share of investment in GDP rose just as the growth of potential output declined. That was not a sustainable combination in the longer term.

This now leaves the Chinese authorities with three huge economic headaches. The first is cleaning up the legacy of past financial excesses while avoiding a financial crisis. The second is reshaping the economy, so that it is more dependent on private and public consumption and less dependent on extraordinarily high levels of investment. The third is achieving all that while sustaining dynamic growth of aggregate demand.

Recent events matter because they suggest the Chinese authorities have not yet worked out a way of pulling this triple combination off. Worse, the expedients they have tried over the past seven years have made the predicament even worse. Maybe, Mr Market has grasped how difficult this is going to be and so how destabilising some of the options the Chinese might choose actually are. These include devaluation, ultra-low interest rates and even quantitative easing. If this is the case, the market turmoil might not be foolish. The global savings glut can get worse. That would affect everybody.

Martin Wolf

Fonte: FT

Show steel and raise rates or the financial system will fracture

Raising interest rates is always harder than cutting them. When investors are bleeding and workers fear the chop, promises of cheap money sound like the hoofbeats of arriving cavalry. But the trauma does not end for everyone at the same time. When the rescuers depart, some complain they are being abandoned too soon.

Pity the Federal Reserve, then, which is widely expected to start increasing rates by the end of the year — or had been expected to, until a fierce bout of selling began in emerging markets and spread to stock exchanges around the world. There will be calls for central banks in the US and elsewhere to delay long-flagged increases in interest rates. Yet they must not blink.


The case for waiting does not rest on market movements alone. Since there is no sign of inflation, it is argued, there is no need to raise rates. And since the recovery has always seemed fragile, there is no sense in raising them. The case for caution was being made when markets were rising. Its appeal will only grow now markets are faltering.

Yet monetary policy cannot confine itself to reacting to the latest inflation data if it is to promote the wider goals of financial stability and sustainable economic growth. An over-reliance on extremely accommodative monetary policy may be one of the reasons why the world has not escaped from the clutches of a financial crisis that began more than eight years ago.

The origins of today’s market panic relate to recent policy choices. One of the factors behind the stock market slide is the stalling of growth in China. Official data, which paint a reassuring picture of steady growth, are widely considered to be unreliable. Look at what is happening in individual industries, however, and the picture is more troubling. Chinese consumption of smartphones shrank for the first time in the second quarter of this year, according to data from Gartner. The sales projections of many western technology companies have followed suit.

The slowdown in the Chinese economy has its roots in decisions made far from Beijing. In the past five years, central banks in all the big advanced economies have embarked on huge quantitative easing programmes, buying financial assets with newly created cash. Because of the effect they have on exchange rates, these policies have a “beggar-thy-neighbour” quality. Growth has been shuffled from place to place — first the US, then Europe and Japan — with one country’s gains coming at the expense of another. This zero-sum game cannot launch a lasting global recovery. China is the latest loser. Last week’s renminbi devaluation brought into focus that since 2010, China’s export-driven economy has laboured under a 25 per cent appreciation of its real effective exchange rate.

Exchange rates aside, long periods of accommodative monetary policy have led to a misallocation of resources. The extent of this will be impossible to measure for many years but, in the places where credit growth has been most dramatic, there are strong hints.

Accommodative monetary policy was supposed to spur investment in productive activities at home. Instead, companies and banks hoarded cash. Much of the extra credit instead financed housing purchases at home, or was funnelled into loans for companies and governments in emerging markets. According to the World Bank, corporates and sovereigns in emerging economies collectively sold $1.5tn in new bonds in the five years to 2014, almost three times the rate between 2002 and 2007. Although today’s attention is on the weakness of stock markets in America, Europe and Japan, turmoil in the distant debt markets where investors from developed countries have placed their cash will be of more lasting concern.

There are two silver linings to the dark clouds. First, because of the highly concentrated flow of international credit flows, today’s crisis may come to resemble the Asian financial crisis of 1997. It was brutal and contagious, but regionally contained in comparison to the global and systemic crisis that began in 2007. Second, despite many protests, emerging markets long ago decided the international financial system is inherently unstable and built up reserves to help them weather the storm.

Still, that fragile and dysfunctional financial system is a serious problem. It will remain so as long as the institutions that are supposed to manage international spillover effects from monetary policy lack legitimacy, credibility and capital. And if the advanced economies continue to rely on near-zero interest rates to fuel growth, they will only make that predicament worse.


Avinash Persaud is a fellow of the Peterson Institute for International Economics and is the author of ‘Reinventing Financial Regulation’




Fonte: FT

Conditions for rate rise approaching, says Fed

Não acredito mais que o aumento ocorrerá em setembro. Dezembro é mais provavel, dependendo, naturalmente, dos dados da economia americana.



Federal Reserve policymakers expressed concern about low inflation as well as threats to the US economy posed by a stronger dollar and developments in China, but deemed conditions for a rate rise to be “approaching”, according to minutes released on Wednesday.

The minutes of the July 28-29 meeting of the Federal Open Market Committee include no mention of any plans to raise rates at their next meeting on September 16-17. They point to a vigorous debate within the Fed over a number of key data points including inflation and the timing of an increase.


But the minutes also offer a view of a Fed that is clearly approaching decision time on raising rates for the first time since the global financial crisis with much of the bank’s internal discussions focused on how best to communicate the eventual move to markets.

“Most [FOMC members] judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point,” Fed staff wrote.

When that moment comes, however, the minutes show that the Fed’s policymakers are eager to get the message out that any future increases in the federal funds rate will be modest.

FOMC members had stressed that “the committee’s communications around the time of the first rate increase should emphasise that the expected path for policy, not the initial increase, would be the most important determinant of financial conditions and should acknowledge that policy would continue to be accommodative,” Fed staff wrote.

Markets read the minutes as dovish. Bond markets rallied on the lack of any overt hints of imminent monetary policy tightening, with the US 10-year Treasury yield falling to 2.11 per cent after climbing as high as 2.22 per cent earlier in the day. The dollar also slipped on the cautious tone of the Fed minutes, with the main US currency index declining 0.6 per cent.

“We don’t come away from the minutes feeling more confident about our call for a September rate hike,” said Michelle Girard, chief US economist at RBS Securities.

The July minutes were released early by the Fed after Bloomberg sent out a headline to subscribers before an embargo lifted. The company said it had “inadvertently” broken the embargo by 24 minutes.

With recent employment figures strong, the state of the US labour market prompted little discussion at the July meeting. But some members of the FOMC said they were still concerned about the fact wages were rising only slowly, along with other evidence of continuing slack in the labour force.


Alongside that discussion was a more pointed debate within the Fed over inflation and whether it is on a path toward the central bank’s 2 per cent target.

Consumer price data released on Wednesday showed prices in July were just 0.2 per cent higher than a year before. The so-called “core inflation rate”, which excludes energy, put the increase at 1.8 per cent.

At their July meeting FOMC members “generally anticipated that inflation would rise gradually toward 2 per cent as the labour market improved further and the transitory effects of earlier declines in energy and import prices dissipated”, the minutes said.

But “some participants” also took a more pessimistic view, pointing to the risk of further declines in oil and commodity prices and the risk of a further strengthening in the dollar.



The July meeting took place before China’s move last week to depreciate its currency, the renminbi, in what many have interpreted as an expression of concern by the leadership in Beijing over the slowing Chinese economy.

Since that move the downside risks to US inflation have only grown with many commodity prices and oil tumbling in the wake of the Chinese central bank’s announcement.

But the Fed policymakers already had China in mind when they met in July, even as they saw diminishing risks of an escalating crisis in Greece.

“While the recent Chinese stock market decline seemed to have had limited implications to date for the growth outlook in China, several participants noted that a material slowdown in Chinese economic activity could pose risks to the US economic outlook,” the minutes said.

There were also concerns that a Fed move to raise rates could lead to a divergence internationally in interest rates that “might lead to further appreciation of the dollar, extending the downward pressure on commodity prices and the weakness in net exports”, Fed staff wrote.




Fonte: FT

Najib Razak has too much power for Malaysia’s good

The story is that in March 2013 one or more unnamed Middle Eastern donors transferred a total of nearly $700m into the personal account of Najib Razak, prime minister of Malaysia. The generous amount was a donation to be lavished on that year’s election campaign of the ruling United Malays National Organisation as Mr Najib saw fit. So sordid are the goings-on in Malaysia these days that, astonishingly, this is not the case being mounted against the prime minister. This is the case for Mr Najib’s defence. Malaysia’s widely lampooned prime minister is in such a deep, dark and money-stuffed hole that this is the version of events being promoted by his allies.


It was also the finding this month of the Malaysian Anti-Corruption Commission. It turns out that an anonymous donation from a foreign benefactor is the least damaging explanation of how 2.6bn ringgit found its way into Mr Najib’s account. The prime minister has denied committing any wrongdoing or accepting money for personal gain.


If this is the positive take, the negative version is worse. This would have it that in 2009 Mr Najib set up a development fund, now in debt to the tune of $11bn, with the express purpose of generating cash to be spent on prolonging UMNO’s already nearly six decades in power. Seeded with a tiny amount of state capital, 1Malaysia Development Berhad, or 1MDB in its now dirt-splattered initials, avidly set about borrowing money on the capital markets. It issued bonds worth billions of dollars and bought sundry energy and property assets in Malaysia and around the world. 1MDB, which has a chronic lack of cash flow, is struggling to service its debts. In May, it received a lifeline when an Abu Dhabi state fund injected $1bn into its coffers to tide it over.

According to a report last month in the Wall Street Journal and investigative journalists at the Sarawak Report, the money in Mr Najib’s account had been moved by agencies, banks and companies linked to 1MDB. Mr Najib denies any connection between 1MDB and the funds in his account. He has threatened to sue the Wall Street Journal. 1MDB, says Mr Najib’s defenders, was a genuine, if flawed, attempt to modernise the Malaysian economy through developing innovative sources of growth.

Whether you believe the bad version of the story (donation) or the very bad version (slush fund) comes as small consolation to Malaysia. Once considered a model of development, the country’s reputation is sinking fast. So is that of Mr Najib. The urbane, blue-blooded and British-educated prime minister was once courted by the likes of Barack Obama, US president, and David Cameron, British prime minister, who saw him as an economic moderniser and a progressive standard-bearer of moderate Islam.

One disaffected Malaysian, in an allusion to the former dictator of the Philippines, described his country as “going backwards to the era of [Ferdinand] Marcos”. In Mr Najib’s wife, the fashion-conscious Rosmah Mansor, Malaysia may even have its own prospective Imelda, the former first lady of the Philippines whose extravagant shoe collection became a symbol of the rottenness of the Marcos regime. The reputational risk to Malaysia is having financial consequences too. The ringgit has fallen to a 17-year low and Malaysian stocks, the worst performing in Asia, are down one-third over the past 12 months.

Mr Najib’s supporters say he is the victim of a conspiracy being led by Maha­thir Mohamad, the still-influential for­m­er prime minister who built the system of patronage and money politics that has sustained UMNO for so long. At 90, Mr Mahathir is launching salvo after vituperative salvo via his blog.

Yet more than the innuendo and the as-yet-unproven accusations, Malaysia’s crisis is about the legitimacy of its institutions. To the extent that these were ever strong, they are now being badly compromised. Mr Najib has moved aside the attorney-general who was investigating his case. He has sacked his deputy prime minister for daring to suggest there was a case to answer. Four members of a committee co-ordinating a probe into 1MDB have been conveniently promoted, bringing that part of the investigation to a halt. Two newspapers have been suspended for running with the 1MDB story and the leader of the now-fractured opposition, Anwar Ibrahim, has been jailed for ­sodomy.

Tony Pua, an opposition MP who has led the charge against Mr Najib, thinks the prime minister will survive. “He can’t be removed because he controls the wheels of power,” he says. As prime minister, Mr Najib wields enormous authority. As president of UMNO, whose interests often trump those of the state, he perhaps wields even more. That is Malaysia’s real problem. UMNO’s interests and those of the nation have been artificially fused. For the good of Malaysia, they should be prised apart.




David Pilling




Fonte: FT

A currency skirmish that was not made in China

There was a time when young beggars in the countryside outside Jakarta shunned dollars in favour of Japanese yen. Potential customers in Indonesia, meanwhile, shunned Japanese imports because they were so expensive. If your prosperity depends on finding foreign markets for its products, a strong currency is a curse.

Last week China became the latest country to counter that curse with the charm of competitive devaluation. Beijing tweaked the formula used each day to fix the value of the renminbi against other currencies, triggering the biggest one-day currency move since the mid-1990s. Some analysts said other countries, particularly in Asia, may be forced to follow suit — perhaps setting up a cascade of tit-for-tat devaluations.


Yet China is a latecomer to the currency skirmishes. Before 2005, the value of the renminbi was fixed at a constant rate against the dollar. Since that peg was relaxed, the Chinese redback had risen 25 per cent against the greenback. (It has risen still more steeply against a trade-weighted basket of currencies, and by about 50 per cent against the Japanese yen.) Even the International Monetary Fund no longer finds the currency undervalued.

Meanwhile, central banks in the big developed economies have held interest rates at close to zero and used freshly minted cash to buy financial assets in huge quantities, a practice known as quantitative easing. Such policies have become the instruments of choice for governments wishing to drive their currencies down and their exports up.

Japan, where exports have yet to return to their pre-crisis peak, is a case in point. The country suffered for three years with a sharply appreciating yen, until the Bank of Japan embarked on its own quantitative easing programme in April 2013, which threw that trend into reverse. The Japanese currency has fallen 33 per cent against the US dollar since then. For all the talk of prime minister Shinzo Abe’s “three arrows”, this is the only element of his economic policy that has convincingly taken flight.

When trade is flourishing and output is growing strongly, there is little harm in such antics. But when the world economy is soft, they are both predatory and dangerous. The gains in exports of one nation come at the expense of others.

The US Treasury, which has said little about Japan’s extraordinary programme of monetary easing (or, for that matter, the Federal Reserve’s) regularly uses its semi-annual reports to Congress to lambast China for “manipulating” its currency. That is an odd stance.

For one thing, many Americans have benefited from the Chinese export surge, although it has clearly made life harder for manufacturing workers. Consumers have been able to buy more with their dollars, and borrowers have had access to cheaper financing because China recycles much of its earnings by buying US government debt.

But the oddest thing about the Treasury’s complaints is that China has in fact kept its currency strong — displaying restraint that has earnt it little credit.



To be sure, Beijing’s motives have not been entirely altruistic. The rest of the world might think of China as a maker of cheap toys and low-end electronics, but a rising renminbi forced Chinese manufacturers to move upmarket. The country is increasingly making its own capital goods instead of importing them from Germany or Japan. It is challenging Samsung and other Korean makers on everything from ships to smartphones. A single Chinese company, Shenzhen-based DJI, now accounts for 70 per cent of the world market for small drones.

China’s plan for growth once involved investing heavily in fixed assets and marshalling cheap labour to operate them, exporting manufactured goods to the rest of the world. That has changed. Now Beijing wants an economy that relies more on value-added manufacturing and a shift to domestic consumption and spending on services. That depends on workers earning more and having more income to spend. It cannot be achieved by driving down the price of Chinese goods in foreign markets.

When Beijing has nudged the renminbi lower, its hand has often been forced. After the G20 meetings in Sydney 18 months ago the Chinese currency fell by about 2 per cent, to the vocal ire of the US. Yet at that time, many hedge funds were minting money by borrowing cheap yen and buying assets such as corporate debt priced in renminbi; the Chinese pointed out that there needed to be a two way trade in renminbi, “in accordance with market principles”.

Last week’s manoeuvre, which was also couched in the language of the market, is unlikely to be the start of a sharp descent for the Chinese currency. Many companies have borrowed dollars offshore; depreciation only makes their debt burden heavier. And authorities do not wish to see dramatic increases in capital outflows.

But if that proves optimistic and a currency war ensues, history should record that Beijing did not fire the first shot.


Henny Sender


Fonte: FT

Fear Vladimir Putin’s weakness not his strength

It is hard to find a more spirited supporter of Russian president Vladimir Putin than Konstantin Malofeev, the so-called “Orthodox businessman” who has been outspoken in his backing of the separatists in Ukraine.

In Mr Malofeev’s telling, Mr Putin’s accomplishments have been to crush the oligarchs, reassert the Kremlin’s authority across the country, revive the economy, bolster the Orthodox church and re-establish Russia as an independent geopolitical actor.

“Russia is not Belgium. Russia can only exist as an empire,” he told my Moscow colleagues and me earlier this year in his offices resplendent with tsarist regalia. “Putin is a historic leader. The best leader in the past 100 years.”

But when asked about whether Mr Putin had succeeded in creating a system of governance that would outlast him, the voluble Mr Malofeev expressed some uncharacteristic doubts. “Finding another Putin is very difficult. I am not sure this system can continue after Putin,” he said.

Mr Malofeev’s hesitation touches on the cardinal sin of Mr Putin’s rule that should be considered by western policymakers dealing with Moscow. Mr Putin has consolidated the Kremlin’s power by stripping all rival institutions of authority and legitimacy. Over the past 15 years, he has neutered parliament, the regional governors, the free press, the opposition and the law courts. From any longer-term perspective, the striking feature of Mr Putin’s Russia is not its strength but its alarming brittleness.

For the moment, Mr Putin may convey the impression of being the master of all he surveys, leading a resurgent Russia and intimidating her former Soviet neighbours. If anything, western debates about Russia tend to exaggerate the country’s cycles and its politicians are shivering at the prospect of a new cold war. But before long, Russia may have slipped again into a cyclical downturn, leaving the west to fret about the dangers of economic and social chaos, virulent nationalism and nuclear proliferation. A weak Russia may be even more worrying than a strong one.

It is not only Mr Putin’s political model that looks outdated. Russia’s economy appears equally threadbare. Under the strains of lower energy prices, western sanctions and massive capital flight, Russia’s economy contracted 4.6 per cent in the second quarter of 2015 compared with the same period the previous year. Real incomes are falling for the first time in Mr Putin’s rule.

The Soviet Union once vied with the US for economic supremacy; now, America’s gross domestic product using purchasing power parity is five times larger than Russia’s. If, as some suggest, we have reached “peak demand” for oil then Russia’s economy looks vulnerable given its failure to diversify. It has no new model for growth.

Underlying this economic fragility is a demographic disaster. Russia’s population has fallen to 142m, smaller than that of Bangladesh. Many of its best brains are quitting the country, or are being forced to do so. A recent Russian report into the country’s demographic trends concluded: “If the situation does not improve the country can expect problems in the economy, international competitiveness and, in a long-term perspective, geopolitics too.”

Abroad, Russia has few reliable allies. The Eurasian Union it has cobbled together to rival the EU is a palace built on sand. Moscow has made much of its partnership with China but the relationship is wildly lopsided and Beijing has been adept at exacting a high economic price for its political goodwill. In a pre-nuclear age, China would have surely annexed Siberia by now.

Russia’s projection of soft power looks no more promising in spite of the expansion of state-backed English-language media outlets. A report published this month by the Pew Research Centre into the attitudes of 45,000 people in 40 countries found that Russia and Mr Putin were held in low regard around the world. “Favourable opinion of Russia trails that of the US by a significant margin in most regions of the world,” it found. A median of 58 per cent in each country outside Russia held a negative opinion of Mr Putin.

Considering all these weaknesses, one liberal Russian friend compares Mr Putin to the monster cockroach in the children’s poem by Korney Chukovsky. For a while, the cockroach, with his ugly threats and fearsome moustache, throws all the larger animals on a picnic into a panic.

“Into the fields and woods they dash —

Terrorised by the Roach’s moustache!”

But then a sparrow swoops down and snaps up the cockroach, leaving the animals to wonder why they were ever afraid in the first place.

Mr Putin’s fate remains uncertain and Russia’s future wildly unpredictable. Calibrating a response is difficult. The west carries more weight when it is united and strong. It has surely been right to sanction Mr Putin’s regime for trampling over Ukraine’s sovereignty. It is right to bolster the defences of Nato member countries that border Russia.

But it would be rash to equate Mr Putin’s regime with Russia and reinforce it by declaring a new cold war. To the limited extent that it is possible, the west should make clear to the Russian people that it has no wish to isolate them. It should leave the door to Russia ajar in case any future leader wishes to walk back through it.

Fonte: FT

Zhou Xiaochuan, Beijing’s central radical banker

In the early 1980s, a promising PhD student from a prominent political family caught the eye of China’s most senior Communist leaders by urging them to lift price controls and allow imports of televisions.

Three decades later Zhou Xiaochuan, China’s longest-serving central bank governor, is still convincing the country’s authoritarian leaders of the merits of economic reform. In persuading them this week to devalue the currency, he may have pulled off the crowning achievement of his long career — by preparing the way for a free-floating renminbi that can challenge the US dollar as the world’s reserve currency.

The People’s Bank of China’s announcement on Tuesday that it had devalued the renminbi against the dollar by nearly 2 per cent overnight — the biggest fall since 1994 — caught markets by surprise and raised the prospect of a so-called currency war. Mr Zhou presented the move internally to President Xi Jinping as a matter of national interest, necessary to boost the economy at a time when growth is slowing sharply. To the outside world, the PBOC portrayed the devaluation as a step toward a more market-oriented and freely tradable Chinese currency. He hoped this would prevent competitive devaluations while also convincing the International Monetary Fund to include the renminbi in a basket of reserve currencies.

The ability to make his reforms palatable to both global markets and Communist party stalwarts marks him as a brilliant technocrat at the height of his political powers, even as he prepares to retire. Although he is often referred to as China’s Alan Greenspan, the position of central bank governor is far less influential in the People’s Republic than in the US. Big decisions such as raising or lowering interest rates are decided by party leaders. But, as with most posts, it is the person who bestows power on the position rather than the other way round.

Mr Zhou, like Mr Xi and many other senior leaders, is a “princeling”, as the children of senior party members are known, and this gives him influence that goes well beyond his official title. He was born in 1948, one year before the establishment of the People’s Republic. His father was an early member of the Communist party and its secret service in the second world war, and later vice-minister of machinery.


Beyond official biographies, the personal details of senior Chinese leaders are considered state secrets and, apart from the fact that he is married to a senior former official in the ministry of commerce legal department, little of his private life is known publicly.

The younger Zhou graduated from an elite Beijing high school in 1966; and, when the Cultural Revolution began that year, he was a leader in one of the vicious Red Guard groups that persecuted teachers, “bad elements” and “capitalist roaders”, according to two people familiar with the matter. Any-one who has met him in the past few decades finds it hard to believe this avuncular, urbane and scrupulously polite man could have been involved in the violent excesses of that period.

In 1968, like millions of other rebellious youngsters, Mr Zhou was sent to a state farm in the frigid far northeast, where he kept his spirits up in four years of exile by listening to banned classical music records. When his father was rehabilitated in 1973 he was allowed to return to Beijing and embark on a life in academia. In the 1980s he studied briefly in the US and, on his return, joined a group of young technocrats in Beijing pushing to open up to the west.


Mr Zhou’s political star really began to rise when President Jiang Zemin, a former protégé of his father, came to power in 1989. He served as head of a string of organisations, including the China Securities Regulatory Commission, where he was known as Zhou “Bapi” — the Flayer — because of attempts to crack down on corruption in nascent capital markets. Again, his titles did not reveal his true influence. He has been instrumental in establishing China’s equities markets in the early 1990s, in bailing out and restructuring banks in the late 1990s, overhauling equity markets in the early 2000s and nurturing the bond market since then.

A regular at meetings of the IMF, he charms westerners with his coruscating intelligence, fluent English, sense of humour and mean tennis game. Hank Paulson, former US Treasury secretary, credits Mr Zhou with convincing him to take the job in 2006 after he had already turned it down. But the traits that make him palatable to western elites have often worked against him at home, where he is accused of being too liberal, too “foreign” and too close to the US.

His imminent political demise has been wrongly reported multiple times— at least twice by the Financial Times — since he became central bank governor in 2002, and he has been the subject of campaigns by overseas Chinese-language media alleging everything from insider trading to selling China’s banks to foreigners on the cheap. In 2010, the PBOC was forced to publish pictures of Mr Zhou meeting foreign dignitaries in Beijing in the wake of rumours he had defected to America to avoid punishment for losses on US Treasury bonds.

“It is clear he sometimes pisses people off, including President Xi,” says Christopher Johnson, a former senior China analyst at the CIA now at the Center for Strategic and International Studies in Washington. “But he has never been so important or so powerful. He is going to retire soon so has nothing to lose and he is absolutely determined to achieve the market reforms he has committed most of his life to.”


Jamil Anderlini is the FT’s Beijing bureau chief

Beijing’s futile quest to turn string-savers into spendthrifts

My very Chinese Malaysian wife saves string. She saves practically everything that comes into the house that can be used again, but the string is notable because it comes from the small bags in which Kuala Lumpur’s roadside mamak stalls serve drinks — takeaway cups at a fraction of the cost of the ones used by companies such as Starbucks.

A hawker pours your drink into the bag, knots a top corner, inserts a straw, pulls a loop of string around it all, and you’re good to go. You can hang five from one finger and not spill a drop on your way to the office. I needed a little string to stake some tomato plants recently and she pointed me to a bunch of loops hanging in the kitchen. It has taken some cajoling to get her to throw away the straws and bags themselves.


Though generous with family and friends, she will push a cart full of groceries to the other end of a mall to save 5 cents on two litres of milk. When buying a pen, she gives me the evil eye for being slow to whip out my loyalty card for the points. Our sons might be outgrowing their school uniforms, but they will wait until the next year for new ones.

That is the frugal culture prevalent in the Chinese diaspora across east Asia, and it stems from the historical need to be secure in later years. Americans will pick up a $3 coffee each morning whether they are going to work or to the unemployment office. Chinese won’t.

China has nothing like the west’s social security systems. If you are lucky, the one child you have is a son — for whose education you will have saved up — because you can move in with him and his family when he has his own home. (If you are really lucky, your daughter-in-law will like you.) If you are not lucky, your daughter — for whose education you also saved up — becomes someone else’s daughter-in-law, and you’re on your own. You probably do not have a company pension; but you would not be living large on it, or on what the government might give you, anyway.

You have saved your whole life, as your parents and their parents taught you, and as you teach your own child and grandchild. It was never about having the most toys or about winning; it was about your old-age health, and maybe a place with indoor plumbing. The 600m Chinese who live on a few dollars a day are just a statistical concept to westerners, but they are family to the country’s emerging middle class.

Changing this culture from saving to consuming was never going to be easy, and was never going to be accomplished by government prodding. Sure, China’s millions of newly prosperous are happy to consume — conspicuously — but not because the state says so. They are a small percentage of the population anyway, and there is a limit to the macroeconomic impact of even their spending. For everyone else, it will take a confidence in Beijing that has been greatly shaken recently, if it ever existed, by the failure of one state intervention after another to put paid to stock market volatility. Good luck with that.

Even living in a controlled society driven by propaganda, Chinese people know state-issued reports are often not accurate, that ghost cities are not productive, that the crackdown on corruption feels cynical, and that massive government lending for infrastructure cannot be good. Now they have learnt how markets work, and that Beijing cannot really control them, the hard way.


Millions of Chinese are thought to have opened new trading accounts — and lost hundreds of billions of dollars — this year heeding the government’s sweet talk about good times ahead in the stock market. This week’s devaluation of the renminbi is more bad news. You think a few per cent is small change? My wife stocked up on groceries in March before Malaysia’s six per cent sales tax kicked in on April 1. So did most of her friends. So did most of Malaysia, if local retailers are to be believed.

For Chinese saving to send a child to a western university, worrying about how many renminbi you will need to buy dollars or pounds when that day arrives does not make you want to buy a new iPhone today. My wife had to change universities in the US when the ringgit tanked in 1997. Plenty of Chinese people around Asia had similar experiences.

Beijing’s recent financial market moves, which seem more desperate than wise, will not convince more citizens to spend at Starbucks instead of mamak stalls. Nor will a less certain future stop China turning into a consumer society. Centuries of sensible frugality will do that. Either way, it will take more than a few years of state prodding and propaganda. So don’t hold your breath — and, if the economic engine that has driven much of the world’s growth in the past two decades keeps sputtering, you may want to save string.


Robert Boxwell is director of Opera Advisors, a Kuala Lumpur-based consultancy

Fonte: FT

A Greek deal based on fear and mistrust

Nobody is quite ready to celebrate, and the deal Greece appears to have struck with its creditors on Tuesday morning is not the stuff to induce a party mood anyway.

There is little to surprise those combing the details leaking out in press reports. How could there be, given how extraordinarily detailed were the conditions set by creditors in July’s hair-raising crisis summits?

The path outlined for primary budget surpluses, however, gives cause for cheer. While the target for 2018 was agreed last month — government revenues should by then exceed spending (excluding debt service) by 3.5 per cent of gross domestic product — the tightening will take place later than Greece’s creditors had previously insisted. For 2015, a primary deficit of 0.25 per cent is required. Given the economy’s return to recession, that may still entail a budgetary squeeze. But then little further austerity is needed to achieve the 0.5 per cent surplus target for 2016; the bulk of the consolidation will happen in the last year of the period.

This is a welcome sign of more enlightened self-interest from the creditors. No one benefits from making Greece’s debt burden worse by excessively squeezing an economy in recession. It bears remembering that in 2014, when Greece’s economy recorded three quarters of growth afters five years of recession, was also the only year in which the country undertook no structural budget tightening.

Substance aside, that a deal is being finalised itself tells volumes.

The European Commission has stressed that the talks that have apparently come to a successful end were technical discussions, and the deal they produced in principle still needs to be backed by a political agreement. But this underplays how big a reversal has taken place in the Greek approach.

Recall that for the first half of this year, the Syriza government insisted on lifting discussions from the technical to the political level, in the hope that other leaders would heed its calls for a new approach. That strategy, as we know, failed. The Greek capitulation not just on the substance, but on the process, has no doubt helped speed things up.

Note also how quickly Germany has found itself alone in the emphasis that a thorough deal is better than a speedy one. That insistence was always a bit odd given the thoroughness of what was on the table already, but Berlin’s concern that a deal needs to hold up for the full three years for which it is projected reflects the continuing lack of trust between creditor and debtor.

The hard stance that Berlin took in July — not least its suggestion that Greece be suspended from the euro — has triggered shock in other European capitals. It is provoking reactions that we are only just starting to glimpse.

One seems to be a determination not to be held hostage by German recalcitrance any more than Greek obstreperousness. Hence the broad support for getting a deal wrapped up before August 20, when Athens must redeem a bond held by the European Central Bank, rather than arrange another bridge loan and keep stringing negotiations along.

The ECB itself is arguably the most immediate beneficiary of the technical agreement. It gives the central bank a pretext for getting out of the corner into which it has painted itself, where it claims to be able neither to force a restructuring of Greek banks nor to grant them enough liquidity to facilitate the smooth flow of payments between one eurozone member and the others. The fact of a deal makes it easier to let funds flow more freely; and the deal itself suggests a bank restructuring and recapitalisation is in the works.

Where does all this leave Greece and the rest of Europe’s monetary union? The slightly slower pace of austerity aside, the deal is no better and no worse than it was in July. The economy will have a tad more breathing space than expected. Some of the reforms — if implemented — may improve growth rates in the post-recession future, still years away. Others are likely to make little difference; they could even make things worse.

In any case, the detailed policies are not what matters. Far more important is whether the deal succeeds in restoring certainty that Greece has a future in the euro. If it does, investment and spending will return. Otherwise, they will not.

The drama of July frightened not just Greece but also other countries enough to make them back away from the brink. That is good news. But fear is a shaky foundation for confidence. It will take more for the eurozone to climb out of its deep economic and political hole. At least it seems to have stopped digging

Fonte: Ft

Rating agencies still matter — and that is inexcusable

No one said setting up an early warning system for a global financial storm was easy. Among those blamed for failing to spot the 2008 subprime crisis are senior politicians, the world’s biggest banks and several supranational institutions.

However, with the US Federal Reserve and Bank of England likely to raise interest rates, China’s growth slowing and commodity prices falling, we need an effective way to spot the gathering clouds now as much as ever. For many, that means turning to credit rating agencies — despite the fact that they failed to detect signs of crisis on the horizon in the last decade


Credit rating agencies matter. These private companies assess the ability of debtors, including countries, to repay. Because regulators often defer to their assessments of the risk inherent in holding a particular asset, they in effect dictate what investors can invest in, and how much.

They help to determine how much banks are willing to lend, and how much governments — and their citizens — must pay to borrow. They inform with whom corporations are willing to do business and on what terms.

In principle, credit ratings should be based on statistical models of past defaults. In practice, because there have been very few defaults, sovereign ratings are often a highly subjective affair. Analysts follow developments from London or New York, visiting only when it is deemed necessary because of a notable crisis or because the country pays to be rerated.

This means that ratings are often backward-looking and downgrades too late. Moreover, the agencies may lack the tools to track vital factors such as a country’s ability to innovate and the financial health of non-state actors.

Investors have tried to identify good alternatives to credit ratings. Market assessments of risk, such as sovereign yield spreads and credit default swaps, react fast (and often overreact) — but these are not systematic mechanisms for uncovering hidden risks and avoiding crisis.

In order to assess a country’s macroeconomic risk, one needs to look systematically at its entire balance sheet, including risk in the financial system and the wider private sector.

Consider the rating agencies’ optimism over China. Local governments, state-owned enterprises and the construction industry are horribly over-indebted. True, the national government has plenty of resources to bail them out. But Beijing will face a choice: reform, or take on further debt to stimulate the economy. Either way, I believe it will fail to achieve its 7 per cent growth target this year.


Brazil should have been downgraded to below investment grade last year as it struggled with a widening fiscal deficit, a growing debt burden in the wider economy and a weak and worsening business environment. Yet rating agencies are only now starting to look closely at the country, mainly because of a corruption scandal at Petrobras, the state-controlled oil company.

Meanwhile, investors are missing opportunities in Hungary, which should have been returned to investment grade as early as 2013. Since it lost the accolade two years earlier, the government has trimmed its deficit. Household balance sheets have also been improving. Ireland, too, deserves to be upgraded following fiscal consolidation.

Spotting risk is difficult, and it is tempting to let others do the hard work. But rating agencies follow an ad hoc and slow-moving approach. Market signals, such as the interest rates payable on sovereign bonds, are noisy and volatile. It takes systematic, data-driven analysis to understand the dangers hidden in a shifting global economic scene.




Nouriel Roubini is chairman of Roubini Global Economics and Professor of Economics at the Stern School of Business, NYU

Dread risk is not to blame for everything

As the period of ultra-loose monetary policy in the developed world inches to a close, a paradox calls for explanation. Throughout this extraordinary monetary experiment managers of listed companies appeared to see risks everywhere and have been reluctant to invest in fixed assets despite enjoying the lowest borrowing costs in history. By contrast financial institutions have been fearless in propelling markets ever higher.

This dichotomy between subdued risk taking in the real economy and aggressive risk taking in financial markets has prompted Angel Gurría, ­secretary-general of the Organisation for Economic Cooperation and Dev-elopment, to remark that one or other of these views will be proved wrong. With the US Federal Reserve now preparing to raise interest rates we may soon know whose judgment is dangerously flawed.


The behaviour of financial institutions, whether judicious or insane, is at least comprehensible. Central banks’ post-crisis bond buying programmes were precisely designed to prod investors to take on more risk. This has given further impetus to a secular decline in real interest rates that predated the financial crisis, reflecting such forces as the Asian savings glut, deficient ­investment in the west and adverse demographic trends. The outcome has been the much-discussed search for yield.

Downward pressure on yields has been reinforced by a shortage of so-called safe assets. Hence a stampede into sovereign bonds with negligible or negative yields — in effect, a search for non-yield. Even after the recent upturn in yields, investors are still paying some European governments to take their money.

In a speech in June Andrew Haldane, chief economist of the Bank of England, pointed out that there had been no precedent for such negative rates since the time of the Babylonians. Among the various potential explanations, Mr Haldane puts particular emphasis on the phenomenon of “dread risk”, a term used by psychologists to describe an exaggerated sense of fear and insecurity in the wake of catastrophic events.

It certainly provides a plausible explanation of private sector savings behaviour after 2008. Back then, households and companies were running a combined financial deficit (income less spending) of 2.4 per cent of gross domestic product in the US and 1.5 per cent in the UK, while the eurozone was running a surplus of 2.4 per cent. So the private sector was neither saving nor dissaving to any great degree.

By 2010 the private sector had switched to a large financial surplus of 7.2 per cent of GDP in the US, 8.2 per cent in the UK and 5.8 per cent in the eurozone. Serious thrift had set in.


Yet there are limits to the explanatory power of dread risk. Why should a once-in-5,000-year event have struck now, rather than in the 1930s Depression, which saw far greater losses of output and employment?

Note, too, that the dichotomy between risk perceptions in the real economy and in the financial markets is partly an illusion. Industrialists ­themselves are fuelling risk-taking in markets through buy-backs and ­takeovers.

In their recent Business and Finance Outlook, OECD economists identified flawed incentive structures as part of the reason for divergent perceptions of risk. They are surely right. The growth of buy-backs stems from equity-related incentives and performance-related pay. The most popular performance metrics, earnings per share and total shareholder return, are manipulable by management. No surprise, then, that survey evidence in the US has shown that profitable investment opportunities are routinely turned down in order to meet short-term earnings targets.

A different take comes from economists at the Basel-based Bank for International Settlements. For them, the people who suffer most from dread risk — though they do not use the term — are central bankers. The folk in Basel believe that low interest rates beget yet lower rates because they cause bubbles, followed by central bank bailouts. Their worry is that we risk trapping ourselves in a cycle of financial imbalances and busts. Unlike Mr Haldane, they would like to see an early return to monetary “normalisation”.

This, though, would be painful. Even a modest move in the direction of historic interest rate norms could pose a threat to solvency, not least for banks whose balance sheets are stuffed with sovereign debt. The search for non-yield has made safe assets unsafe, while rock-bottom policy interest rates have restricted central bankers’ crisis management toolbox. Escaping from this once-in-5,000-year aberration may thus require Houdini-like skills.




John Plender




Fonte: FT

We will be lucky to go 70 years without another Hiroshima

The 70th anniversary of the bombings of Hiroshima and Nagasaki has understandably garnered reflection and more than a little debate. Much of the looking back has underestimated the case for the American use of nuclear weapons (to avoid what would have been a prolonged and costly invasion of Japan to end the second world war) and overlooked the subsequent utility of nuclear weapons in helping to keep the cold war cold.

Less commented on, though, is a question not of history but of the future: is the world likely to go another 70 years without nuclear weapons being used? The short and troubling answer is no. Even worse, the potential for such use has increased in recent years and seems likely to rise further. The potential for use is least among those that maintain the largest inventories of nuclear weapons and have possessed them the longest. The chance of the five formal nuclear weapon states — the US, Russia, China, Britain and France — deliberately using such weapons is minuscule.


The fact that they have robust arsenals capable of surviving a first strike by someone else and still delivering a devastating response makes the possibility of any such initial use remote.

These countries also possess intelligence capabilities that give each of them a good picture of what the others are doing, reducing the chance of miscalculation leading to catastrophe. Diplomacy and arms control arrangements further buttress stability.

Russia is the one country that gives one some pause, in part because President Vladimir Putin operates with fewer constraints than any of his predecessors since Stalin. Still, the political differences between him and the US, however real, do not rise to the level of nuclear use. More worrying is the chance of political instability developing in Russia, and the possibility that some terrorist group could gain control of one or more devices.

The greatest potential for nuclear use, though, comes from those countries that have acquired these weapons more recently. Pakistan, with a large and growing arsenal of more than 100 weapons, is arguably the most serious concern. One can all too easily imagine a conflict with India not just breaking out but also escalating. Pakistan, the weaker of the two states in conventional military terms, might be tempted to use nuclear weapons as an equaliser.

Pakistan also represents another nuclear-related concern, one that stems from its potential internal instability and lack of firm civilian oversight. It is at once a strong state, in terms of nuclear might, and a weak one, in terms of political fragility — a bad combination when it comes to seeing that nuclear weapons are not used or acquired by terrorists.

North Korea is yet another country that might use nuclear weapons. One can imagine a crisis set off by an act of aggression on the part of Pyongyang, or by a crisis that results from some form of internal collapse. A desperate leadership might turn to nuclear weapons to survive.

What might be the fastest growing threat to extending the nuclear peace for another 70 years, though, comes from the Middle East.In addition, to stave off collapse, the cash-starved government there might also be tempted to sell nuclear weapons or critical components to other countries or organisations with few if any qualms about using such weapons.

Israel already has a substantial nuc­lear arsenal. Meanwhile, the just-negotiated agreement with Iran allows the Islamic Republic to keep most of the prerequisites of a large nuclear weapons programme, and to add to its inventory of centrifuges and supplies of enriched uranium in 10 or 15 years respectively. Other countries in the region, including Saudi Arabia, the United Arab Emirates, Turkey and Egypt, may well follow suit.

We could witness a race to establish a nuclear identity. Several governments could see value in striking first, be it to prevent an adversary developing such a capability or, amid a crisis, from actually using it. Brittle governments could lose control of weapons or materials to groups such as the Islamic State of Iraq and the Levant or al-Qaeda. And terrorists could marry nuclear materials to conventional explosives and cause widespread panic and harm, even without detonating a nuclear explosion.

These and other such possibilities may seem like the stuff of fiction. In fact, they are anything but.

Preventing further spread of these nuclear weapons and their use may
well turn out to be the great challenge of the 21st century. One hopes the world is up to it.




Richard Haass is president of the Council on Foreign Relations




Fonte: FT

A gatecrasher at Obama’s African homecoming

With every one of President Barack Obama’s trips to Africa, he has seemed keen to make a historic statement. His debut, a visit to Cairo , was meant to start a new phase in US-Arab relations after the grave misunderstandings seen during the presidency of George W Bush. The visit to Ghana soon afterwards was no less significant — the nation became in 1957 the first sub-Saharan African country to gain its independence, and is the most stable democracy in west Africa. Senegal, Tanzania and South Africa followed in 2013.

Mr Obama’s fourth visit to Africa, in July, was the first time a serving US president would visit either Kenya or Ethiopia. With Kenya, there was the added significance of a homecoming: his father was born in the country and died there. Indeed, in one of the president’s speeches there, he described himself as “the first Kenyan-American to be president of the United States”.


China has been paying attention; along with the US, it is a frontrunner in the race for economic and diplomatic influence on the continent. It overtook America as Africa’s largest trading partner in Mr Obama’s first year in office. That might have been on Hillary Clinton’s mind when, in Senegal as secretary of state in 2012, she said: “The days of having outsiders come and ex­tract the wealth of Africa for themselves, leaving nothing or very little behind, should be over in the 21st century”. Today it is Beijing being snarky, with state news agency Xinhua deriding Mr Obama for “playing the family card”.

Perhaps Chinese ire is a measure of the success of Mr Obama’s attempt to make up for the indifference of his first term. He has unveiled partnerships in infrastructure and trade, and a Mandela Washington Fellowship targeting young African leaders. Yet the upper hand remains with Beijing. The number of Chinese people in Africa is now estimated at more than 1m . Mr Obama’s final speech on the continent was delivered in the African Union’s imposing new Addis Ababa headquarters, a gift from the Chinese government.

Preaching to Africa is one thing America has done better than any imperial overlord, and a US presidential trip would not have been complete without it. In Kenya, Mr Obama spoke against widespread homophobia. Many Africans perceive this as an attempt to im­pose an alien culture. In Ethiopia, he was scathing in his assessment of African rulers’ penchant for tenure extension. (Unlike the homosexuality point, this was extremely well received.)

The pulpiteering had an air of hypocrisy. Mr Obama described the Ethiopian government, which took 100 per cent of the vote in May, as “democratically elected”. Yet Burundi’s July poll, in which the opposition took more than a quarter of the vote, was “not credible”.

Hanging over this Africa trip — as with Mr Obama’s previous ones — is the conundrum: “Why not Nigeria?” It is Africa’s most populous country, and its largest economy; the US is its biggest investor and until last year the leading importer of its crude oil.

Before now, Mr Obama’s apparent reluctance to visit might have been explained by strained relations between the two countries, with the US alleging that Nigeria’s military has been guilty of large-scale human rights abuses and that the central government has been too tolerant of corruption.

Yet days before Mr Obama travelled to Kenya he treated Muhammadu Buhari, the new president elected on an anti-graft platform, to a lavish reception in Washington. Mr Buhari was asked in an interview by Christiane Amanpour of CNN if he was “disappointed” that the US leader had yet again left out of his nation. “I wouldn’t say I was disappointed, but how I wished he’d change his mind and go to Nigeria,” said Mr Buhari, adding that he planned to “send a formal invitation”.

We may yet see one final African presidential trip in 2016.




Tolu Ogunlesi writer is west Africa editor at The Africa Report




Fonte: FT