sexta-feira, 16 de setembro de 2016
Russia’s dark art of disinformation
Speaking at the Kremlin in December 2014, Vladimir Putin explained that bears might prefer a quiet life, eating berries and honey instead of chasing piglets, but no self-respecting bear should let its enemies rip out its claws and fangs. Among the bears for which the Russian president’s remarks were sure to have held singular resonance was Fancy Bear.
Fancy Bear is a Russian cyberespionage group that the World Anti-Doping Agency holds responsible for hacking into its computer systems and publishing the confidential medical data of US and European athletes. Another tech-savvy denizen of the Russian forest that likes to show its claws is Cozy Bear.
According to CrowdStrike, a California-based cyber security company, the two bears were responsible for separate attacks on Democratic National Committee servers that disrupted this year’s US presidential race.
Despite Russian government denials of involvement in these two incidents, CrowdStrike suspects that Fancy Bear is affiliated with the GRU, Russia’s military intelligence agency, and that Cozy Bear may be connected with the FSB, successor to the KGB, the Soviet spy service. The two bears do not appear to co-ordinate their cyber attacks on the US and its allies. But the nature of their targets indicate that the bears dance to a powerful state’s tune.
Fancy Bear and Cozy Bear are almost certainly examples of a rich and highly distinctive tradition of Russian subversion that dates to before the first world war. This includes forged documents, false news stories planted in foreign media, front organisations and, in our times, government-backed social media trolls and fake websites.
Naturally, when it comes to hacking and related clandestine operations, other governments are no babes in the woods. For example, China and Russia tout their friendship, but Chinese hacking of Russian institutions and companies has increased this year, according to security experts in Moscow.
As for forgeries, a notorious 20th century case, the Zinoviev letter of 1924, had nothing to do with Soviet intelligence. The document purported to be a letter to the UK Communist party from Grigory Zinoviev, the Soviet international propaganda chief, encouraging subversive acts. British intelligence passed it to the Conservative party, from where it arrived at the Daily Mail. The Mail published it on the eve of the 1924 election, which the Tories proceeded to win by a landslide — although their victory owed little to the scandal.
Nowadays, historians think that the letter probably originated with anti-Soviet White Russian exiles in Berlin or Riga. However, another spectacular forgery — The Protocols of the Elders of Zion — seems to have been concocted by the Paris-based head of the foreign branch of tsarist Russia’s secret police. The Protocols, which makes wild allegations of a Jewish plot to rule the world, was first published in Russia in 1903 and nourishes global anti-Semitism to the present day.
The Soviet Communist party and KGB had a kind of colour scheme for subversive measures. The KGB’s Service A conducted “black propaganda” (forgeries and rumours); the party’s international information department handled “white propaganda” (stories in the official Soviet press); and the party’s international department took care of “grey propaganda” (clandestine radio broadcasts and front groups).
From the 1960s until the late 1980s, all sorts of lies were sown in western countries and the developing world. The KGB spread a rumour that a rightwing conspiracy was behind President John Kennedy’s assassination in 1963. In a deception codenamed Operation Infektion, a letter appeared in a pro-Soviet Indian newspaper in 1983 alleging that Aids was the result of Pentagon biological weapons programmes. In 1985 the disinformation campaign moved to Literaturnaya Gazeta, a Soviet literary weekly, from where it spread to non-Communist countries, damaging America’s image. After the Soviet Union’s collapse, Yevgeny Primakov, a former foreign intelligence chief, confirmed that the KGB had set up the whole operation.
A comparable example involving Mr Putin’s Russia is the false story in January that asylum-seekers had raped the 13-year-old daughter of a Russian immigrant family in Germany. This tissue of lies, first reported on Russian state television, stirred up ethnic Russians in Germany just when public opinion was on edge because of the tide of refugees entering the country.
Rather than pure aggression, retaliation often seems to be behind Russia’s dark arts. The hacking of Wada was probably a tit-for-tat move for the ban on Russian athletes at the Olympics that followed Wada’s disclosures of state-sponsored doping. The DNC hacking may reflect the Kremlin’s perception that the US had a hand both in the 2011 anti-Putin protests in Russian cities and in the 2014 Ukrainian uprising.
Whatever their motives, Fancy Bear and Cozy Bear seem in no mood for a diet of berries and honey.
quinta-feira, 15 de setembro de 2016
Why on earth would anyone buy a bond that yields a negative interest rate? That is the $12.6tn question gripping global markets as the pile of negative yielding bonds mounts. If you ask investors, they typically offer two replies: “desperation” (they cannot think of anywhere else to park their funds) or “regulation” (they have to buy bonds to comply with financial supervision rules or investment mandates).
But there is a third explanation: some investors have found ways to make those negative yields pay — and not just through traders “churning” bonds to generate commission.
The real cause is that government intervention to reinvigorate stagnant economies has left markets so peculiarly distorted that there is potential for canny alchemy — and profits.
For one example of this, look at dollar-yen cross currency swaps. This rather esoteric corner of finance normally goes unnoticed by the wider world. But right now there are two reasons it merits greater attention.
First, the Bank of Japan will publish on September 21 a hotly anticipated report about the impact of negative rates. Second, it is evident that recent developments in this swaps market have been bizarre.
The issue at stake is the spread — in effect, the cost of converting short-term yen contracts into dollars. Three decades ago, this spread was around zero, since demand for dollars and yen was evenly balanced. But when the Japanese financial crisis erupted in 1997-98 the country’s banks grew increasingly stigmatised and the one-year spread widened to minus 35 basis points, meaning in effect that anyone converting yen into dollars paid a penalty.
After 1999, the spread returned to zero. It has subsequently widened twice at points when financial crises have sparked a global dash into dollars. In 2008 it hit minus 70bp; and in 2011 during the eurozone debt crisis it touched minus 50bp.
In between, the spread shrank — as you would expect when markets are calm and functioning normally.
What is peculiar now, however, is that since 2015 that spread has widened and stayed at that level, hitting minus 70bp for one-year swaps. That is in part because Japanese institutions are keen to get hold of dollars, to enable them to buy assets that might produce a return at a time when yen rates are negative.
Another factor is that the US is reforming its money market rules, which is reducing funding to dollar markets. To make matters worse, emerging market countries want dollars in order to repay loans. The run of persistently wider spreads hurt the profits of Japanese banks and life assurance groups.
But it also creates a big opportunity for dollar-rich institutions around the world, from Pimco, one of the world’s biggest bond houses, to Chinese sovereign wealth funds.
So what many of these dollar-rich institutions are doing is cutting deals in this cross-currency swaps market, giving counterparties dollars in exchange for yen — and then using that yen to buy short-term bonds.
At first glance, it might seem like a bad idea to buy those yen bonds. After all, short-term bonds have negative yields (currently about minus 25bp). But the crucial point is this: the yen loss is more than offset by the dollar gain, meaning that there are profits to be made even by holding negative bonds. So it makes sense that foreigners are piling in. Chinese purchases of Japanese bills reached a record cumulative ¥10tn in June, according to Bloomberg .
Now, if you want to be optimistic, you might say that this tale simply shows that central bank actions are working: if Chinese and US investors keep buying short-term yen bonds, that will keep yen rates low.
This should — in theory — provide stimulus to the wider economy, by encouraging more borrowing. However, if you want to be more cynical about whether negative rates really work (as I am), you could also point out that these market dislocations have become so perverse that they are sapping confidence in a self-defeating way.
Either way, the question is what — if anything — the BoJ will do next. My own guess is nothing much; these dislocations have become so deeply ingrained in the markets that investors (and policymakers) seem almost inured.
But if you are ever tempted to wonder about those negative rates, ponder on the alchemy behind this peculiar yen-dollar tale. If nothing else, it should remind us how strange our financial system has become — and the shocks that might occur if, say, yen rates suddenly returned to normal.
terça-feira, 13 de setembro de 2016
The Swiss still refer to the day of the “Frankenschock”.
On January 15 last year, their stable economic lives were shattered by news the Swiss National Bank had abandoned its cap on the super-strong franc’s value against the weak euro. To deter investor inflows, the central bank instead pushed its main policy interest rate even deeper into negative territory — to minus 0.75 per cent.
But if the Swiss feared the sky over the Alps would be brought down by upside-down interest rates, dysfunctional banks and a soaring currency, they were wrong.
Almost two years later, the affluent Alpine state’s financial system still functions despite the most negative interest rates in the world; markets clear; savings are kept in bank accounts rather than under mattresses; dark-suited bankers still manage to dodge the trams rattling across Zürich’s Paradeplatz as they go about their business.
Indeed, Swiss banks’ profits are perky.
The Swiss Bankers Association last week reported their net income rose 5 per cent last year to SFr64.6bn — the highest since before the 2008 global financial crisis. Remarkably, for the first time in a decade, net income from interest-earning lending businesses overtook commission-based and service activities as the most important driver of profits.
So is Switzerland an example of how negative interest rates can work? Does it offer lessons for other financial markets, including the UK, where official interest rates may yet “go negative”? The answer to both is “yes” — but maybe only in the short term.
The SNB — which holds its latest monetary policy meeting on Thursday — can claim its policies have succeeded. After the immediate “Frankenschock”, the currency weakened and has remained within acceptable ranges, although the central bank has also intervened heavily in foreign exchange markets.
Controlling the franc was the SNB’s main objective — not providing an economic stimulus as is the case at other central banks. In Switzerland, there was no need: although annual inflation remains negative, the Frankenschock did not tip the country into recession last year. In the second quarter of this year, gross domestic product expanded 0.6 per cent — the fastest pace since late 2014.
What is more, Switzerland shows the financial system can adapt to a world below zero. Swiss banks knew imposing negative interest rates on ordinary retail customers would risk a disastrous bank run. So they looked elsewhere to compensate for the cost of providing deposit accounts — namely, the mortgage market.
Expanding mortgage loan books, increased margins on lending businesses, as well as lower refinancing costs, explain why Swiss banks remain so profitable.
But the “success” of negative interest rates in Switzerland has depended on local factors — most obviously a buoyant-yet-disciplined mortgage market. There is no talk here of “negative mortgages” — whereby banks would pay homeowners.
Swiss residential mortgage rates actually rose after the Frankenschock, before falling again. UK banks would be pilloried if they reacted to aggressive action by the Bank of England by hiking borrowing costs for homeowners.
Moreover, the equilibrium is fragile.
If the SNB pushed interest rates further into negative territory, it could quickly become unstable, especially if the mortgage market spluttered. Foreign competitors could attack the relatively juicy margins in the domestic bank market, and Swiss banks might be forced to impose charges on retail customers. Inquiries from Swiss companies about insuring cash held in safe deposits rather than in bank accounts have increased significantly, Zurich Insurance reports.
Even if the equilibrium is maintained, Switzerland has not found a way of avoiding the pernicious long-term effects of exceptionally low interest rates on the pensions and insurance industry, which worry investors worldwide.
Rather, the public debate about the creeping distortions created by negative rates grows louder. The commentary in Swiss media is about whether it really would be more damaging to the Swiss economy if the SNB returned to positive official interest rates. Worries remain that negative rates could yet cause the sky to fall in.