Aurelia Butler

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The EU is lobbying China to exclude agriculture from a series of escalating commercial disputes, calling for the “strategic sector” to be protected from trade tensions in the renewable energy and electric vehicle industries.The bloc has launched several investigations over the past year into Chinese suppliers that it alleges have contravened a new foreign subsidies regulation, which gives Brussels the power to “address distortions” that benefit third country companies operating in the EU.“My intention is to do everything which is possible to avoid the situation that agriculture is a victim of the problems in other sectors,” EU agriculture commissioner Janusz Wojciechowski said in an interview during a visit to Beijing late last month.Wojciechowski added that he told “Chinese partners” that “we should treat agriculture as a sector which requires special protection . . . as a strategic sector, strategic for security”.The EU is China’s second-largest trading partner, but tensions have been rising over Brussels’ accusations that Beijing is fuelling industrial overcapacity to boost disappointing economic growth, raising fears of dumping in European markets. Brussels has also objected to a growing Chinese goods trade surplus, which stood at €291bn in 2023, down from a record of nearly €400bn a year earlier but well above the levels of the previous decade.Agrifoods, however, is one area where the EU ran a surplus, Wojciechowski said. The bloc’s agrifood exports to China were worth €14.6bn, down almost 8 per cent from 2022 while imports from China to the EU fell 15 per cent to €8.3bn.European commissioner Janusz Wojciechowski said there was ‘space for improvement’ in the EU-China trade balance, which hit a record surplus of nearly €400bn last year More

Negotiations to finally bring an end to Sri Lanka’s long-running $13bn debt default could result in an innovative new type of bond that would link payouts to economic growth and governance reforms, a long-held aim of emerging market bond investors.The bankrupt south Asian nation and its creditors have agreed in principle to replace the debt, which it stopped paying in 2022 following a currency crisis, with so-called macro-linked bonds that would track the country’s recovery.The inclusion of GDP-tied payouts into bonds that could be included in major indices is a big step forwards in trying to develop debt structures that will lure international investors back to riskier emerging market nations desperately in need of financing, say analysts. The Sri Lankan proposal “sets a precedent to embed the contingency” into a bond that could be simple enough to be included in indices, said an independent observer of the discussions.“For this new wave of instruments to be good for everybody, you need to have one decision point and certainty afterwards” about levels of payments, they added.The government of President Ranil Wickremesinghe, who faces an election towards the end of this year, said last month that it would continue talks on the bond proposals “with a view to reaching common ground in the next few weeks”, in a sign that a deal may be close.In return for taking a roughly one-third haircut on their original debt, creditors have proposed a new $9bn bond with payments adjusted higher or lower in 2028 depending on the average US dollar GDP that Sri Lanka achieves.The country has put forward other ways of setting GDP-linked payments and is also assessing a creditor proposal for a separate governance-linked bond. This would cut coupon payments if the country raises tax revenue collection as a share of GDP and passes anti-corruption reforms.As they emerge from defaults, countries such as Ukraine and Uruguay have handed out equity-like warrants, which promise extra money based on factors like movements in the price of commodities that the country produces or GDP, as a way of getting creditors to swallow debt losses.But these instruments, which can be difficult to price and trade, have often ended up on the market scrapheap.Sri Lanka’s proposed bond could break new ground because “it is not a warrant — it is an adjustment to an existing bond that would take effect from 2028. That is the difference with earlier versions,” according to Thilina Panduwawala, senior macroeconomist at Frontier Research, a Sri Lankan advisory firm.The proposals will still have to overcome scepticism among some investors stemming from the chequered history of attempts to link payouts to volatile economic factors, especially GDP.Earlier this year, Argentina had to deposit hundreds of millions of dollars with a London court in order to appeal against a ruling that it must pay creditors €1.3bn for using the wrong GDP data for warrants it issued after its chaotic 2001 default.Last month, El Salvador raised eyebrows when it sold a bond with a warrant that would pay out even more on top of a 12 per cent yield if it fails to secure an IMF bailout in the next 18 months. Nevertheless, some see macro-linked bonds as the way to tempt back investors who have fled the riskier end of the sovereign debt market in recent years in favour of the high interest rates on offer in the US and other developed countries. Proponents of the new type of bonds believe they can bridge this divide and prove attractive to both creditors and debtors.“It will be a very bad sign for our market if we don’t” adopt these bonds, one investor in emerging market bonds said. “Recoveries will be low, and people will feel badly used, and that this isn’t really tenable as an asset class,” they added.In the lowest growth scenario being proposed for the macro-linked bond, Sri Lanka’s US dollar GDP would average $78bn per annum over the three years. That would mean bondholders having to take a further haircut of more than one-third, meaning they will have lost more than half their original claim. However, if GDP averages about $90bn, the restructured bond’s new payback amount will instead rise by one-quarter. According to provisional central bank data, GDP had possibly already recovered to $84bn in 2023. “It’s not really out of reach at all,” Panduwawala said. “As long as we don’t see another [large currency] depreciation over the next few years, we are likely to end up in the higher US dollar GDP scenarios.”The proposal for a governance-linked bond was less contentious so far, they said, although the government still had to provide feedback on how big such a bond should be, which will affect index eligibility.However, the potential reduction in the coupon on offer for carrying out reforms was not much of an financial incentive in itself, Panduwawala said. But it would mean that if a future government veered off course, “opposition and civil society will be able to point to a specific cost”.In the meantime, Sri Lanka’s debt restructuring will have to survive the potential upheaval that comes from the country’s elections later this year, before the bedding in of any new kind of bond that might help reboot demand for the debt of poorer but fast-growing economies.“Some in the opposition will want to review the restructuring deals if they are in power,” Panduwawala said. “There is that question whether, post-election, there will be friction between a potential new government and bondholders.” More

“Theory and experience have also shown the importance of transparency and clear communication, including setting an explicit, numerical longer-run inflation target, and of taking appropriate actions to support the achievement of that goal,” Williams said in remarks prepared for delivery to a monetary policy conference at Stanford University’s Hoover Institution. “These are critical in anchoring inflation expectations—which, in turn, help keep inflation at its target level.”The Fed has been battling too-high inflation for more than two years, raising interest rates from near zero in March 2022 by more than five full percentage points, an aggressive pace not seen in 40 years. While price pressures have eased since their peak in mid-2022, inflation is still running above the Fed’s 2% goal, a centerpiece of the Fed’s approach to policy since 2012. Later this year Fed policymakers plan a broad review of the central bank’s policy framework, and a number of critics are urging big changes. “The future is uncertain,” Williams said in his prepared remarks. “But as we continue to move closer to our 2% longer-run inflation goal, I’m confident that we have the foundation of theory and experience to guide us in restoring price stability and set the stage for sustained economic prosperity. We are committed to getting the job done.”Fed policymakers earlier this week agreed to leave short-term borrowing costs in the 5.25%-5.5% range where they have been since July 2023. Williams did not offer any updated views on whether or when the Fed should begin cutting interest rates. Fed policymakers have signaled they won’t cut rates until they are more confident inflation is headed sustainably to the Fed’s goal. More

The dot plot, published every three months since 2012, is a graph depicting where each of the 19 U.S. central bankers expect the Fed’s policy rate to be at the end of each of the next few years. The latest one, published in March, shows the median Fed policymaker expected to need to cut short-term borrowing costs three times by the end of this year, though nearly half saw fewer rate cuts, and several saw just one rate cut or none. But in its current form, Goolsbee said in remarks prepared for delivery to a conference on monetary policy at Stanford University’s Hoover Institution, “the dot plot is just a collection of opinions without economic content.”It’s impossible to know, for instance, if a policymaker who writes down fewer rate cuts this year fears the economy is overheating, or simply believes the economy has the capacity to grow faster and therefore can tolerate higher rates. The goal of Fed communications, Goolsbee said, should be to lay out the rationale for policy decisions, and the dot plot falls short.”Because it can’t be connected to the economic conditions the participant thinks will justify that interest rate, there is nothing to tell us why they think this a reasonable choice,” he said. “A matrix that anonymously matches the economic forecasts to the rate path for each participant would answer some important questions.”His remarks come after European Central Bank board member Isabel Schnabel floated the idea of publishing an ECB “dot plot,” and as the Fed itself prepares for a review of its own policy framework, expected to begin later this year.Goolsbee did not offer his own rate-path view, or explain the economic assumptions that underlie it. Earlier in the day Goolsbee said that recent cooling in the U.S. labor market gave him added confidence the economy is not overheating. More