Aurelia Butler

BERLIN (Reuters) – The danger of a global recession has largely been averted but growth will be meagre, German government sources said, referring to International Monetary Fund forecasts that will be published later on Tuesday. “The global economy is growing, but it is not growing very dynamically. In other places, like here, it is not growing at all,” one of the sources said.Structural reforms are therefore necessary, they added.”In the medium term, global growth prospects are also unsatisfactorily low,” a source said.This week’s IMF spring meeting in Washington DC is taking place in difficult times, recently exacerbated by the Iranian attack on Israel. On the margins of the meeting, the G20 finance ministers and central bank governors will hold two meetings, each focussing on a single topic.On Wednesday evening, they will discuss climate financing, followed by a meeting on Thursday morning on strengthening international development banks. A communique is not planned, the sources said. German Finance Minister Christian Lindner and Bundesbank President Joachim Nagel called for the IMF to refocus on its core tasks, in a jointly written guest op-ed published in Germany’s Handelsblatt on Tuesday.”Financing a development policy agenda is not the IMF’s original task and should rather be left to institutions such as the World Bank,” wrote Lindner and Nagel ahead of the spring meetings. More

“Treasury will not hesitate to work with our allies to use our sanctions authority to continue disrupting the Iranian regime’s malign and destabilizing activity,” Yellen is prepared to say Tuesday, as per the Axios report.”The attack by Iran and its proxies underscores the importance of Treasury’s work to use our economic tools to counter Iran’s malign activity,” she will further say, Axios reported.Yellen said previously that Iran’s actions threatened stability in the Middle East and could cause economic spillovers, adding that the U.S. would use sanctions and work with allies. More

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Since the great financial crisis of 2007-08 regulators have engaged in the biggest push to de-risk the global financial system since the 1930s. Yet instability and flawed risk management have proved extraordinarily resistant to this regulatory onslaught.The collapse last year of Silicon Valley Bank, the 16th largest in the US, exposed very basic mistakes, not least a failure to hedge against the risk of surging interest rates undermining the value of its US government bond holdings. There followed a deposit run of hitherto unimaginable speed at SVB and other regional banks.This, together with the forced sale in Europe of failing Credit Suisse to rival UBS, prompted Agustín Carstens, head of the Bank for International Settlements, to declare that “business models were poor, risk management procedures woefully inadequate and governance lacking”. Then there have been repeated episodes of turbulence in the $26tn US Treasury market, the world’s ultimate financial haven. The most extreme case was the March 2020 dash for cash as the spread of Covid-19 gathered pace. Volatility has been exacerbated by the reduction in the big banks’ market making capability, ironically a result of the regulatory response to the financial crisis.In a market that provides vital support for the collateral and hedging operations of global investors, there are fears that risky hedge fund trading strategies involving large borrowings pose a constant destabilising threat. In the meantime, the UK government bond market went into meltdown in 2022, as pension funds’ liability-driven investment strategies struggled to cope with a sudden rise in yields.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Such destabilising activity is fostered by, among other things, marked growth in private markets and a shadow banking system that includes money market funds, hedge funds, high-speed electronic traders and others who operate in a less transparent and less regulated environment than banks.The share of global financial assets held by these non-bank financial institutions has risen from 25 per cent after the 2007-08 crisis to 47.2 per cent in 2022, higher than the 39.7 per cent of conventional banks. No one can be sure what cyber or cryptoasset threats might lurk in this financial adventure playground where complex financial products proliferate.While private markets have surged, public equity has shrunk. According to the OECD, more than 30,000 companies have delisted globally since 2005, notably in the US and Europe. These delistings have not been matched by new listings. Share buybacks have contributed further to the shrinkage.In this environment, which appears chronically vulnerable to shocks, investors have come to expect constant central bank bailouts, a morally hazardous inducement to more risk-taking and debt accumulation.   Each one of these market disruptions can be explained as the product of particular circumstances. Yet they all reflect profound long-run changes in the role and structure of the world’s financial system.In the immediate postwar period, the central task of this system was simple. The household sector in the developed world saved for precautionary reasons and for retirement. It passed those savings, via the banking system and the capital markets, to governments to fund budget deficits and to the corporate sector to finance working capital and investment.Not so today. A combination of globalisation, surging debt and changes in industrial structure have reduced the capital intensity of corporate sectors in advanced economies. The old financial certainties are vanishing, and new ones are yet to replace them. A vitally important part of this evolution has been the growing dependence of many developed countries, including the US and UK, on debt to drive economic growth. According to the IMF, debt in the 39 economies it terms advanced rose from 110 per cent of gross domestic product in the 1950s to 278 per cent in 2022.The rise was substantially financed from the 1980s by emerging Asian countries, most notably China, that ran undervalued exchange rates to facilitate export-led growth. The resulting trade surpluses, combined with under-developed banking systems and poor welfare provision in those countries, led to huge surpluses of national savings over investment.Contrary to the pattern established by Britain in the late 19th century, when the British exported large sums of capital to mainly newly settled, low-income countries, funds flowed from the Asian poor to the rich west. This Asian savings glut was then supplemented by Japan, where an ageing population meant lower investment opportunities and higher savings as baby boomers approached retirement.Commuters in Shanghai. The global labour market shock arising from China and other developing countries joining the international trading system partly led to the global corporate sector transforming from a net borrower to a net saver More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer, an FT contributing editor, is chief executive of the Royal Society of Arts and former chief economist at the Bank of EnglandIn the early years of inflation targeting in the UK, the then head of forecasting at the Bank of England entered my room clutching a piece of paper. On it were two lines: the inflation forecast produced painstakingly by his team over the preceding weeks, and an alternative inflation projection hand-drawn in pencil by the then governor. Only the latter “forecast” ever saw the light of day.Since then, governors and monetary policymakers have come and gone, each bearing different pencils. But the process of economic forecasting has remained essentially unchanged: largely performative, typically opaque, nine parts art to one part science. The recent review of forecasting by Ben Bernanke, former chair of the US Federal Reserve, while full of sound recommendations, is unlikely to alter that.It was all meant to be so different. At the outset of inflation targeting, the use of inflation forecasts was deemed a breakthrough. The long and variable lags of monetary policy mean it is only by responding to inflation one to two years ahead that timely decisions can be made about interest rates today. Inflation forecasts became the pivot point for monetary policy. The second breakthrough was to have those projections produced, consistently and coherently, courtesy of an economic model. This served as a disciplining device on the whims of policymakers. In that sense, inflation forecasting was a key constraint in the “constrained discretion” of inflation targeting.Future inflation is of course uncertain. Former central bank governor Mervyn King used to observe that the probability of forecasts proving correct was almost precisely zero. (Ironically, this is one of the few BoE forecasts ever made that turned out to be accurate.) That led many central banks to quantify and illustrate this uncertainty, in the BoE’s case through so-called “fan charts”.In time, several central banks — although not the BoE — published interest rates projections, alongside inflation and growth, revealing more of policymakers’ future hands. The Fed’s “dot plots” are one example and have become the centrepiece of its monetary policy communications.Full disclosure, there was no more effusive advocate of this new monetary policy technology than me. And inflation targeting itself has performed far better than anyone could ever have expected in anchoring inflation expectations. But, truth be told, inflation forecasting has been incidental to this success. This is not (or not only) because models and their forecasts have been wrong, often very wrong. That comes with the territory. It is because inflation forecasting has in practice imposed the wrong sorts of policy constraint.Economic models bring rigour to policy. Unfortunately, they also bring mortis. Even models at the frontier are always at least one step behind real-world events: from the global financial crisis (when most were found to take no meaningful account of the financial sector) to the Covid-19 and cost of living crises (when most were found to have no well-developed sectoral supply side). In these instances, models served to unhelpfully blinker policymakers to events playing out before their eyes, but not embedded in their models. This led to them first missing these crises, and then responding too slowly.Those models can also be gamed in ways that impose too few constraints on policy. In my experience, many policymakers produced their economic forecasts by working backwards from their preferred stance. This is an inversion of the way inflation targeting was meant to operate. Bernanke’s diagnosis and recommendations are sound. The bank’s fans, like those in a fan dance, were used largely to preserve the dignity of the dancer and avoid audience embarrassment. Their suggested replacement, with defined scenarios, will deliver a more revealing performance, while still leaving the audience largely in the dark. Publishing forward interest rate paths — neither recommended nor ruled out by Bernanke — would alter the bank’s policy communications more fundamentally. They would make explicit what is currently often implicit. Whether this is helpful is another matter. For me, it risks an over-reliance on, and over-sensitivity to, central bank signals, as Fed experience illustrates.John Kenneth Galbraith famously said economics was extremely useful — as a method of employment for economists. The same could be said of inflation forecasts and central bankers. For all Bernanke’s sound analysis, forecasting is likely to remain interpretive dance — always mysterious, occasionally enlightening, a show without much tell. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.International investors have rushed into Egypt’s debt after the most populous Arab nation secured a $55bn bailout and Gulf investment package to reboot its troubled economy and prevent it succumbing to fallout from the war in Gaza.Demand for short-term bonds issued by Egypt at double-digit interest rates has surged since last month’s financial rescue, and a large devaluation in Egypt’s pound, staved off a debt crisis that only weeks ago loomed over the country.Investors bid $21bn for $2.4bn in one-year Treasury bills on offer from the Egyptian government over the past month — it sold $8.5bn — in a return of the “hot money” flows that had shunned the country as too risky only a few weeks ago. Yield on the bills fell from 32 per cent to 26 per cent.“Everybody wants a piece of Egypt now. It’s quite a change from just a few weeks ago,” said Farouk Soussa, Middle East and north Africa economist at Goldman Sachs.President Abdel Fattah al-Sisi’s government came under mounting pressure during the past year, as the IMF and Cairo’s traditional Gulf partners refused to step in to again save an economy they have had to repeatedly bail out.Egypt, the second largest debtor to the IMF after Argentina, has taken multiple loans from the fund since 2016, while repeatedly baulking at implementing difficult reforms including floating its currency.But the outbreak of war in neighbouring Gaza helped to change the attitudes of donors, who feared Egypt was heading towards default and economic collapse.“The US doesn’t want Egypt to be destabilised because there would be repercussions for Israel and the region. Europe is also terrified of a migration crisis,” said Riccardo Fabiani, north Africa director of the International Crisis Group. “When they say Egypt is too big to fail, this is true.”Tourism revenues and receipts from trade through the Suez Canal dropped amid the conflict, undermining two of Cairo’s key foreign currency earners. But the war also underscored Egypt’s strategic importance in a volatile region, including its role in negotiations to free Israeli hostages as well as the provision of aid in Gaza.The new financial support for Egypt has included an $8bn IMF loan, $6bn from the World Bank over three years and more than $7bn from the EU until 2027.But the biggest short-term impact has come from a $35bn deal with the United Arab Emirates to buy development rights of prime land on Egypt’s Mediterranean coast in the Ras al-Hekma area. The first tranche gave Cairo the buffer it needed to float its currency, a much-delayed move that met a key IMF condition.The Egyptian pound has since fallen to about 47 to the dollar, down from about 30 before it was floated.The result is that Egypt now looks to have stabilised after two years of crisis marked by soaring inflation — which topped 35 per cent in February — and a suffocating foreign currency shortage.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.A question now is whether Cairo will stick with reforms or revert to former practices such as fixing the exchange rate.Ziad Bahaa Eldin, a former deputy prime minister, said Egypt could either “rely on these new inflows to defer reform and continue to run the economy in the same way that brought about the current crisis, or . . . use it as an opportunity to adjust policy”.Arguing for the latter, he added: “We need policies aimed at encouraging industry, tourism and exports and we need to reduce the role of state-owned enterprises.”Under Sisi, Egypt has spent billions of dollars on a debt-fuelled infrastructure programme overseen by the military which includes building a grandiose new capital. Critics say this has helped drive up debt and produced little in terms of exports and foreign currency revenues, although Sisi has defended the spending as necessary to create millions of jobs.Cairo has now committed to keeping a flexible exchange rate regime and reducing state infrastructure spending to help create a level playing field for the private sector which has to compete with privileged military and state-owned enterprises.Ivanna Vladkova Hollar, the IMF Egypt mission chief, said the new exchange rate system had to be “sustained”. She also noted that Cairo had committed to capping infrastructure spending and bringing transparency to the finances of dozens of state-owned agencies, adding that military-owned companies were not exempt.“The same measures that we are discussing to reduce the competitive advantage state-owned firms have vis-à-vis private sector firms, applies to military-owned firms as well,” she said.Goldman’s Soussa said Egypt’s reforms had given confidence to the short-term investor community now piling into the debt market. “This is assurance that Egypt’s going to revert to a more orthodox policy trajectory and that it’s going to roll back some of the excesses that brought us to this place in the first place,” he said.“There’s now an opportunity,” he added. “If it’s wasted, it will be because of a reversion to poor economic policy and policy decisions.” More