Aurelia Butler

Kemal Derviş (pronounced Dervish), the Istanbul-born economist who launched the ambitious restructuring of the Turkish economy after a devastating devaluation in 2001, has died aged 74. Derviş, who suffered from Parkinson’s disease, rose to international prominence as the architect in his native Turkey of one of the world’s most successful IMF stabilisation programmes following a 22-year career at the World Bank in Washington. So powerful were the vested interests he challenged with the establishment of apolitical market regulators that the newly-minted minister of state for the economy took to wearing a bulletproof vest, recalls Ajay Chhibber, the World Bank representative in Ankara who worked closely with him during his 17 months in office. Turkish newspapers at the time of his appointment by then prime minister Bülent Ecevit described the cosmopolitan polyglot as everything from “bionic” to “the last Turk the world has any confidence in”. A political novice, Derviş explained painful reforms with a clarity and sincerity that resonated with ordinary Turks after decades of economic mismanagement under a succession of shaky coalition governments. Following the failure of 17 previous programmes for Turkey, the IMF-backed $8bn rescue combining structural reforms with fiscal orthodoxy gave the Nato ally straddling Europe and Asia an unprecedented decade of economic growth and foreign direct investment. And this happened only because Recep Tayyip Erdoğan, who started off as a reformer in pursuit of EU membership, initially continued to implement the programme he had inherited from Derviş after his Justice and Development party (AKP) was elected by a landslide in 2002. But two decades later, Turkey’s increasingly authoritarian leader had driven central bank independence into the ground with his belief that interest rates cause inflation. As Derviş watched on from Washington, where he died, the former Islamist firebrand fostered a return to the crony capitalism and hyperinflation that plagued Turkey for the latter part of the 20th century. What was left of Derviş’s legacy was a marker of the success that a well-managed Turkish economy and private sector are capable of. “That success was very hard-won and it created, in spite of the backward movement since then, a significant benchmark in the national memory,” said Sevdil Yildirim, a Turkish business leader and former financial regulator. Other Turks were less positive. While far-right nationalists accused the keen tennis player of being a US agent, others blamed Erdogan’s rise on Derviş’ decision not to lend his support to the fledgling reformist New Turkey party.Instead he backed the long-established Republican People’s party, which in the May 14 presidential election will lead a six-party opposition attempt to unseat Erdoğan. That bloc includes Ali Babacan, who continued Derviş’s plan after succeeding him as minister of state for the economy.Other observers dismissed the idea that a new party backed by Derviş could have stopped Erdoğan. As one western official put it: “Politically Kemal was struggling because he was an outsider and he got outmanoeuvred.” Nor did Derviş, a technocrat who could charm any audience in Turkish, English, German or French, particularly care for the nitty-gritty of retail politics in Turkey. The mainstream Hürriyet newspaper reported in 2015 that he had agreed to serve as minister of economy in the event of an election victory by the Republican People’s party — but only from outside parliament.And he was quoted as saying this when a childhood friend asked why he had not competed more vigorously for power: “Going into politics in Turkey means campaigning all around Anatolia with your party comrades and going into towns and villages surrounded by party men, then sitting around with local men . . . all smoking in closed surroundings . . . I can’t do that.” After the two parties that had vied for his support were crushed by the AKP in the 2002 election, Derviş returned to the US where he served as administrator at the United Nations Development Programme from 2005-9. He then moved to the Washington-based Brookings Institution to lead its global economy and development programme until 2017. In 2011, his name was floated as a leading contender to take over as managing-director of the IMF after Dominique Strauss-Kahn was forced out by his arrest for sexual assault. But Derviş decided against running for fear that an earlier affair with a married subordinate at the World Bank would ultimately count against him. The descendant of a reformist Ottoman prime minister, Derviş grew up speaking German to his mother, who had met his businessman father while she was working as a secretary at the German embassy in Ankara during the second world war. Having spent his early childhood on the island of Büyükada near Istanbul, the young Derviş was sent to the elite Le Rosey boarding school in Switzerland before going on to study economics at the LSE and Princeton. Derviş is survived by his American-born second wife Catherine and his first wife, childhood sweetheart Neslihan Borali, with whom he has two sons, Erdal and Erol. More

The question of pay restraint in a time of inflation has reached the ranks of the European Central Bank, which has launched a staff wage review that will consider proposals for semi-automatic salary increases when prices rise. Union officials requested the review after contesting this year’s pay award of just over 4 per cent by the ECB, which left employees with a real terms pay cut after inflation averaged 8.4 per cent in the eurozone last year. The wage offer was double the ECB’s inflation target and is in line with wage growth across the eurozone.The dispute puts the ECB in an awkward position after it raised interest rates for the seventh time in a row last week to try to tame the biggest surge in inflation for a generation, while urging workers and employers not to drive wages and prices up too far.Carlos Bowles, vice-president of the Ipso union that represents ECB staff, told the Financial Times it was “asking for a more balanced approach” for setting staff pay, such as “the one in place at the European Commission”.The pay of EU employees rose 6.9 per cent this year, with part of the increase determined by an automatic adjustment mechanism that is designed to maintain the relative purchasing power of civil servants across Europe. About 2.5 per cent of the increase was also down to a payment delayed from 2020. ECB president Christine Lagarde on Thursday repeated her earlier warning against a “tit-for-tat” dynamic in which workers and employers try to avoid losses from rising inflation by pushing up wages and prices. She said this would increase the “risk of something that is much more difficult” by keeping price pressures elevated and requiring “more active measures in monetary policy”.The central bank’s current methodology for adjusting the pay of all its staff is based on wage dynamics at the 20 euro area national central banks, the European Commission, the European Investment Bank and the Bank for International Settlements. The 4.07 per cent pay increase it introduced from January compared with a 1.48 per cent rise a year earlier, when eurozone inflation was 2.6 per cent. The ECB said staff turnover was only 1.3 per cent last year, suggesting most employees were not too dissatisfied.The union is in dispute with the ECB over claims the central bank did not follow its existing methodology correctly. The staff committee, which is elected by all employees and on which Ipso has six of nine seats, also launched an internal appeal against the calculations behind the 2022 offer, which was signed by 373 employees. Bowles said the appeal was “the first step which paves the way for a court case, which we will do for sure”.The ECB said: “Every three years a review of the general salary adjustment can be requested by a stakeholder. Last year a recognised trade union asked for it — so this year a review is taking place. Decisions on the GSA are taken by the ECB governing council.”The review — only the second in the ECB’s history — is expected to last beyond the end of this year, by which time it predicts annual inflation will have fallen from 7 per cent in April to below 3 per cent, meaning any pay rise is likely to be smaller, regardless of the methodology used. The ECB said: “While we respect diversity of views, Ipso does not necessarily represent the majority view of ECB staff.”The European Commission said its annual adjustment of EU staff pay was “calculated by Eurostat based on the evolution of national civil servants’ purchasing power”.If inflation exceeds a certain level in Belgium and Luxembourg, the commission can also give EU staff a mid-year pay rise that is backdated to the start of the year. More

The Bank of England is set to raise interest rates to their highest level since 2008 on Thursday in the wake of official data last month that showed inflation remained stubbornly high.The expected increase in the cost of borrowing would represent the 12th successive boost by the central bank since it started raising rates in December 2021. It comes in the wake of similar moves by the US Federal Reserve and European Central Bank.Economists will be looking beyond the decision on rates in the Monetary Policy Committee’s messaging, which was finely balanced on future tightening at the last meeting in March, and its new economic forecasts to try to gauge how much higher interest rates could still rise.How much is the MPC expected to raise rates by?Economists and the markets almost universally expect a quarter of a percentage point increase from 4.25 per cent to 4.5 per cent. The rise was far from a foregone conclusion after the March MPC meeting when the committee said it would continue to monitor for “evidence of more persistent [inflationary] pressures” before raising interest rates again. But in the past month, official data showed inflation in March was running at 10.1 per cent, well above the BoE’s forecast made in February when it expected an easing to 9.2 per cent. Combined with a pick-up in wage pressures and stronger economic data, economists believe that evidence threshold has been reached. Bruna Skarica, UK economist at Morgan Stanley, said she thought the inflation figures were a game-changer with “stickiness in core goods [inflation], despite fairly lacklustre retail sales volumes”. George Buckley, chief UK economist at Nomura, said the chances of the BoE doing anything other than raising rates by 25 basis points were “very low”. He added: “Pricing suggests that markets are thinking the same.”What will happen to the BoE’s forecasts?The BoE’s starting point will be the higher than expected inflation rate for March. Officials are still expected to forecast price pressures will ease quickly over the course of 2023 as last year’s sharp rise in energy prices fall out of the annual comparison.Although the initial rate of inflation in May’s forecast will be worse, lower than anticipated energy prices will bring the MPC’s inflation expectations down even faster than predicted in February. This, in turn, would boost household incomes. The spot price of natural gas is now 82p a therm, less than half of the 189p market price the BoE used for 2023 in its February forecasts. For late 2024, the current futures price is 147p a therm rather than 174p three months ago.Buckley said the fall in energy prices would allow the BoE to scrap its forecast that the economy would fall into recession this year. But an improved outlook would also pose a problem for the central bank because it would have to explain why it is raising interest rates when its model’s central forecast is likely to show lower medium-term inflationary pressure. Officials will justify this approach by pointing to signs of “second-round” effects — economists’ jargon for what most people call a wage-price spiral. But these are not well defined in the BoE’s model, and Jumana Saleheen, chief economist at Vanguard Europe, said some MPC members had “underestimated the transmission of [recent] high inflation rates becoming embedded into the economy”.

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Problems with the central bank’s model became evident in February, when officials decided to add 0.8 percentage points to its results to produce what they called a risk-weighted “arithmetic mean” forecast. This approach led to the largest-ever deviation from the MPC’s central forecast.Economists believe the adjustment factor this time round could be even greater, reflecting concerns among some committee members that high inflation is becoming more ingrained into daily life and pricing decisions by companies. Will the central bank’s guidance change?One thing is certain, the MPC will not want to tie its hands and rule out future interest rate increases. Officials are expected to signal that future interest rate moves would be “data dependent” and that there was no bias either way for tightening policy further or reversing course and lowering rates. MPC members have become increasingly worried about the threat posed by a wage-price spiral. Late last month, the BoE’s chief economist Huw Pill told households and companies they “needed to accept” that they were poorer as a result of higher energy prices. Central bank officials have said they were watching companies’ pricing decisions closely. Ashley Webb, UK economist at Capital Economics, said the MPC should have communicated the need to make borrowing for companies and households more expensive rather than urging people not to ask for pay rises or seek to defend profit margins. “Since the bank started to raise interest rates from 0.1 per cent in December 2021 to 4.25 per cent now, it has consistently warned that rates wouldn’t rise very far. If the bank had sounded more hawkish, perhaps price and wage expectations may have declined further,” he said. Given the uncertainties, the MPC is also likely to talk about the risks that it is running whatever its decision on interest rates.“The MPC has always taken a risk-based approach, or at least should have done” in an effort “to minimise the probability of large and persistent errors”, said Jagjit Chadha, director of the National Institute of Economic and Social Research.

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If the MPC raises interest rates too far before the effects on economic growth and inflation kick in, the risk is that MPC members look like “fools in the shower”, said Silvana Tenreyro, an external committee member, who has consistently voted against rate rises. She warned that further tightening of monetary policy could trigger a sharp downturn. But the hawks worry that the risk is that the MPC acts too slowly and fails to return inflation to anywhere near the BoE’s 2 per cent target. For most of the period since interest rates started rising, financial markets have been a better guide than economists or BoE officials in predicting the short-term likely rapid rise in interest rates.Although the BoE is not expected to signal the need for future rate rises, traders continue to bet on further tightening with the futures market indicating borrowing costs will finish the year at close to 5 per cent. More

NEW YORK (Reuters) -The practice of short selling is coming under increased scrutiny as shares of regional banks remain under pressure, with some calls for more regulatory oversight of the practice.Short sellers, who borrow shares they expect to fall and hope to repay the loan for less later to pocket the difference, have profited from the banking crisis. They gained $1.2 billion in the first two days of May, analytics firm Ortex said. Wachtell, Lipton, Rosen & Katz, a law firm that has represented large companies, such as Twitter, in mergers and against attacks from hedge funds, on Thursday called on U.S. securities regulators to restrict short sales of financial institutions. In a letter to clients, Wachtell said that the Securities and Exchange Commission (SEC) should regulate what it defined as “coordinated short attacks” by imposing a 15-trading day prohibition on short sales of financial institutions.This would allow time for regulators to act and for investors to digest information, Wachtell’s co-chairman Edward D. Herlihy and partner Matthew M. Guest wrote in the letter, adding that attacks by short sellers are not related to fundamental performance and put the U.S. economy at “great risk.”The law firm did not specify any stocks that had been subject to such attack. Wachtell did not immediately respond to a Reuters request for comments.Wachtell’s proposal would revive a ban implemented in 2008. During the financial crisis, short selling was temporarily banned in the U.S., although a New York Federal Reserve review later showed the curb did not achieve the intended effect.The SEC is “not currently contemplating” a short-selling ban, an agency official said on Wednesday, as worries over bank soundness hit share prices.The SEC declined to comment on Thursday when asked if it should impose a short selling ban.However, U.S. officials at the federal and state level are assessing the possibility of “market manipulation” behind big moves in banking share prices in recent days, according to a source familiar with the matter. SEC Chair Gary Gensler also told Reuters the SEC is focused on identifying and prosecuting any form of misconduct that might threaten investors, capital formation or markets more broadly.Reuters reported last month that many hedge funds secured high gains as First Republic, Silicon Valley Bank (SVB) and Signature Bank (OTC:SBNY) struggled.While some market participants criticized the practice, others, like non-profit group Better Markets, have said while some do abuse the system, other short sellers warned markets about the challenges regional banks were facing.”Short sellers act as a check to stock promotions and promotional management teams,” said Sahm Adrangi, who runs hedge fund Kerrisdale Capital, adding “It is a very worthy service we provide to keep financial markets running efficiently.”The KBW Regional Banking Index is down 30.4% this year and 11.3% this month. More

(Reuters) -Electric vehicle (EV) maker Lucid Group Inc reported lower-than-expected first-quarter revenue on Monday and trimmed its 2023 production forecast as a price war sparked by Tesla (NASDAQ:TSLA), rising interest rates and recession fears hurt sales.Shares in the maker of the Air luxury sedan dropped about 9% in after hours trade.Tesla Inc’s move to cut prices and increase volume, a strategy which CEO Elon Musk said is part of the EV maker’s recession playbook, as well as lower-priced electric models launched by traditional automakers have hurt startups such as Lucid and Rivian Automotive Inc.”I believe that there is a challenge to the entire market right now because of macroeconomics and because of interest rates,” Lucid CEO Peter Rawlinson told analysts.Lucid, faced with mounting losses, has largely shied away from lowering prices on the Air luxury sedan that starts at $87,400, and Rawlinson did not announce any plans for further cuts.Instead, Lucid said in late March it would lay off 18% of its workforce, or about 1,300 employees across the organization as part of a restructuring plan to rein in costs. The company reported quarterly revenue of $149.4 million, compared with analysts’ average estimate of $209.9 million, according to Refinitiv. It last month reported first-quarter production and delivery figures lower than in the preceding three months.”The revenue was actually the weakest that’s been since the second quarter of last year, so there’s a big miss on the top line,” said Garrett Nelson, analyst at CFRA Research. “This could be an indication that this pricing war is having a direct impact on their results.”Rawlinson said on Monday the company was on track to produce over 10,000 vehicles in 2023, compared with an earlier forecast for 10,000 to 14,000 units this year.The first quarter net loss widened to $779.5 million from $604.6 million a year earlier, while cash and cash equivalents fell to $900 million at the end of the first quarter from $1.74 billion in the fourth quarter.Chief Financial Officer Sherry House said the company had $4.1 billion in liquidity, enough to fund the luxury EV maker at least into the second quarter of next year.The EV maker is set to unveil its Gravity sport utility vehicle later this year ahead of its launch in 2024.Rawlinson said that the company was also in talks with multiple parties on licensing and selling its powertrain technology, but he declined to provide details. More

MEXICO CITY (Reuters) -The Mexican government on Monday set out fresh details of a plan to attract businesses to a corridor straddling a narrow isthmus of southern Mexico, part of a larger push to pump investment into the relatively poor region.The plan, called the Inter-Oceanic Corridor, will include 10 new industrial parks along the stretch connecting the Pacific port of Salina Cruz in Oaxaca state with the Gulf coast hub of Coatzacoalcos in Veracruz state, officials said.The government will provide incentives for companies who set up business in the parks, including waiving taxes on rent and value-added taxes (VAT), in return for creating a minimum number of jobs, the economy ministry said.Officials also hinted at plans to construct four wind plants across the area, home to major installations of state-run oil company Pemex. They did not provide further details.The scheme, which aims to encourage manufacturing in poorer states rather than northern and central industrial hubs, is a priority for President Andres Manuel Lopez Obrador, complementing his plan for a transoceanic freight rail line.”A big worry of this administration has been focused on lowering the asymmetries between north and south,” Economy Minister Raquel Buenrostro said at a presentation of the plan.Another reason to push manufacturing to the south is that the north – which benefits from its proximity with the United States – is facing a drought, officials say.Buenrostro noted that Lopez Obrador would soon issue a decree altering rules for water-usage concessions in areas – including the north – where the resource is scarce, and decide which companies should receive exemptions.The industrial parks plan will be pitched to firms from the United States, Canada, Taiwan and Germany, among others who may wish to bid, Buenrostro added, with auto makers, tech companies, and semiconductor producers tipped as potential park investors.The project’s anchor project, the freight rail line linking Mexico’s Pacific and Gulf coasts, is scheduled to be finished this year and ultimately aims to compete with the Panama Canal as a channel to move goods. More