Aurelia Butler

Jes Staley must face trial alongside his former employer JPMorgan Chase in October, a New York judge has ruled. JPMorgan is suing Staley for allegedly failing to disclose his participation in Jeffrey Epstein’s sex crimes. Lawyers for JPMorgan last month said new details about the relationship between Staley and the late paedophile had emerged during an interview with an alleged victim.Staley had sought to have the claims separated from two lawsuits brought against the Wall Street lender by an alleged Epstein victim and the US Virgin Islands, where Epstein had a home.But Judge Jed Rakoff ruled JPMorgan’s claims against Staley were “closely related” to those made in the other civil lawsuits and that the three complaints would be heard together in October as planned.Rakoff did agree to extend a pre-trial procedural deadline by seven weeks after Staley’s lawyer had argued that his client would need more time to review tens of thousands of documents related to the case.Separately on Monday, in a response to the complaint against the bank by the alleged Epstein victim, JPMorgan denied that longstanding chief executive Jamie Dimon knew of Staley’s “personal involvement” with Epstein.In the new filing, the bank also denied that Dimon knew Epstein had been arrested for solicitation in Florida in 2006 or subsequently registered as a sex offender in the state. Dimon is set to make a deposition in May.Here’s what else I’m keeping tabs on today: IMF: The fund releases its global financial stability report as part of its annual spring meetings with the World Bank in Washington.Monetary policy: Chicago Federal Reserve president Austan Goolsbee, Philadelphia Fed president Patrick Harker and Minneapolis Fed president Neel Kashkari are all due to speak at public events. Biden in Belfast: The US president is set to arrive in Northern Ireland tonight to commemorate the 25th anniversary of the Good Friday Agreement.PS: We’re launching a new newsletter on April 17: One Must-Read. The newsletter will bring readers the most exceptional story from the FT each weekday. Sign up by clicking hereFive more top stories

A Ukrainian soldier fires a howitzer at Russian positions in Luhansk © Roman Chop via AP

1. The Pentagon said it was “working around the clock” to find out the source and scale of a leak of highly classified intelligence documents that appeared to contain operational data on the war in Ukraine as well as information from countries in Asia and the Middle East. Read the full story on the breach.2. Chinese tech giant Alibaba pledged to introduce artificial intelligence across all its business lines as it launched its ChatGPT-like generative artificial intelligence model in Beijing. Read more on the service, which is called Tongyi Qianwen or “truth from a thousand questions”.3. The world’s largest gold miner Newmont this morning raised its all-share offer for Australian rival Newcrest to $19.5bn. If agreed, the deal will create a global powerhouse in the precious metal sector.4. US pharmaceutical industry executives have called for the reversal of last week’s judicial ruling that could withdraw regulatory approval for the common abortion drug mifepristone. Read more on the open letter. 5. The US and the Philippines have kicked off their largest joint military exercise in 31 years, a day after China wrapped up three days of manoeuvres around Taiwan. The annual flagship drill, called Balikatan, involves 12,000 US forces, 5,400 Philippine military personnel and more than 100 Australian forces.News in-depth

Wall Street Journal reporter Evan Gershkovich is escorted by officers from court in Moscow last month © AP

Russia’s recent arrest of Wall Street Journal reporter Evan Gershkovich has drawn comparisons with the country’s detention of Brittney Griner in February 2022. But while the US basketball star was released in a prisoner swap after 10 months, former and current US officials warn that Gershkovich’s path to freedom may be tougher and longer.We’re also reading . . . Taiwan tensions: A dangerous rise in Chinese military exercises is a price worth paying to protect a flourishing Asian democracy, argues Gideon Rachman.Markets Insight: Last month’s turmoil in the banking sector seems to indicate the great speculative era has ended, and a new phase, the great unwinding, has begun, says Philip Coggan.US politics: Waning support in Ohio for the Ukraine war in Ohio points to a flashpoint in next year’s US presidential election.Chart of the dayUS companies are facing their sharpest drop in profits since the early stages of the Covid-19 pandemic, according to Wall Street forecasts, as high inflation squeezes margins and fears of an impending recession hold back demand.Take a break from the newsWe are seeing a gradual reimagining of where, when and how we work. Grace Lordan, an associate professor at the London School of Economics, says her work has found that much of this shift is coming from employees.Additional contributions by Tee Zhuo and Vita Dadoo Lomeli More

Happy IMF/World Bank spring meeting week to all who observe. That includes FT Alphaville, as there are usually some actually fascinating titbits in the various reports published in and around the economic jamboree, alongside the usual bloviating. You can read Kristalina Georgieva’s opening remarks here (tl;dr just bland stuff about the IMF’s “Resilience and Sustainability Facility” climate initiative). She had already trailed the glum World Economic Outlook report forecasts for global economic growth before Easter. The full WEO won’t be published until later today — with the Global Financial Stability Report coming out a bit later — but some of the early chapters that have already been released are worth a closer look. For example, Chapter 2 deals with R*, one of FTAV’s fave subjects as well. You might already have seen the accompanying blog summary that argues that “interest rates (are) likely to return towards pre-pandemic levels when inflation is tamed”. The second chapter of the GFSR looks at shadow banking, which is interesting enough to dig into separately.But the WEO gold mine so far is chapter 3, titled Coming down to Earth: How to tackle soaring public debt. You may be tempted to shout “2000-2022 called and wants its headline back” but the chapter does have some interesting nuggets, such as on Jamaica’s miraculous turnround. You can read a precis in the accompanying IMF blog post, but here are the chapter’s main bullet points. Our emphasis in bold, and some thoughts at the bottom:• First, adequately timed and appropriately designed fiscal consolidations have a high probability of durably reducing debt ratios. The average size of primary balance consolidations that reduced debt ratios in the past is about 0.4 percentage point of GDP, lowering the average debt ratio by 0.7 percentage point in the first year and up to 2.1 percentage points after five years. About half of the observed decreases in debt ratios are driven by suitably tailored consolidations. • The effectiveness of fiscal consolidation in reducing public debt ratios is influenced by various factors. The probability of success in reducing debt ratios improves from the baseline (average) of about 50 percent to more than 75 percent when (1) there is a domestic or global expansion and global risk aversion and financial volatility are low, (2) the scope for “crowding out” effects is high (cases with initial high public debt and low private credit such that the benefits of reducing public debt can outweigh its costs), and (3) the consolidation is driven more by expenditure reductions than by revenue increases (in advanced economies). • At the same time, because such conditions may not always hold, and partly because fiscal consolidation tends to slow GDP growth, the average fiscal consolidation has a negligible effect on debt ratios. Unanticipated transfers to state-owned enterprises (SOEs) and other contingent liabilities that get realized on government balance sheets, as well as unexpected exchange rate depreciations, which can increase the domestic value of foreign-exchange-denominated debt, can further offset debt reduction efforts. • Debt restructuring is typically used as a last resort when other efforts to reduce debt have failed and requires careful consideration of risks and potential consequences. However, in emerging market economies and low-income countries, where most restructurings occur, restructuring can significantly reduce debt ratios by an average of 3.4 percentage points in the first year and 8 percentage points after five years.Restructurings have historically had larger effects on debt ratios, especially in the short term, when they were (1) executed through face value reduction and (2) part of coordinated and large-scale initiatives for debt reductions (for example, the Heavily Indebted Poor Countries [HIPC] Initiative and Multilateral Debt Relief Initiative [MDRI]).• Case studies highlight that, in practice, debt restructuring is always a very complex process that involves burden sharing among residents, domestic creditors, and foreign creditors. Restructuring can also have reputational costs, affect interest rates and future market access, and have internal distributional consequences. Therefore, debt restructurings are typically used as part of a broader policy package— often as a last resort after other efforts have failed and there is some urgency to reduce debt (or to provide clear signals that a reduction will come). It is by no means a free lunch for countries undergoing this process. • Economic growth and inflation play an important role in reducing debt ratios. Growth reduces debt ratios not only through its effects on nominal GDP, but also because countries on average consolidate (run higher primary balances) during good times. • In terms of policy lessons, countries aiming for a moderate and gradual reduction in debt ratios should implement well-designed fiscal consolidations, particularly when economies are growing faster and when external conditions are favorable. The debt reduction effects of fiscal adjustments are often reinforced when accompanied by growth-enhancing structural reforms and strong institutional frameworks. • For countries aiming for more substantial or more rapid debt reduction, bold policy actions that do not preclude debt restructuring may be necessary. Fiscal consolidation may still be necessary to regain market confidence and recover macroeconomic stability. Regardless of the type of restructuring, lower debt ratios are achieved when restructuring is deep enough and is implemented together with comprehensive policy packages including IMF-supported programs. • To ensure success of restructuring in reducing debt ratios, mechanisms promoting coordination and confidence among creditors and debtors are necessary. Improving the Group of Twenty (G20) Common Framework with greater predictability, earlier engagement, a payment standstill, and further clarification on comparability of treatment can help. Most importantly, prioritizing debt management and transparency in advance can reduce the need for restructuring and help manage debt distress, which would be in the interest both of debtor countries and of their creditors. • Although high inflation can reduce debt ratios, the chapter’s findings do not suggest that it is a desirable policy tool. High inflation can lead to losses on the balance sheets of sovereign debt holders such as banks and other financial institutions and, more crucially, damage the credibility of institutions such as central banks. • Ultimately, reducing debt ratios in a durable manner depends on strong institutional frameworks, which prevent “below the line” operations that undermine debt reduction efforts and ensure that countries indeed build buffers and reduce debt during good times. In the end, countries’ choices will depend on a complex set of factors, including domestic and external conditions, as well as on the fact that not all alternatives may always be available.Basically, the IMF argues that governments tightening their belts can work — if the global economy is still humming along and the focus is on cutting expenses rather than increasing taxes. But “because fiscal consolidation tends to slow GDP growth, the average fiscal consolidation has a negligible effect on debt ratios”. And countries tend to be too wary of restructuring, which (unsurprisingly) are a pretty good way of reducing your debts! Too bad the bankruptcy process for countries can be charitably described as a shitshow. More

Australia will suspend a complaint against China with the World Trade Organization after Beijing agreed to review steep tariffs on Australian barley, in the latest breakthrough that signalled the easing of trade tensions between the countries.Penny Wong, Australia’s foreign minister, said on Tuesday that the suspension of the WTO appeal was a “sign of goodwill” as Canberra attempted to rebuild relations with its largest trading partner.“We hope this will be a template for other areas of dispute,” Wong said, adding that if a barley settlement was reached, she expected a similar process over wine tariffs.The review, which is set to take up to four months, follows improved relations between the governments over the past year aimed at easing trade and political disputes.China imposed tariffs of up to 80 per cent on Australian barley in 2020 at the height of trade discord between the countries. About A$20bn ($13.3bn) worth of Australian goods — including coal, wine, lobsters and cotton — were hit with punitive sanctions and other import measures designed to disrupt trade.Beijing levied tariffs retaliation after the Australian government, then led by Scott Morrison, called for an inquiry into the origins of the coronavirus pandemic in Wuhan, which inflamed bilateral tensions.The move was expected to damage Australia’s export-led economy, but the booming price of minerals and natural resources has bolstered it in terms of trade.David Uren, senior fellow at the Australian Strategic Policy Institute think-tank, said China’s rapprochement with Australia reflected Beijing’s desire to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, a regional trade pact, as friction with the US mounts. “My sense is that China’s priority is to gain entry to the CPTPP, so it needs Australia’s support,” he said. “It is able to forge trade agreements in a way that the US cannot.”Barley was the first Australian product to be targeted with tariffs in 2020 and is the first to be formally put up for review despite signs that coal shipments have resumed between the countries.China imported about A$1bn worth of Australian barley — used to make Tsingtao beer — annually prior to the sanctions, accounting for more than half of the country’s exports of the grain.Beijing accused Australia of using subsidies, such as drought relief, to manipulate the market, prompting the WTO dispute.Uren said barley was also targeted because of pressure from domestic producers in China, but there had been pushback from beer companies that used the Australian grain.“The barley tariffs have had an impact on the flavour of the beer,” he said.

Australia’s barley producers have largely been able to shake off the impact of the Chinese tariffs after Russia’s invasion of Ukraine boosted demand.But much of Australia’s grain that was previously used for Chinese beer has been diverted to Saudi Arabia for livestock feed, which commands a lower price.Barley growers argued that the industry would have work to do if China reversed the tariffs to displace Canadian and Argentine barley, which has filled the gap left by Australian malts over the past three years.Pat O’Shannassy, chief executive of industry body Grain Traders Australia, said it would represent a “fantastic outcome” if the tariffs were reversed in the coming months for growers and traders who had invested heavily in building relationships with Chinese partners prior to the dispute. More

Hyperinflation in Berlin was visible in 1923 when laundry baskets were needed to collect the bulky pay packets © Popperfoto/Getty ImagesEconomic history is rarely taught in universities these days. This is a pity, since it is a better guide to policymaking than Nobel Prize winning theses in economic theory. As a result, every two generations or so we are destined to repeat serious policy mistakes. In Britain the Truss government failed to study the Barber Boom of 1972-73 and arguably the world’s central banks too have failed to learn from the oil price shocks of 1973 and 1980.Stephen D King’s highly readable and informative book provides a welcome antidote. Its title is spot on. We should talk about inflation, not least because of its arbitrary incidence. It penalises thrift and rewards profligacy. It makes planning difficult. And it enables government through sleight of hand to impose stealth taxes through freezing tax thresholds and real wage cuts on its employees.King’s canter through 2,000 years of inflationary history — from Emperor Diocletian’s debasement of the coinage through to the Federal Reserve’s decision in 2021 to allow inflation to run at above the 2 per cent “central target” — is instructive. Money matters. Print too much and inflation generally follows. But sadly the quantity of money and inflation is not so correlated as to make monetarism — the strict control of supply — an effective policy guide.

Confidence in a currency matters too. Lose it and trust in institutions diminishes. You only have to look at the experience of Argentina and Brazil. But the history of institutions in mature economies also contains lessons. During the 19th century, the high water mark of the gold standard, the purchasing power of sterling increased by 48 per cent. During the 20th century, when both the gold standard and the post-1945 Bretton Woods system of fixed exchange rate collapsed, sterling’s purchasing power fell by 98 per cent.When inflation is rising, governments invariably blame external factors. And we should be in no doubt that the supply chain problems arising from the pandemic, and the energy price increases generated by the war in Ukraine, have been a major factor in the recent upsurge in inflation. But the ease with which inflation took root must also reflect the excessively loose monetary policy of recent years.

Children using wads of money as building blocks during the 1923 German inflation crisis © Getty Images

King concedes in We Need to Talk About Inflation that “the big challenge regarding inflation is to work out which of its many instances are temporary — the Korean war, for example — and which are likely to persist”. The answer, he writes, lies in four tests. First, have there been institutional changes suggesting an increased bias in favour of inflation? King argues that central banks’ bias against deflation during the past decade may have created a bias in favour of inflation. He adds that by distorting the bond market, quantitative easing removed a key early warning indicator available to central banks to gauge inflationary risks: freely moving prices in government paper. Quantitative easing — the lowering of market interest rates through the large-scale buying of government bonds — also muddied the relationship between finance ministries and central banks, sucking the latter into the corrosive orbit of fiscal decision making.Second, are there signs of monetary excess that indicate heightened inflationary risk? Here, King points to the rate of US monetary expansion during the pandemic.

Third, are inflationary risks trivialised or excused? It took 2.5 years for the annual rate of UK inflation to rise from 0.3 per cent to 10 per cent: yet, throughout that period, the Bank of England persistently forecast that inflation would return to the 2 per cent target within two years. Finally, have supply conditions changed for the worse? The supply chain problems of the pandemic may be receding, but trade barriers — often mis-sold as greater national resilience — remain on the increase. And whatever the benefits of Brexit in terms of “taking back control”, all the signs are that it has damaged the British economy’s ability to grow.Arguably, King’s tests are retrofitted to give one answer: that inflation would rise and persist. But it doesn’t mean he’s wrong. As inflation begins to fall through this year, it will be tempting to think that it will inexorably return to target. That appears to be the view of the central banks and the markets. But the warning signs are still there. Economies are still close to full employment. Vacancies remain elevated.

Real interest rates remain negative. Quantitative tightening may have begun. But the central banks still own eye-watering quantities of government bonds suggesting monetary conditions remain loose.King fears that central banks’ missions have become too wide. As he puts it, “financial stability, full employment, green finance, and, in the European Central Bank’s case, preservation of the euro may all have been worthy objectives but there was no guarantee that they could all be met simultaneously.” The resulting trade-offs forced central banks “to make choices that they were politically ill-equipped to carry out”. The recent banking crisis has certainly underlined the very real tension between monetary policy and regulatory responsibilities.Perhaps, central bankers have spent too much time in the company of politicians: they don’t want to be blamed for higher unemployment. They may be legally independent. But they are no longer the detached philosopher kings of legend, immune to the social consequences of their actions in the inexorable pursuit of low inflation.In one sense, this is desirable. We want central bankers to care about the society they serve. But it’s a further sign of a bias in favour of inflation. And King’s timely book should be essential reading for economic policymakers everywhere.We Need to Talk About Inflation: 14 Urgent Lessons from the Last 2,000 Years by Stephen D King, Yale £20, 224 pages Nick Macpherson is a former permanent secretary at the UK Treasury Join our online book group on Facebook at FT Books Café More

Low-income countries will face their biggest bills for servicing foreign debts in a quarter of a century this year, putting spending on health and education at risk. Repayments on public debt owed to non-residents for a group of 91 of the world’s poorest countries will take up an average of more than 16 per cent of government revenues in 2023, rising to almost 17 per cent next year, according to a study by debt campaign group Debt Justice that is due to be published on Tuesday.The figures — the highest since 1998 — follow a steep rise in global borrowing costs last year, when central banks sought to counter high inflation with rapid rate rises.For many of the 91 countries, which are classified as low and lower-middle income by the World Bank, repayments on domestic debt, borrowed from lenders inside the country, make the burden of debt service overall much greater still, according to separate data from the IMF.The rise in debt servicing costs will fuel an ongoing debate over debt forgiveness. Multilateral lenders and foreign governments led by the IMF and the World Bank delivered far-reaching debt relief around the turn of the millennium. The Highly Indebted Poor Countries initiative wiped out the bulk of bilateral and multilateral foreign public debt for many countries.Heidi Chow, executive director of Debt Justice, said debt repayments today were again reaching “crisis” levels for many governments, “hindering [their ability] to provide public services, fight the climate crisis and respond to economic turmoil”. The average reached a low of 6.6 per cent of revenues in 2011 and has been rising since.Chow called for “fast and comprehensive” relief on external debts, including changes to laws governing bond contracts in England and the state of New York to force private creditors to take part in debt cancellation.But Masood Ahmed, president of Washington-based think-tank the Center for Global Development and a former senior IMF and World Bank official, said today’s problems could not be tackled in the same way as in the past.“It is different now,” he said. “Most borrowers want to keep their access to the multilateral lenders and, most importantly, to private-sector creditors.”According to the World Bank data analysed by Debt Justice, Sri Lanka faces the steepest schedule of external repayments, equal to 75 per cent of government revenues this year. The country is unlikely to meet those payments following a default on its external debts last year. Sri Lanka’s scheduled repayments on domestic debt are even greater. According to an IMF report last month, these will be equivalent to more than 27 per cent of gross domestic product in 2023. That is almost three times as much those on external debt, equal to 9.8 per cent of GDP, according to the IMF.Zambia, which defaulted on its external debts in 2020, and Ghana, which followed last year, also have high levels of domestic debt, adding to the strain on their public finances.Pakistan, seen by many economists as running a high risk of default, has scheduled repayments on foreign public debts this year equal to 47 per cent of government revenues, according to Debt Justice. In a report last September, the IMF said its external government debts were equal to 28 per cent of GDP and its domestic debts 37 per cent of GDP. More

The writer, an FT contributing editor, is chief executive of the Royal Society of ArtsAfter a decade of radical financial regulatory reform, designed to rid the world of institutions that were “too big to fail”, this time was meant to be different. Alas, not. Not only the big (Credit Suisse) but the medium-sized (SVB) were found to matter, the safety net was again distended, and the best-laid regulatory plans perished in their first brush with reality.There are positives to take from the latest crisis. So far, we are suffering financial casualties rather than full-blown collapse, a credit squeeze rather than crunch. Some equity-holders (in SVB) and bondholders (in Credit Suisse) have borne the burden. Government support has been in guarantees of deposits or losses, not direct equity injections.Yet in other respects this financial melodrama feels eerily familiar. It is a centuries-old story of policymakers talking tough then bending the knee, fearing the collateral consequences of sticking to their plans. We remain caught in a “doom loop”, with insured risk-taking begetting further risk-taking. While this dynamic is not new, its velocity is. Recent events have seen a significant widening as well as deepening of the state safety net, casting it well beyond the financial system to households and companies. Since the global financial crisis, the world economy has been hit by two enormous shocks, first Covid and then the cost of living. These were cushioned by monetary and fiscal measures of unprecedented scale and scope.During Covid, quantitative easing in major central banks was expanded by over $10tn and fiscal policy by over $7tn. Direct support to households and businesses, in the US, UK and eurozone alone, amounted to around 25 per cent, 20 per cent and 12 per cent of national gross domestic product, respectively. During the cost of living crisis, support to households and companies across Europe averaged a further more than 3 per cent of national GDP. This support dwarfs the equity injections to banks in 2008/09. Because it is difficult for households and companies to self-insure against shocks of this type, the case for social insurance is strong. I have done so repeatedly myself. Not to provide it has the potential to cause large and lasting economic and social scarring due to household unemployment and corporate insolvency.That was the story of the 1970s and 1980s when, following large shocks, too little insurance was provided, causing long-term scarring, most clearly in high unemployment. Policy in the 21st century learnt those lessons, with responses larger and economic and social scarring lower as a result. But all insurance carries costs by reshaping risk-taking behaviour. Whether these distortions erode the cushioning benefits is a question of degree, not principle. Even when each individual act is justifiable at the time, the cumulative consequences may nonetheless become sub-optimal. The evidence is mounting that we may be at or close to that point. First, state-led safety nets are inherently one-sided. That inbuilt asymmetry naturally skews risks to demand and inflation to the upside. Latterly, those risks have been realised. During Covid, the world’s major economies administered the largest double-dose of fiscal and monetary medicine in human history, lighting the inflationary fire central banks are now frantically trying to extinguish.Second, when state insurance pays out following extreme events, this ratchets up government debt. Debt-to-GDP ratios in the major economies have doubled since 2008. With debt limits at or close to being breached in many major economies, fiscal space is now constrained. This reduces room for manoeuvre in the event of future shocks and constricts public investment, damaging growth. Third, the same safety net that prevents business gazelles and unicorns from being grounded also prevents corporate zombies from being slain. Taken too far, it crowds out creative destruction and diminishes business dynamism. There is growing evidence of a lengthening tail of stagnating firms, low rates of business entry and exit and falling market contestability.These effects add velocity to the “doom loop”. Reversing it would require a lengthy period of macroeconomic stability, such as that experienced after the second world war and in the run-up to the global financial crisis. In today’s world of “polycrises”, we can hope for renewed macroeconomic moderation, or a spontaneous growth spurt. But hope is not a prudent policy strategy. It is time to reconfigure our safety nets, in finance and beyond, and reinvigorate capitalism in anticipation of the next big crisis. More

The writer is a financial journalist and author of ‘More: The 10,000-Year Rise of the World Economy’The recent turmoil in financial markets is a sign of a longer term problem. More than a year after Russia’s invasion of Ukraine, inflation has proved to be far from transitory. That has meant government bond yields, while volatile, have shown no sign of dropping back to the historic lows reached in the past decade. The knock-on effects have been seen in the past few weeks’ banking sector turmoil after losses on long-term bonds triggered the collapse of Silicon Valley Bank. The loss of confidence in the sector spread, leading to the takeover of Credit Suisse by UBS and an emergency funding deal for First Republic. It seems as if the great speculative era has ended, and a new phase, the great unwinding, has begun.Finance is a Darwinian world in which participants must adapt their strategies to survive. In the great speculative era, the cost of finance was generally low or falling, and the price of assets was generally rising. A strategy of borrowing money to buy assets was the best way to prosper; hardly surprising that investment vehicles such as private equity did so well. By the same token, high nominal returns meant that clients were relaxed about paying hedge-fund fees and venture capital groups could also flourish.It is true that this era was subject to the occasional cull such as the collapse of the dotcom bubble in the early 2000s and the financial crisis of 2007-08. But the speculative bug came back with a vengeance in the 2010s. Risk-taking just found new avenues to explore; cryptocurrencies and special purpose acquisition vehicles, the listed shell companies that raise funds and seek something to buy, are just a couple of examples.But all that will change if the great unwinding takes hold. Interest rates and bond yields will trend higher not lower. Just as low bond yields resulted in an upwards repricing of risky assets, higher yields will cause a shift in the opposite direction. Borrowing to buy assets will be an extremely dangerous bet.There was a massive example of a great unwinding between 1965 and late 1981 when the yield on 10-year Treasury bonds surged from 4.2 per cent to 15.8 per cent. The effect on risky assets was grim. The Dow Jones Industrial Average managed to break above 1,000 in 1972, but was still trading at near that level in 1981.It is unlikely, but by no means impossible, that the next unwinding will be as long-lasting as that era. But possible calamities include the breakdown of globalisation as relations between the US and China become increasingly hostile, a slowdown in growth as the global economy struggles to reduce its dependence on fossil fuels, and political division in the US.Even if those risks are avoided, we have seen signs of how a shift to the new era would be difficult for the financial sector. SVB had its own peculiarities, particularly its bet on long-dated bonds and its dependence on wholesale deposits. Credit Suisse, with its long history of scandal, was a particularly weak link among European banks. And is hardly surprising that there has already been trouble among institutions exposed to cryptocurrencies, a sector that has seen more collapses than the towers in a game of Jenga.Higher bond yields also will cause crises in many other places. In the autumn, British pension funds were caught out by their use of liability driven investment, an approach that on the surface sounded risk-averse but which in practice turned out to involve leveraged bets on the bond market. Longer term, the Darwinian forces as well as regulatory pressures will force institutions and investors to adapt to the great unwinding. The world may even return to the days when a reputation for prudence was regarded as a commercial asset. If that does happen, then the numbers of bankers and fund managers who receive multimillion dollar bonuses will reduce. If risk-taking is seen as a vice, rather than a virtue, behaviour will have to change. Just as the authorities had to rescue a bank based in the libertarian enclave of Silicon Valley, many in the finance sector are now counting on the central banks to change the direction of monetary policy and allow the speculative era to have one last hurrah. It all depends on whether the US Federal Reserve perceives the need to avoid a financial crisis as greater than the need to bring inflation back down to target. In short, will Fed chair Jay Powell prove as steely an inflation fighter as his predecessor Paul [email protected]. More

The failures of Silicon Valley Bank and Credit Suisse have made a global economic slowdown more likely and European governments should be ready to support businesses as credit conditions tighten, veteran Italian banker Corrado Passera has said.“The banking crisis in the United States and the situation at Credit Suisse have increased the risk of recession,” said the 68-year-old, who left the top job at Italy’s largest bank Intesa Sanpaolo to serve in government at the height of the country’s debt crisis in 2011. Passera, who is now chief executive of Illimity, a digital bank he founded five years ago, added he was most worried about the impact on small and medium-sized businesses. Governments should be on alert “to compensate for lack of credit availability, because problems in this area of the market will translate to the rest of the economy”. More than 75 per cent of Italian businesses are SMEs. Illimity specialises in lending to the sector and in the management of non-performing loans. It reported €75mn in net profit and had €6.5bn in total assets in 2022, up from €3bn in 2019.Financial shares have fallen around the world after last month’s bank failures. While European regulators have sought to reassure investors that the bloc’s banks are in a much better position compared with the financial crisis 15 years ago, businesses are likely to be less able to withstand another major shock or tightening of credit conditions only three years since the start of the pandemic.Passera pointed out that macroeconomics and structural changes in banking had created challenges for smaller companies.“High interest rates, bank branch closures, which have taken away a channel to access finance for SMEs, and the uncertainty around banks’ equity might stress this segment of the market,” he told the Financial Times. While Italy is expected to avoid recession this year, analysts and experts have warned that the combination of rising interest rates, inflation and the latest banking turmoil could have unexpected consequences.“The European Central Bank must not overreact and give inflation time to cool . . . it is important for central banks to demonstrate that they are aggressively fighting inflation, but stagflation [a combination of high inflation and economic stagnation] must be avoided at all costs,” Passera said. “Interest rates are now sufficient to cool inflation.” Last month, Bank of Italy governor Ignazio Visco was the first European central banker to warn against prolonged interest rate rises. The ECB stuck with a planned 50 basis points rate rise in March but policymakers have been hinting that they will stop increasing rates. “The job of central banks today is quite difficult as monetary policy actions can have opposing outcomes in terms of both price stability and financial stability,” said Passera. “While inflation needs to be reduced drastically, collateral damage cannot be ignored.” More