Aurelia Butler

NEW YORK (Reuters) – Some investors and analysts are calling for more coordinated interventions from central banks to restore financial stability, as they fear that tumult in the global banking sector will continue amid rising interest rates.After the collapse of two U.S. lenders this month and last weekend’s Swiss-government-orchestrated takeover of troubled Credit Suisse markets have remained jittery. On Friday, shares of Deutsche Bank (ETR:DBKGn) plunged amid concerns that regulators and central banks have yet to contain the worst shock to the banking sector since the 2008 global financial crisis.Global central banks including the Federal Reserve have recently taken measures to enhance the provision of liquidity through the standing U.S. dollar swap line arrangements. At the same time, however, both the European Central Bank (ECB) and the Fed have continued to hike rates over the past two weeks, as they remain dead set on fighting stubbornly high price pressure.For Erik Nielsen, group chief economics advisor at UniCredit in London, central banks should not separate monetary policy from financial stability at a time of heightened fears that banking woes could lead to a widespread financial crisis.”Major central banks, including the Fed and the ECB, should make a joint statement that any further rate hike is off the table at least until stability has returned to the financial markets,” he said in a note on Sunday. “Statements like these within the next few days would most likely be needed to take us away from the brink of a much deeper crisis,” he said.Money markets in the U.S. also expect the Fed to pause. Fed funds futures traders on Friday were pricing in only a 20% chance that the Fed will hike rates by an additional 25 basis points in May, and an 80% probability it will leave the rate unchanged at 4.75% to 5.0%. They also see the Fed cutting rates to 3.94% by December.Others, however, think regulators will be able to ensure financial stability while continuing with their inflation-fighting campaign. “We see central banks sticking to a ‘separation principle’ – using balance sheets and other tools to ensure financial stability while keeping monetary policy focused on reining in inflation,” the BlackRock (NYSE:BLK) Investment Institute said in a note last week.For now, few investors see this year’s events as a repeat of the systemic crisis that swept through markets in 2008, but they are wary that another bank run could erupt if people believe U.S. or European regulators won’t protect depositors.”The situation remains fluid but we tend to think the way out of this problem could be coordinated central bank action to bolster confidence in the system,” said Felipe Villarroel, a partner and portfolio manager at TwentyFour Asset Management.”The issue with European banks and big U.S. banks at the moment is confidence. It is not capital,” he said in a blog on Friday. “Consumers are nervous because they see banks failing and they question whether these issues will spread to other banks and whether or not they should take their deposits out or sell their bank stocks.”U.S. regulators said last week the banking system remained ‘sound and resilient’ in a bid to calm markets and bank depositors. Treasury Secretary Janet Yellen on Thursday also said she was prepared to repeat actions taken in the Silicon Valley and Signature Bank (NASDAQ:SBNY) failures to safeguard uninsured bank deposits if failures threatened more deposit runs.Still, Fed data on Friday showed deposits at small U.S. banks dropped by a record amount following the collapse of Silicon Valley Bank on March 10.Meanwhile, overall deposits in the banking sector have declined by almost $600 billion since the Fed began to raise interest rates last year, the biggest banking sector deposit outflow on record, noted Torsten Slok, chief economist at Apollo Global Management (NYSE:APO).”The near-term risks to banks combined with uncertainty about deposit outflows, bank funding costs, asset price turbulence, and regulatory issues, all argue for tighter lending conditions and slower bank credit growth over the coming quarters,” he said. More

The countries first reached the agreement last May, promising to boost bilateral trade after they normalized ties in 2020 in a U.S.-brokered deal.The deal will also allow Israeli companies to gain access to government tenders in the UAE, the ministry said.Israeli Foreign Minister Eli Cohen, who on Sunday gave a final signature for the tariff arrangement within the trade pact, said it would “strengthen the connection” with the UAE and that Israel was working to normalize ties with more Arab countries. More

FINMA President Marlene Amstad told Swiss newspaper NZZ am Sonntag it was “still open” whether new proceedings would be started, but the regulator’s main focus was on “the transitional phase of integration” and “preserving financial stability”. UBS agreed to buy Credit Suisse for 3 billion Swiss francs ($3.26 billion) in stock a week ago and to assume up to 5 billion francs in losses in a merger engineered by Swiss authorities during a period of market turmoil in global banking.Credit Suisse on Sunday declined to comment on the FINMA President’s comments when asked by Reuters for a response.Asked whether FINMA is looking into holding current Credit Suisse managers accountable for the collapse of Switzerland’s second-largest bank, Amstad said it is “exploring the options”. “CS had a cultural problem that translated into a lack of responsibilities,” Amstad was quoted as saying by NZZ, adding: “Numerous mistakes were made over several years”. FINMA had conducted six public “enforcement proceedings” against Credit Suisse in recent years, Amstad said. “We have intervened and used our strongest instruments,” she said of its previous moves.Amstad also defended Switzerland’s decision to write down 16 billion Swiss francs of Credit Suisse Additional Tier 1 (AT1) debt, to zero as part of the forced rescue merger.”The AT1 instruments contractually provide that they will be fully written off in the event of a trigger event, in particular the granting of extraordinary government support,” Amstad said.”The bonds were created precisely for such situations.” ($1 = 0.9199 Swiss francs) More

The writer is chair of Rockefeller InternationalAs bank runs spread, it has become clear that anyone who questions a government rescue for those caught underfoot will be tarred as a latter-day liquidationist, like those who advised Herbert Hoover to let businesses fail after the crash of 1929. Liquidationist is now challenging fascist as the most inaccurately thrown insult in politics. True, it’s no longer politically possible for governments not to stage rescues, but this is a snowballing problem of their own making. The past few decades of easy money created markets so large — nearing five times larger than the world economy — and so intertwined, that the failure of even a midsize bank risks global contagion.More than low interest rates, the easy money era was shaped by an increasingly automatic state reflex to rescue — to rescue the economy from disappointing growth even during recoveries, to rescue not only banks and other companies but also households, industries, financial markets and foreign governments in times of crisis. The latest bank runs show that the easy money era is not over. Inflation is back so central banks are tightening, but the rescue reflex is still gaining strength. The stronger it grows, the less dynamic capitalism becomes. In stark contrast to the minimalist state of the pre-1929 era, America now leads a rescue culture that keeps growing to new maximalist extremes.Today’s troubles have been compared to bank runs of the 19th century, but rescues were rare in those days. America’s founding hostility to concentrated power had left it with limited central government and no central bank. In the absence of a financial system, trust was kept at a personal, not an institutional level. Before the civil war, private banks issued their own currencies and when trust failed, depositors fled. Had the US Federal Reserve existed at the time, it would not have helped much. The ethos of contemporary European central banks was to help solvent banks with solid collateral — in practice they were tougher, protecting their own reserves and “turning away their correspondents in need”, as a Fed history puts it.A restrained government was a key feature of the industrial revolution, marked by painful downturns and robust recoveries, resulting in strong productivity and higher per capita income growth. Right into the 1960s and 1970s, resistance to state rescues still ran deep, whether the supplicant was a major bank, a major corporation or New York City. Though the early 1980s is seen as a pivotal moment of broader government retreat, in fact this era was marked by the rise of rescue culture when Continental Illinois became the first US bank deemed too big to fail. In a move that was radical then, reflexive now, the Federal Deposit Insurance Corporation extended unlimited protection to Continental depositors — just as it has done for SVB depositors. Recent bank runs have been compared to the savings and loan crisis of the 1980s. Triggered in part by regulation that made it impossible for S&Ls to compete in an environment of rising rates, the crisis was resolved by regulators who wound down more than 700 of these “thrifts” at a cost to taxpayers of about $130bn. The first preventive rescue came in the late 1990s, when the Fed organised support for a hedge fund deeply tied to foreign markets, in order to avoid the threat of a systemic financial crisis.Those rescues pale next to 2008 and 2020, when the Fed and Treasury smashed records for trillions of dollars created or extended in loans and bailouts to thousands of companies across finance and other industries at home and abroad. In each crisis, rescues held down the corporate default rate to levels that were unexpectedly low, compared with past patterns. They are doing the same now even as rates rise and bank runs begin. The hazards are not just moral or speculative, as many insist — they are practical and present. The rescues have led to a massive misallocation of capital and a surge in the number of zombie firms, which contribute mightily to weakening business dynamism and productivity. In the US, total factor productivity growth fell to just 0.5 per cent after 2008, down from about 2 per cent between 1870 and the early 1970s.Instead of re-energising the economy, the maximalist rescue culture is bloating and thereby destabilising the global financial system. As fragility grows, each new rescue hardens the case for the next one.No one who thinks about it for more than a minute can wax nostalgic for the painful if productive chaos of the pre-1929 era. But too few policymakers recognise that we are at an opposite extreme; constant rescues undermine capitalism. Government intervention eases the pain of crises but over time lowers productivity, economic growth and living standards. More

By Catarina Demony, Patricia Vicente Rua and Sergio GoncalvesLISBON (Reuters) – When Maria Lopes moved to Lisbon from the northern Portuguese city of Tondela, her goals were straightforward: study, find a job, get a place of her own.But a decade on, she still lives in a tiny, rented room – one of tens of thousands of young Portuguese hit by a housing crisis exacerbated by the arrival of richer foreigners lured in by incentives pushed by her own government.Those incentives – including golden visa schemes for moneyed entrepreneurs – got a lot of the credit for attracting the investments that helped pull Portugal out of the 2011-2014 debt crisis.Since then, critics say those schemes have come back to bite the economy by ramping up competition for scarce housing – fuelling inflation and piling pressure particularly onto young, local, entry-level workers.”I want to live… I don’t want to just survive,” Lopes said after a shift at a hop-on, hop-off bus tour company. The 30-year-old, who has two degrees in tourism, shares a flat with five others, pays 450 euros ($475) per month for a 13 square-metre mezzanine room, but makes as little as 800 euros a month during the low tourism season. “I hope all this noise we’re making shakes things up,” she said, referring to a wave of discontent – protests, marches and petitions – driven by mostly young people struggling to pay their bills. Living costs have been soaring across the world. But it is the stark contrast between the winners and losers that makes Portugal stand out among its European peersPortugal ranks as one of western Europe’s poorest nations. But its capital was last year ranked the world’s third least financially viable city, thanks to its punishing combination of low wages and high rents.Since 2015, Airbnbs and new hotels have mushroomed, foreigners have ploughed money into property and investment funds have bought up entire buildings.”Lisbon became ‘trendy’,” Gonçalo Antunes, a housing expert at Nova University said. “The property market developed without any control.”Rents in Lisbon have jumped 65% since 2015 and sale prices have sky-rocketed 137%, figures from Confidencial Imobiliario, which collects data on housing, show. Rents increased 37% last year alone, more than in Barcelona or Paris, according to another real estate data company, Casafari. Locals struggled to keep up in a country where public housing only represents 2% of the property market, according to government data.Antunes said the situation was particularly galling for the young. Portugal’s monthly minimum wage is 760 euros ($801.27), and around 65% of those aged under 30 made less than 1,000 euros a month last year, according to the Labour Ministry. The average rent for a one-bedroom flat in Lisbon is around 1,350 euros, a study by housing portal Imovirtual showed.’NO HOPE'”Some people are not eating to pay rent… there are truly dramatic cases out there,” Luis Mendes, a housing researcher and geographer at the University of Lisbon, said.The number of evictions has also been increasing, jumping 13% in Lisbon last year compared to pre-pandemic 2019, according to government data.Young mother Dulce Dengue, originally from Angola, was evicted with her children and nieces from a poor neighbourhood in Lisbon’s outskirts in 2021. They moved from hostel to hostel before finding a council house in Setubal, around 50 km south of Lisbon. Moving back to the city would be “impossible,” she said.Some leave the city. Some stay with their parents. The average age people leave the parental home in Portugal is 33.6, the highest in the European Union, according to data from the bloc’s statistics office.”It comes to a point in our lives that we have no hope,” said Vitor David, a 26-year-old programmer, who rents in Almada, across the River Tagus from Lisbon, where costs are slightly lower. Mendes said a recent housing package announced by the Socialist government had some “bold measures” but would not lower prices in the short term. As part of the package, new licenses for short-term rentals, such as Airbnbs, will be prohibited – except in less populated rural areas. Rights groups have pointed a finger at the “golden visas”, which the government has promised to scrap. The programme has been giving foreigners residents’ rights since 2012 in return for investments, attracting 6.8 billion euros primarily into real estate. A new “digital nomad” visa, which allows foreign remote workers making four times the minimum wage to live in Portugal for a year with no tax on external income, has also been widely criticised.But even some of those remote workers are becoming increasingly aware of the housing crisis. Esmee, a 28-year-old from the Netherlands, lives in the coastal town of Costa da Caparica, across the Tagus, and pays 825 euros per month for her flat.”Even for me – having an income from another country – it’s a lot of money,” Esmee said. “If housing stays this expensive or gets worse, (foreign) people earning a Portuguese income … will start moving back to their own countries.”($1 = 0.9485 euros) More

How fast is eurozone inflation falling?European Central Bank president Christine Lagarde said last week that eurozone inflation would “decline steeply this year” while underlying inflation pressures would “remain strong”. Data to be released on Friday will show how these two trends are playing out.Inflation in the 20-country single currency zone has fallen for four consecutive months since hitting a record high of 10.6 per cent in October and it is expected to fall again from 8.5 per cent in February to 7.3 per cent in March, according to a Reuters poll of economists.However, any relief at the ECB over this drop could be offset by an expected rise in core inflation — which strips out energy and food prices to give a better picture of underlying price pressures — from 5.6 per cent to a new eurozone record of 5.7 per cent.Economists think this month’s turmoil in the banking sector is likely to make lenders more cautious, squeezing credit supply and reducing price pressures. But it is probably too soon for this to have much impact on Friday’s inflation data.A purchasing managers’ survey published by S&P Global last week pointed to more strong growth in wages and companies’ selling prices, particularly in the services sector. Franziska Palmas, an economist at Capital Economics, said this “adds to the reasons to think that, as long as the banking crisis doesn’t escalate much further, the ECB will continue to hike rates”. Martin ArnoldHow much will Chinese economic activity have slowed?Investors are expecting slower growth in China’s business activity ahead of the latest purchasing managers’ indices on Friday. But markets could come under further pressure if either of the official growth gauges underperforms — or slips into contractionary territory.Economists polled by Bloomberg have forecast China’s manufacturing PMI to come in at 51.8 in March, down from 52.6 for the January-February period and closer to the 50-point line separating expansion from contraction. The non-manufacturing PMI, which includes the country’s vast services sector, is tipped to dip to 54.3, from 56.3 previously.Analysts said that while recent data for industrial production, investment and retail sales in China had all shown at least modest growth, the country’s recovery from a long period of economically disruptive Covid-zero policies would be gradual and remained vulnerable to external demand shocks.Iris Pang, chief Greater China economist for ING, predicted slowing demand for Chinese goods from foreign markets was likely to result in a drop for export orders in March, but expected a simultaneous boost for domestic orders. She added that while a recent rise in housing purchases was likely to support the non-manufacturing PMI, which includes the construction sector, “it should not be seen as a growth factor”.Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis, said China’s reopening was “clearly improving this year’s economic outlook . . . but there are still challenges, especially from very weak external demand”. Hudson LockettWill the Fed’s preferred measure slow further? The Bureau of Economic Analysis will on Friday release the February figures for the core personal consumption expenditures index, the Federal Reserve’s preferred measure of inflation. Some parts of the data are expected to show that price rises slowed last month, after a surprising acceleration at the start of the year, attributable to a one-off increase in social security payments. Economists surveyed by Bloomberg forecast that headline PCE will have slowed from 5.4 per cent in January, year over year, to 5.1 per cent in February. But the core figure — which strips out the volatile food and energy sectors, and is more closely watched by the Fed — is expected to remain flat at 4.7 per cent. That stagnation is likely because of the continued strength in shelter and other services costs, argue analysts at Credit Suisse, even as the prices of goods prove disinflationary. The data comes after the Fed raised interest rates by 0.25 percentage points at its meeting last week, and indicated in its “dot plot” that officials expect interest rates to be raised only one more time this year, even amid signs of persistent inflation. The transatlantic angst in the banking sector has driven interest rate expectations lower, with experts, including Fed chair Jay Powell, saying that the resulting tightening of credit conditions is likely to have the same effect as an interest rate increase. Kate Duguid More

Not a day too soon, Europe is confronting the reality that it is investing too little. That is true for both public and private sectors, it is true for creditor economies and high-debt states, and it has been true for a long time. For years, many European countries barely invested enough to maintain their existing capital stock, if that.As external crises abound, the EU is starting on the back foot: there is an infrastructure shortfall to make up before even beginning on the mammoth task of Europe’s green transition, recasting its energy system and securing its defence capacity.The need for more investment is universally acknowledged. But willing the ends has not yet led to willing the means — spending more public money. Public investment itself has to rise, of course. Government incentives will also be needed for private investment to reach sufficient levels and the right areas.That means the investment imperative runs headlong into the EU’s rules constraining public spending: the state aid (subsidy) framework and the “economic governance” (budget) framework. The former, designed to prevent member states from outbidding each other to attract companies, is being tweaked and remains under pressure for even more loosening. The latter is undergoing wholesale reform. The changes are still fiercely contested, often in predictably knee-jerk ways which reveal old faultlines between southern and northern states. Behind the defence of shibboleths, there are difficult questions regarding how to ensure more spending would actually boost the right kind of investment. But the direction of travel is clearly towards more flexibility. More leeway for public investment or subsidies, however, runs into another pillar of EU co-operation: a level playing field in the single market. If national budgets have to become more investment-friendly, not all can be equally generous. Whether because of budget rules or market borrowing rates, some will be unable to match the largesse of others. The result of a large but geographically uneven subsidy bonanza may be a large but geographically uneven productivity boom, with the fruits of the green transition reinforcing existing inequalities.Only three years ago, similar fears that pandemic support packages would upend single market fairness pushed the EU across the Rubicon of common borrowing and a (small) fiscal union. It is unsurprising that analogous fears today produce calls for more of the same, such as an EU-level “sovereignty fund” to finance the required industrial transformation.There is a contradiction, then, between the goals of more investment, strict constraints on national budgets and no additional common spending. The future of Europe’s economy depends on resolving this trilemma.For the northern “frugal” states, whose ambitions from climate to defence are in increasing conflict with their traditional budget hawkishness, this is particularly difficult. Denying there is a problem is a political and practical dead end. Some will insist member states can fund investment incentives by raising other taxes or cutting spending elsewhere. But any single country’s climate or strategic investments will benefit other Europeans too. Simple economic logic means that without additional incentives, national governments will underinvest relative to narrower domestic priorities.Looking for ways to avoid tackling the trilemma is tempting. Cheaper energy would do wonders for investment. However, it requires more infrastructure spending in the first place.There are policies that can soften the trade-offs. Doubling down on trade and regulatory policies that convince companies a huge EU market for green goods is imminent should lift investment and has no cost. And while corporate Europe’s complaint of an “existential threat” from the US Inflation Reduction Act is self-serving (EU subsidies are larger than America’s), the move does highlight that the US delivers its subsidy dollars faster and more predictably. Practical ideas to replicate this, such as the European Commission’s suggestion of a common scheme for national tax credits, would help deploy existing funds faster. But even so, the trilemma would remain. It reflects divergent visions of how to run the economy — and the European project itself. More than technical policy fixes, statecraft is needed to resolve it. [email protected] More