Aurelia Butler

The ministry confirmed an earlier report in Der Spiegel magazine that said the finance ministers of Estonia, Finland, Austria, Ireland, the Czech Republic, Denmark and Slovakia had written to Dombrovskis saying that too far-reaching financial support for companies “not justified by clear market failures” could lead to a dangerous “subsidy race”.Czech Finance Minister Zbynek Stanjura also said it would be wrong to “escalate a trade war with the United States”.”Introducing retaliatory protectionist measures will threaten the fiscal stability of EU countries and will lead to disruption of the internal market,” Stanjura said on Twitter.”We have to find with the U.S. side a compromise solution that will maintain a fair competitive environment.”The EU said in December it would adapt its state aid rules to prevent an exodus of investment triggered by the U.S. Inflation Reduction Act, which it feared might lure away EU businesses and disadvantage European companies. More

CHTAURA, Lebanon (Reuters) – The money exchange shop in Lebanon’s Bekaa Valley was buzzing with business. Cellphones pinged endlessly and employees shouted out various rates as customers flocked in carrying plastic bags of the crashing local currency to buy U.S. dollars. “Welcome to the Wall Street of Lebanon,” grinned the storefront’s owner, a machine gun leaning on a rack behind him in case of a robbery. Cash is now king in Lebanon, where a three-year economic meltdown has led the country’s once-lauded financial sector to atrophy.Zombie banks have frozen depositors out of tens of billions of dollars in their accounts, halting basic services and even prompting some customers to hold up tellers at gunpoint to access their money.People and businesses now operate almost exclusively in cash. The local currency in circulation ballooned 12-fold between Sept. 2019 and Nov. 2022, according to banking documents seen by Reuters.Most restaurants and coffeeshops have hung apologetic signs stating that credit cards are not accepted but that dollars are, at the fluctuating parallel market rate. COLLAPSING POUNDLebanese use mobile apps to check on the collapsing pound, which has lost some 97% of its value since 2019.Fleets of mobile money exchangers zip to offices or homes to carry out transactions. Highways are dotted with billboards advertising money-counting machines.With credit cards redundant, people document big transactions by taking pictures of the dollar bills used, fanning them out to show the serial numbers. Even the largely paralysed Lebanese state is moving towards the cash economy: the finance ministry has considered requiring traders to pay newly-increased customs tariffs partly in cash. With more bank notes in circulation, crime has risen. Elie Anatian, CEO of security firm Salvado, said yearly sales of safes had grown steadily, with a 15% increase in 2022. Other businesses are faltering. Omar Chehimi imports smaller shipments for his home appliance shop with cash he has on-hand, since banks stopped granting letters of credit for large ones.”Even the companies we source from – Samsung (KS:005930), LG – are only dealing with us in cash,” he said, examining a crumpled $20 bill a customer had used to buy an electric heater. WESTERN CONCERNSAny recovery hinges on government action to address some $72 billion of losses in the financial system and revive the banking sector. But politicians and bankers with vested interests have resisted reforms sought by the International Monetary Fund to fix the situation and access international aid.Paul Abi Nasr, CEO of a textile company, said the cash economy made it “practically impossible” to enforce taxes “because everything can simply stay outside of the banks”.    “The government’s ability to be financially sound down the line hinges on this,” he said, adding that the cash economy also risked Lebanon being listed as a country falling short in the struggle against money laundering and terrorist financing.Western governments, which oppose the role of the heavily armed, Iran-backed Hezbollah group, share those concerns. A Western diplomat said foreign governments were worried illicit transactions would rise as cash was harder to track.The U.S. Treasury last week sanctioned Lebanese money exchanger Hassan Moukalled and his business for alleged financial ties to Hezbollah, saying he helped “transfer cash” on its behalf and recruited money exchangers loyal to the group.Moukalled denied the charges.Nassib Ghobril, chief economist at Lebanon’s Byblos Bank, said the pound’s continuing decline meant the cash economy was now also dollarised, “with dollars accounting for approximately 70-80% of operations”. “The transformation to a cash economy means the collapse of the economy,” said Mohammad Chamseddine, an economic expert at Lebanese research group Information International. More

The EU Commission plans to present a package to promote European industry on Wednesday in response to the U.S. government’s 370-billion-dollar subsidy package to promote climate-friendly technologies.The EU said in December it would adapt its state aid rules to prevent an exodus of investment triggered by the Inflation Reduction Act, fearing it might lure away EU businesses and disadvantage European companies. “This is a challenge for our competitiveness on top on already existing challenges,” Gentiloni said. A draft of the Commission’s plan to support industries facing U.S. and Chinese competition, seen by Reuters on Monday, said it would produce a simpler regulatory framework for manufacturers of technologies deemed key to meeting the EU’s climate change goals, including faster permitting procedures.”We will not start this discussion from the end, meaning the funding,” Gentiloni said.The European Commission will not propose any new joint EU borrowing, a draft of its “Green Deal Industrial Plan” showed on Monday. More

BUDAPEST/WARSAW (Reuters) – Even as hopes grow that central European economies can avoid all-out stagflation, the region’s central bankers have their eyes on two potential foes in their fight against inflation: corporate profits and indexation.A fall in gas prices means the region could weather a winter downturn with limited hit to output – good for economic growth but possibly a new trigger for inflation levels already in some cases double those in the economies of the euro area.As a decline in real wages spills over from the Czech Republic into Poland and Hungary, the question is how bold companies will be in the start-of-year re-pricing of goods and services that already saw hefty mark-ups last year.”Our calculations show that price hikes exceeded cost rises in several sectors,” Hungarian central bank Deputy Governor Barnabas Virag said last week after the bank left its base rate unchanged at 13%, the highest benchmark in the EU.”We think this has contributed to last year’s fast rise in inflation,” he said.The latest Eurostat data from the third quarter shows gross operating surplus in the corporate sector – a measure of post-wages profit – rising by an annual 34% in Hungary, 22% in Poland and 16% in the Czech Republic. That is far above growth rates of 10% the European Union as a whole and just 8% for the euro zone.While Spain’s left-wing government is on the watch for any excess profits made by supermarkets and others, and authorities in Portugal have also seen signs of rising profits, it has not featured strongly in European Central Bank deliberations. A similar debate in the United States last year, where record corporate profits led to questions as to whether companies were fuelling inflation in their quest to re-build profit margins, has also died down.In central European economies like Hungary, however, economists see a possibility that companies will seize on the fact that nominal wages are rising at a double-digit percentage rate, albeit still behind headline inflation.”The pricing power of companies can prevail for longer if they experience no drastic collapse in purchasing power,” ING economist Peter Virovacz said. “Although the change in real wages over the course of the year could be negative, this can be substantially smaller than we had expected earlier.””INFLATIONARY IMPULSES”The net financial result of the Polish corporate sector rose to record highs in nominal terms in the second quarter, as growth in sales revenue outpaced the costs of goods sold, the Polish central bank said in its November inflation report.”This indicates that companies passed on the sharp increases in costs, including those related to high prices of natural gas and electricity, to the prices of final goods,” it said.”Consequently, profitability indicators, including the percentage of profitable firms, remained high.”Prime Minister Mateusz Morawiecki has called on state-owned railway firms to cut intercity ticket prices after hikes of between 11.8% and 17.8% this year, making air travel a cheaper option than taking some trains between Poland’s largest cities.The Czech National Bank said in its autumn monetary policy report that sole traders have been able to generate higher-than-usual real profits based on its latest figures, while data on the largest 2,000 Czech firms showed the profit rate in all sectors was at least equal to the pre-pandemic level.The profit rates in key sectors of the economy – trade, transport and restaurant services – were increasing, it added.Czech central bank Vice Governor Eva Zamrazilova has said corporate margins are one area to monitor for possible price dangers, adding however that recent developments showed consumers were becoming increasingly sensitive to high prices.”That is another thing that I will watch closely, and if something that can be called a profit-inflationary spiral is maintained here, then for me it will be a step to intervene,” said Zamrazilova.Economists at Komercni Banka said the third-quarter profit rate of Czech non-financial enterprises was the highest since the first half of 2021. However, declining demand could make it increasingly hard for companies to raise prices, they said.INDEXATION RISKThe Hungarian Competition Office has launched a probe into a sharp increase in food prices, which rose by an annual 49.6% in Hungary in December, by far the highest in the EU.Hungarian food price growth moved broadly in line with regional and EU levels until the start of 2022 but gathered pace from May, when the forint decoupled from central European currencies and weakened substantially against the euro.Some telecommunications companies in Hungary have also raised services prices in response to high inflation, with Deutsche Telekom (OTC:DTEGY)’s local unit matching last year’s 14.5% inflation rate across its consumer services contracts.”We do not consider it optimal that companies are not setting their prices based on their cost structure but mechanically track last year’s inflation rate,” Hungarian central bank Director Andras Balatoni told Reuters. “We are monitoring developments.” (Additional reporting Jan Lopatka in Prague; Writing by Gergely Szakacs; Editing by Mark John and Christina Fincher) More

The Bank of Russia is widely expected to keep its key interest rate on hold at 7.5% at its first meeting of the year next week, with inflation gradually slowing but still well above the bank’s 4% target. Households’ inflationary expectations in January stood at 11.6%. In a report on economic trends, the bank highlighted three key inflationary risks Russia faces as it tries to haul the economy out of its current slump.”Inflationary pressures remain subdued, however pro-inflationary risks from the labour market, budget and balance of payments have increased,” it said.The bank also warned that the weaker rouble, which slumped in December as a price cap on some Russian oil products came into force, could feed into price inflation, particularly if Russia’s trade surplus decreases significantly. Initially dire predictions of a double-digit economic contraction in 2022 proved unfounded and the central bank said the economy had quickly adapted to last year’s shocks.But despite the shift to new supply chains and increased economic activity in sectors such as agriculture and consumer services towards the end of 2022, threats to Russia’s long-term economic health remain marked. “Staff shortages, technological limitations and weak external demand could slow the economy’s transition to sustainable growth from the second half of 2023,” the central bank said. The central bank said the impact on export volumes of price ceilings imposed by Western countries on Russian oil seemed limited, based on current market conditions. It said the European Union’s embargo on Russian oil products may lead to a rise in demand for Russian crude elsewhere in the world, while Russian Urals crude may trade at a narrower discount to benchmark Brent crude thanks to logistics changes. More