Aurelia Butler

Daniel Davies is a managing director at Frontline Analysts, and the author of ‘Lying for Money: How Legendary Frauds Reveal the Workings of Our World’.Anyone who follows central banks knows that there are some subjects they love talking about endlessly (inflation forecasts), some they’re less happy being open about (quantitative easing) and some where they’re hardly prepared to talk at all. The key function of “lender of last resort” is very much in the third category. In the language of memes:

Which makes it surprising that the Bank for International Settlements published a short four-page document last Wednesday which seems to set out an entire policy framework for the extension of that role to emergencies in all kinds of financial markets, potentially going well beyond the banking system. Only true central bank trainspotters will have seen it, given the lack of a press release and the unassuming title of “Market dysfunction and central bank tools: Insights from a Markets Committee Working Group”, but it’s actually quite radical.Here’s why it mattersBeing cagey about the circumstances in which central bank support might be offered is an old tradition. If you ever want to learn about last-resort lending to the banking system, arguably your best reference is still “Lombard Street”, by Walter Bagehot. Despite being written in 1873 by the then editor of The Economist, over time central bankers have tacitly and grudgingly admitted that the book has things about right. Ever since the Great Financial Crisis, economists like Perry Mehrling have been arguing that we need a “New Lombard Street”, because the Federal Reserve, Bank of England, European Central Bank and the rest have steadily taken on a role as “dealer of last resort” when securities markets threaten to blow up. However, hardly anyone has been optimistic for the prospects of getting any clear policy statement. And by and large the central bankers themselves have taken the Fight Club approach to their most politically sensitive and economically risky activity.

But now we have the equivalent of a TED Talk on the subject. The “Markets Committee” of the BIS is an obscure cousin of the Basel Committee on Banking Supervision, formerly known as the Committee on Gold And Foreign Exchange. They’re central bank operations and markets people, most famous for rewriting the FX Code. And they’ve made a straightforward statement, in reasonably clearly written English, of what they call the “Backstop Principle”.. . . In situations where it appears likely that market dysfunction will have a material adverse impact on the real economy, central banks should consider using their ability to expand their balance sheets and provide liquidity in order to mitigate this impact.This looks like it could form the basis for a quite activist policy; it would suggest that central banks did the right thing in March 2020, when they flooded the market with liquidity to prevent bond markets locking up at the start of the COVID pandemic. The Markets Committee is still a little bit worried about moral hazard in the long term. But the caveat they make looks more like a definition of what constitutes a “backstop” than anything which might justify ever letting an economically-significant market freeze up.. . . Central banks should aim under normal market conditions not to (i) interfere with price discovery or market determination of the allocation of resources; or (ii) substitute for the primary obligation of market participants to manage their own risks . ..The document identifies a number of “open issues” which also touch on previously neuralgic policy issues. It suggests that in many cases, outright asset purchases can be a more powerful tool of intervention than just providing liquidity through the banking system, as QE purchases can directly attack mispricings and balance sheet overhangs (at the cost of probably creating worse moral hazard and exposing the central bank balance sheet to more risk, but swings and roundabouts etc). It also holds out the possibility that the lender of last resort function shouldn’t necessarily be restricted to banks — any institution that’s subject to “appropriate regulation and supervision” might reasonably be given emergency liquidity in a crisis.So the interesting question arises — what is the status of this document? If it were to be a general statement of global central bank policy, it’s one of the most important such statements since the days of Bagehot. Although the authors recognise that different countries and situations will interpret it differently, the backstop principle itself gives a lot more clarity about the circumstances in which central banks will and won’t ride to the rescue.It isn’t such a statement, of course. It’s an ad hoc publication by a working group of a committee, with only two members of that working group named (Andy Hauser of the Bank of England, and Lorie Logan, now off to lead the Dallas Fed but at the New York Fed’s markets desk when it was written). The backstop principle isn’t binding on anyone, either for action or inaction. But it’s not just a thrown-off thinkpiece either. It’s something that a committee of the BIS — a famously consensus-driven club of central banks — has decided is worth putting in the public domain. In terms of a new Lombard Street, this is likely to be as much as we’re going to get, and more than we were expecting. More

When US Treasury secretary Janet Yellen meets her counterparts in Brussels on Tuesday, one big topic for discussion will be how to fund a country battered by war. While the immediate concern is covering Ukraine’s short-term financing needs, officials are also increasingly worried about a reconstruction bill that is heading above half a trillion euros. Some are now tempted to use the roughly $300bn of Russian foreign exchange reserves frozen when the EU, the US and their allies imposed sanctions on the country’s central bank. Josep Borrell, the EU’s top diplomat, this month called for the assets of the Russian state to be directly targeted, saying such a move would be “full of logic” given the enormous cost. But confiscating foreign governments’ assets would be fraught with risk and legally questionable, according to some scholars. As the US Treasury secretary put it last month, using Moscow’s reserves to fund rebuilding is not something to consider “lightly”. Why would such a move be seen as incendiary?Governments around the world hold the bulk of their wealth in dollars and euros. Beijing, for instance, is one of the biggest holders of US Treasuries in the world.

The decision to freeze Russia’s assets has already raised concern in states with tense relations with the US and Europe. An outright seizure of Moscow’s wealth would be viewed as crossing a political Rubicon. “It would essentially be an action that does away with the international political economy system we have set up over [recent] decades,” said Simon Hinrichsen, a visiting fellow at the London School of Economics.In a blog post published by the Bruegel think-tank on Monday, Nicolas Véron and Joshua Kirschenbaum argued that while the idea of seizing the assets was “seductive”, it was also “unnecessary and unwise”. “Credibly standing for a rules-based order is worth more than the billions that would be gained from appropriating Russia’s money,” they said. “Countries place their reserves in other countries trusting they will not be expropriated in situations short of being at war with each other.” The possibility of leaving the reserves frozen and later returning them to Moscow was also “a powerful bargaining chip” for Kyiv, the two authors said. What is the US’s stance? Yellen has said making Russia pay for rebuilding is something that the authorities “ought to be pursuing”, though the Treasury secretary has cautioned that doing so would require changes in US law and require the support of US allies. In the new $40bn aid package for Ukraine that is making its way through Congress, the Biden administration has proposed measures that would make it easier and faster for the government to seize assets linked to Russian “kleptocrats”. The Biden administration has form in seizing governments’ assets: earlier this year the president ordered some of the Afghan central bank’s wealth that was parked in accounts in the US to be used for humanitarian assistance. Still, doing the same in the case of Russia would involve surmounting significant legal obstacles. What do lawyers think? International law recognises that the assets of convicted war criminals can be seized in reparations to their victims. In 2017 Hissène Habré, the former president of Chad, was ordered by a special war crimes tribunal to pay more than $145mn to victims of abuses under his rule. However, Habré died last year without his victims seeing compensation.There was more success in the case of Iraq, where the country’s government has paid $52bn to victims of Saddam Hussein’s invasion of Kuwait. The last payment, funded by oil sales and backed by the UN, was made earlier this year.

With Ukraine, the scale of the asset freezes already targeting Russia is a clear advantage. But the assets remain the property of Moscow under US law. Lee Buchheit, a veteran lawyer of international finance, said the US president was likely to need an act of Congress to change that. “The issue is whether they can take the next step and actually confiscate [the assets],” said Buchheit. “It is highly likely to happen, because the political pressure on western leaders is building to take this step.”However, Véron and Kirschenbaum argue that, even if Congress passes new legislation, it could be found to be unconstitutional in future court cases. “Such an aggressive expansion of executive powers might even cause the US judiciary to revisit the deference it has historically granted the government when exercising blocking or other sanctions authorities,” they said.What other ways are there to make Russia pay? Confiscating assets of wealthy individuals is one route. The Biden plan has bipartisan support, with both Republican Lindsey Graham and Democrat Richard Blumenthal championing it in the Senate. The EU has set up a so-called freeze-and-seize task force which is examining whether to take a similar approach to the US — as are officials in the European Commission’s justice directorate. One stumbling block is that asset confiscation is subject to strict legal limits in member states, and in many (although not all) cases it can only happen following a criminal conviction of the owner of the relevant property. To overcome this, the commission is working on measures to clarify that evasion of sanctions — for example, by moving assets to another jurisdiction — is itself a criminal offence, facilitating the confiscation of the assets by the authorities. But, compared with the vast wealth of the Russian central bank, the assets of the oligarchs are relatively small and would leave the allies with a massive gap to plug in the reconstruction bill. More

High energy and food prices are particularly bad news for people who live from one payday to the next. In the UK, about 22 per cent of adults have less than £100 in savings, according to a government-backed survey. In the US, about 20 per cent of households say they could only cover their expenses for two weeks or less if they lost their income, according to the consumer protection regulator.In this context, many employers are keen to do something to help their staff become more “financially resilient”. One increasingly popular idea is to partner with companies which provide “earned wage access” or “early salary advance scheme” products. These companies connect with an employer’s payroll to let employees draw down some of their forthcoming pay packet in advance. The companies usually charge a fee per transaction (generally between £1 and £2 in the UK) which is paid by the employee or the employer. The products are largely unregulated because they are not seen as loans. They are proliferating in the UK, the US and a number of countries in Asia such as Singapore and Indonesia. Revolut, the UK-based banking app, has also entered the market, telling employers it is a way to “empower employee financial wellbeing, at no cost to you”. Data is scarce, but research company Aite-Novarica estimates that $9.5bn in wages were accessed early in the US in 2020, up from $3.2bn in 2018.In a world where many employers don’t offer ad hoc advances to employees any more, these products can help staff cope with unexpected financial emergencies without having to resort to expensive payday loans. Some of the apps like UK-based Wagestream, whose financial backers include some charities, combine it with a suite of other services like financial coaching and savings. There is also value in the clear information some of these apps supply to workers about how much they are earning, especially for shift workers.But for companies which don’t offer these wider services, there is a question about whether payday advances really promote financial resilience. If you take from the next pay cheque, there is a risk you will come up short again the following month. Data from the Financial Conduct Authority, a UK regulator, suggests users take advances between one and three times per month on average. While data shared by Wagestream shows 62 per cent of its users don’t make use of the salary advance option at all, 20 per cent tap it one to two times per month, 9 per cent tap it four to six times and 9 per cent tap it seven or more times.As well as the risk of becoming trapped in a cycle, if you are paying a flat fee per transaction the cost can soon add up. The FCA has warned there is a “risk that employees might not appreciate the true cost” compared to credit products with interest rates. Against that, Wagestream told me frequent users weren’t necessarily in financial distress. Some users are part-time shift workers who simply want to be paid after every shift, for example. Others seem to want to create a weekly pay cycle for themselves. Wagestream users on average transfer lower amounts less often after a year. The company’s “end goal” is that all fees are covered by employers rather than workers. Some employers do this already; others are planning to as the cost of living rises.Regulators have noticed the market but haven’t got involved yet. In the UK, the FCA’s Woolard review last year “identified a number of risks of harm associated with use of these products”, but didn’t find evidence of “crystallisation or widespread consumer detriment”. In the US, the Consumer Financial Protection Bureau is expected to look again at the question of whether any of these products should be treated as loans. A good place to start for regulators would be to gather better data on the scale of the market and the ways in which people are using it.Employers, meanwhile, should be wary of the idea they can deliver “financial wellbeing” on the cheap. Companies that believe in the value of these products should cover the fees and keep an eye on the way staff are using them. They could also offer payroll savings schemes to help people develop a financial cushion for the future. Nest, the UK state-backed pension fund, has just concluded an encouraging trial of an “opt out” approach to employee savings funds.If employers don’t want to go down that road, there is a perfectly good alternative: pay staff a decent living wage and leave them to it. [email protected] More

BENGALURU (Reuters) – The European Central Bank is expected to raise the deposit rate for the first time in over a decade in July and bring it out of negative territory at its following meeting in September, despite a 30% chance of recession within a year, a Reuters poll of economists showed.With inflation hitting a multi-decade high of 7.5% in April and almost every other major central bank having already raised interest rates, ECB President Christine Lagarde backed calls for an early rate hike by policymakers last week.The bank is now expected to end its bond purchases programme in July and follow that with a 25 basis-point deposit rate hike a few weeks later, according to a majority of economists polled from May 10 to 16.Until recently, forecasters were expecting the ECB to wait until the final quarter of the year to raise the deposit rate, currently at -0.50%.Of the 46 of 48 economists who expect the deposit rate to rise in the third quarter, 26 said rates would rise by 50 basis points by the end of the period, implying quarter-point moves at both the July and September meetings.Another 18 respondents said the deposit rate would only rise 25 basis points in Q3 and two said it would only climb 10 basis points to -0.40% by the end of the quarter.An even clearer majority expect rates to no longer be negative by the end of the year. About 90% of economists, or 43 of 48, said the deposit rate would be 0% or higher by then, with 44%, or 21 of 48, saying it would be at 0.25% by then and 8%, or 4 of 48, saying it would be at 0.50%.”There is widespread support for ending negative interest rate policy at the ECB, but they will take a very cautious approach to policy normalisation, in light of substantial macro uncertainty and concerns about a growth slowdown,” said Jens Eisenschmidt, chief European economist at Morgan Stanley (NYSE:MS).”This will be the first time in over a decade that the ECB is lifting rates – with no support from asset purchases – so taking smaller steps would allow the ECB to observe the reaction in markets, with a possible fragmentation of financing conditions in the euro area likely a key concern”.The latest poll results are still lagging rate futures, which are pricing in a cumulative 90 basis points of rate increases for the rest of the year or between three and four 25 basis-point moves. Even that would leave the ECB well behind the U.S. Federal Reserve, which is currently expected to have its federal funds rate around 2.00-2.25% by the end of this year. [ECILT/US] However, the poll also found the time window to raise rates is closing for the ECB, with a steady median 30% probability of a recession in the next 12 months, as the war in Ukraine pushes energy prices higher and saps consumer spending power.The bloc’s economy was expected to grow 0.3%, 0.5% and 0.6%, in the second, third and fourth quarters. This is a downgrade from 0.4%, 0.6% and 0.6% predicted last month.On an annual basis, it was expected to grow 2.7% this year, down from 2.9% and 2.3% next, the same as predicted last month.The European Commission cut its growth forecast for the euro zone this year to 2.7% from 4.0% projected in February, and upgraded its inflation forecasts to 6.0% this year from 3.5%.Rising inflationary pressures, driven by a persistent surge in food and energy prices, have deepened the cost of living crisis in the euro zone.Prices are set to rise 7.7% this quarter, over three times the ECB’s 2.0% target and higher than the 7.3% prediction given last month. It will ease gradually over coming quarters but medians did not show it at target through next year, the forecast horizon.Asked what impact the cost of living crisis would have on growth, 19 of 25 economists said it would be severe and two said very severe. Only four said it would be mild.It will be over six months before the crisis eases significantly according to 90% of the respondents to another question.Despite recession risks, unemployment in the single currency bloc is expected to remain near record low levels at 6.9% and 6.8% this year and next.Meanwhile, average wage growth was expected to be 3.0% this year, the poll median showed.”While current dynamics are triggering higher wage demands, companies are still being cautious due to the weakening outlook,” said Bas van Geffen of Rabobank.”Anecdotal evidence is therefore also pointing to shorter wage agreements so that there’s flexibility to adjust next year, either higher or lower, depending on inflation. So, so far it still seems to be mostly catch-up wage growth rather than forward-looking”.(For other stories from the Reuters global economic poll:) More

Setting out guidance in a mid-term presentation, Nomura said it would target annual pretax income of between 350 billion yen and 390 billion yen ($2.7 billion and $3.0 billion) for its three core divisions in the year to end-March 2025.That compared to 205.2 billion yen it posted for the year ended in March 2022.Nomura also said it will create a new digital asset company later this year that will allow institutional investors to trade products linked to cryptocurrencies, stablecoins, decentralized finance and non-fungible tokens.($1 = 128.9100 yen) More

Treasurer Josh Frydenberg said Tuesday the government planned to increase an efficiency dividend for public service agencies to 2% from 1.5% over the next three years if re-elected on May 21. The measure will cover the costs of all the coalition’s election announcements while leaving the budget better off.“It’s a responsible approach,” Frydenberg told reporters in Melbourne. “It ensures our budget bottom line actually improves over time.”The opposition Labor party is due to release its policy commitment costings on Thursday ahead of Saturday’s ballot.Australia’s books will remain deep in the red over the four-year horizon set out in this year’s budget, reflecting the hit to growth and vast fiscal spending deployed to support the economy through the pandemic. The center-right government, which is trailing in opinion polls, maintains Labor will increase taxes to pay for higher spending. ©2022 Bloomberg L.P. More

WELLINGTON (Reuters) – New Zealand has long been seen as the moderate, even absent, voice on China in the “Five Eyes” western alliance, so much so that its commitment to the group was questioned just 12 months ago. The recent signing of a security pact between China and nearby Solomon Islands appears to have changed that.New Zealand’s tone on both security and Beijing’s growing presence in the South Pacific has toughened, a shift analysts say reflects concerns the agreement will give Beijing a strategic foothold and potentially a military presence in the Pacific that could destabilise Western influence.”It’s a real challenge to New Zealand’s sense of where the Pacific is heading,” said Robert Ayson, Professor of Strategic Studies at Victoria University of Wellington.Prime Minister Jacinda Ardern described the pact as “gravely concerning” and called on Solomon Islands to discuss it within the Pacific Islands Forum. “What is really changing around us is the level of assertiveness and aggression we see in the region,” Ardern said later at a United States-New Zealand Business Summit.New Zealand has previously often shied away from such criticisms, which analysts put down to the country’s heavy trade reliance and close economic relationship with China. Both China and the Solomon Islands have said the new pact will not undermine peace in the region. Details of the final agreement have not been released but Chinese foreign ministry spokesman Wang Wenbin said the agreement called for China to help the Solomon Islands maintain social order and cope with natural disasters, and did not pose a risk to the United States.SOFT POWERBut statements by Ardern and Foreign Minister Nanaia Mahuta were a clear signal they shared U.S. and Australian concerns about Chinese security engagement in the Pacific, said Anna Powles from the Centre for Defence and Security Studies at Massey University. “It also sent a signal to the Pacific that New Zealand supported regional collective security initiatives, and to third parties, specifically China, that regional crises in the Pacific would be managed by the region,” she said.While small and with limited military capabilities, New Zealand’s soft power in the Pacific is arguably stronger than its allies. It has a large Pacifika population and strong family, business, sporting and cultural ties along with territories in the region.New Zealand sees itself as a Pacific country and wants stability and prosperity for its neighbours, and needs a free and open Indo-Pacific to protect trade and telecommunication connections. David Vaeafe, programme manager at non-governmental organisation Pacific Cooperation Foundation, said the relationship with the Pacific was not all about money but about listening and understanding what the region needs.”New Zealand’s foreign policy towards the Pacific is slowly evolving and engaging from being ‘you shouldn’t do this’ to consulting and being part of that process,” he said. FIVE EYES CRITICISMSA year ago, there were questions over Wellington’s commitment to the Five Eyes alliance with Australia, Britain, Canada and the United States, after Mahuta said Wellington was uncomfortable with expanding the role of the group.There had been criticism after New Zealand opted not to sign joint statements from other Five Eyes members, including one on Hong Kong and another on the origins of COVID-19.White House Indo-Pacific coordinator Kurt Campbell told a business summit earlier this month that New Zealand’s underestimation of security risks in the past appeared unlikely to be an issue. “I think there is an understanding that the challenges that are presenting themselves on the global stage are not so distant – they’re closer and they have direct implications,” he said.Already New Zealand and Japan have announced plans to increase security ties and other moves are afoot. Mahuta visited Fiji at the end of March and signed an agreement that among things will facilitate information on shared security challenges.At the start of the month, a partly New Zealand-backed tuna processing plant for the Solomon Islands that is set to create more than 5,500 jobs was announced. The Ministry of Foreign Affairs and Trade has quietly shuffled more money into Pacific development cooperation budget for 2021-2024, according to changes made on its website. The fund has been increased since December by nearly NZ$120 million ($75 million) to $1.55 billion. New Zealand’s budget on Thursday will likely give further detail on Pacific spending with New Zealand’s defence minister previously highlighting the region as a priority. “New Zealand is quite strongly aligned to the United States and Australia,” VUW’s Ayson said. “That doesn’t mean we always see eye-to-eye and it doesn’t mean the we’re as closely aligned as Australia, but New Zealand’s security alliance is quite strong.”($1 = 1.6038 New Zealand dollars) More

WASHINGTON (Reuters) – The U.S. Senate voted on Monday to advance $40 billion more aid for Ukraine in its war against Russia, setting the stage for a vote on the bill possibly later this week, after the military and humanitarian assistance was delayed due to opposition from one Republican senator.The tally was 81 to 11 on the first of a potential three procedural votes paving the way for final Senate passage of the funding, requested by President Joe Biden’s administration to keep aid flowing and boost the government in Kyiv nearly three months after the start of the Russian invasion.All 11 “no” votes were from Republicans.The House of Representatives approved the aid on May 10. But it stalled in the Senate after Republican Senator Rand Paul refused to allow a quick vote. Biden’s fellow Democrats narrowly control both the House and Senate, but Senate rules require unanimous consent to move quickly to a final vote on most legislation.Paul said he wanted an inspector general to be appointed to oversee the funds, but declined an offer from Senate leaders to hold an amendment vote on his proposal. Changing the bill would force the House to vote on it again, causing further delay.There is strong support from both parties for assisting Ukraine. The House passed the measure by 368 to 57, with substantial Republican support, despite all 57 of the “no” votes in the House coming from Republicans. Mitch McConnell, the top Republican in the U.S. Senate, led a small delegation to Ukraine this weekend. He said on Sunday the Senate could approve the aid on Wednesday.The Biden administration had said additional money for Ukraine must be approved by Thursday in order to avoid a lapse in U.S. assistance. More