Aurelia Butler

The European Central Bank must consider the “unprecedented” rise in house prices when assessing the high level of inflation and deciding how fast to tighten monetary policy, said one of its senior executives.In the most “hawkish” comments by an ECB executive board member ahead of next month’s meeting at which it will decide when to withdraw its stimulus in response to record inflation in the eurozone, Isabel Schnabel told the Financial Times: “We cannot ignore this.”“If this [rise in the costs of home ownership] were included, it would have a substantial effect on measured inflation, in particular on core inflation, where the weight of owner-occupied housing is larger,” she said. “It has to be part of our general considerations.”She said including the costs of owning a home in the eurozone’s benchmark pricing figure would have added 0.6 percentage points to third-quarter core inflation of 1.4 per cent, excluding energy and food, taking it up to the ECB’s target of 2 per cent.Unlike the US and UK, the eurozone does not include the costs of owning a house in its inflation data. But the ECB said last year it would start a multiyear process of incorporating owner-occupied housing costs into its targeted inflation measure. Until then it would consider price indicators such as an owner-occupied housing price index to show its effect.

The eurozone has seen an 8.8% annual surge in house prices. © Adrienne Surprenant/Bloomberg

Even without the recent 8.8 per cent annual surge in eurozone house prices, Schnabel said January’s rise in consumer inflation to a new high of 5.1 per cent and the fall of unemployment to an all-time low of 7 per cent meant “the risk of acting too late has increased and therefore we need a careful reassessment of the inflation outlook”.When the ECB governing council meets next month, it is expected to raise its inflation forecast for the next two years close enough to its target to justify ending its net asset purchases faster than planned and to prepare for its first interest rate rise in over a decade.Schnabel is one of the most influential voices on the ECB board and her comments are likely to shift the debate in favour of the increasingly vocal minority of hawks on its governing council who want to withdraw its stimulus more quickly. While wage growth remains subdued in Europe, compared with the US or UK, Schnabel said the ECB needed to anticipate whether it was likely to pick up, as indicated by recent survey data, and act before it did. “Because once it’s there, it’s relatively costly to fight,” she said. “We also have to ensure that current high inflation does not become entrenched in expectations because that could then give rise to a wage-price spiral,” she warned.The German economics professor, who joined the ECB board just over two years ago, also cited three factors that made its policymakers more worried about the impact of inflation: the Omicron wave of coronavirus infections was milder than feared; the labour market had rebounded swiftly from the pandemic; and a 26 per cent annual rise in industrial producer prices indicated “quite a bit of pipeline pressure”.“We are getting to a point where in light of the inflation outlook, the benefits of further net asset purchases may not justify the additional costs,” she said. “There is an argument for ending net asset purchases.”The ECB is monitoring tensions between Russia and Ukraine for their impact on energy prices and the wider economy, she said, adding that a potential conflict was unlikely to speed up the ECB’s withdrawal of stimulus because of “the likely negative effects of an escalation of the crisis on growth and confidence, including through potential sanctions”.Rising market expectations of a “hawkish” shift in ECB policy have already led to a fall in eurozone government bond prices and increased the spread between the borrowing costs of Germany and those of more indebted countries such as Italy. Schnabel said the ECB was “ready to counter severe market dislocations that lead to fragmentation”, while adding that bond yields remained low by historical standards. “Even if current bond yields adjust upwards, average interest rates on the countries’ debt will stay low for an extended period of time,” she said, pointing out that the eurozone was still expected to grow strongly. “In a growing economy, rising yields are not a major concern.” More

Economic activity contracted in 90 per cent of the world’s countries in 2020. This exceeded the proportion hit by the two world wars, the Great Depression and the global financial crisis. A pandemic, we now know, is a comprehensive disaster. It also bequeaths ill health and social and economic disruption. Among the most long-lasting legacies could be financial ones, especially in emerging and developing countries. The spectre of a lost decade looms for vulnerable nations. Determined action will be needed to prevent this. (See charts.)That is the theme of the latest World Development Report (WDR), entitled Finance for an Equitable Recovery, which was prepared under the direction of World Bank chief economist, Carmen Reinhart, a renowned expert on global finance. She notes, “In 2020, the average total debt burden of low- and middle-income countries increased by roughly 9 percentage points of the gross domestic product, compared with an average annual increase of 1.9 percentage points over the previous decades. Fifty-one countries (including 44 emerging economies) experienced a downgrade in their sovereign debt credit rating.” Fifty-three per cent of low-income nations are now seen to be at high risk of debt distress.Sharp rises in indebtedness were a necessary response to the pandemic. Indeed, the problem for most emerging and developing countries was that they could afford to borrow too little, with grave results for their populations. Partly as a result, Covid has increased inequality not only inside countries, but also between them. Not least, the number of people in extreme poverty jumped by 80mn in 2020, much the largest such rise in a generation.Alas, these losses may persist. One reason is that, though the pandemic may be receding, the supply of vaccines and other treatments remains highly uneven across the world. Another is that some important sectors, such as tourism, may take a long while to recover. Another is the disruption to education. Yet another is that the small businesses and informal enterprises on which a huge proportion of the populations of developing countries depend were forced to close during the pandemic.

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Yet the most important source of “economic long Covid” is likely to be financial distress. Emerging and developing countries do not only have historically high ratios of public debt to GDP. They also have other symptoms. Among other things, notes the WDR, there have been jumps in arrears of governments in sub-Saharan Africa as well as clear signs of corporate distress.The balance sheets of households, non-financial businesses, financial businesses, government and foreign creditors are interlinked. These links are always opaque. Yet that is deliberately true this time. As the WDR notes, “In many countries, the crisis response has included large-scale debt relief measures, such as debt moratoria and freezes on credit reporting.” Many of these policies are unprecedented. No one knows what will be revealed as forbearance comes to its necessary end. But the combination of declining government support with the scale of outstanding debt is sure to generate jumps in non-performing loans. The latter will then weaken lending, starting a negative feedback loop with the real economy. What is true within countries, is even truer among them, with the exception that debtors cannot deal with external debt unaided.The WDR’s core recommendation is to tackle bad debt head on. As Reinhart says, “the early detection and swift resolution of economic and financial fragilities can make all the difference between an economic recovery that is robust and one that falters — or worse, one that delays recovery altogether”. But governments will then inevitably find that some of the losses will fall on their own weak balance sheets, which will aggravate problems with sovereign debt.

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The history of managing needed sovereign debt restructuring is awful. On average, the process has taken some eight years. In the meantime, the economy and the people suffer. It is in the aggregate interest to resolve unaffordable debt situations quickly and so allow the country to return to growth. Unfortunately, it is not in everybody’s individual interest to do so. This problem has become worse as the composition of the creditor community has changed, especially with the far bigger roles today of the private sector and China: in 2019, the former held 59 per cent of the debts of emerging and developing countries and the latter another 5 per cent. China held as much as 11 per cent of the debts of low and lower-middle-income countries. Its holdings must at least be made far more transparent than they now are.Ideally, we would possess the sovereign debt restructuring mechanism proposed by the IMF two decades ago. In its absence, we will need suasion from international organisations and leading governments. In the medium term, debt contracts must be made more flexible than they are. As it is now, necessary debt restructurings will be prolonged and messy.

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Recovery from the pandemic will be slow in many emerging and developing countries, which lack medical and financial means to deal with it properly. In addition, we must now expect higher interest rates in the US and elsewhere. That will almost certainly generate disproportionate increases in risk spreads, as well as capital flow reversals. The sole piece of good news for many of these countries is high commodity prices.Leading policymakers need to recognise the risks, especially the financial risks to a truly global recovery. A lost decade for a host of poor countries would be unconscionable. It would also aggravate the threat of social and political instability. They have been [email protected] Martin Wolf with myFT and on Twitter More

The White House is open to temporarily suspending the gas tax, after a high-profile group of Democratic lawmakers proposed scrapping the federal levy on petrol until at least next year in an effort to curb rising inflation.“Every tool is on the table to reduce prices,” said Emilie Simons, White House assistant press secretary. “The president already announced a historic release of 50mn barrels from the strategic petroleum reserve, and all options are on the table looking ahead.”Democrats Maggie Hassan of New Hampshire and Mark Kelly of Arizona last week introduced the Gas Prices Relief Act, a bill that would temporarily suspend the federal gas tax through the end of the year. The current tax imposes a levy of 18.4 cents per gallon on petrol. The proposed legislation would also stipulate that the Treasury department make sure savings were passed on to consumers, rather than clawed back by companies.The Washington Post first reported that the White House’s National Economic Council was reviewing the idea.The move would be a big blow to Joe Biden’s climate agenda; the president had vowed to boost electric vehicle ownership and reduce Americans’ dependence on fossil fuels. But it comes as Biden confronts dismal approval ratings and Democrats on Capitol Hill fret about their political prospects heading into November’s crucial midterm elections, when both chambers of Congress are up for grabs. Hassan and Kelly are both facing tough re-election battles in November. Their legislation was co-sponsored by several other vulnerable Democratic lawmakers, including Georgia’s Raphael Warnock and Catherine Cortez Masto of Nevada.Warnock said the bill was the “latest effort to help working and middle class families overcome the economic pressures of the pandemic”.Democratic senators discussed the gas tax holiday proposal and other ways to address rising consumer costs at their weekly caucus meeting on Tuesday, but not all lawmakers were on board with the idea.Joe Manchin, the conservative Democratic senator from West Virginia who has frequently broken with his party, told reporters on Capitol Hill that suspending the tax did not “make sense”. Meanwhile, Republican moderates including Mitt Romney and Lisa Murkowski, who sometimes bolster Democrats’ numbers in a precariously divided Senate, also signalled their opposition to the bill.The latest Bureau of Labor Statistics data showed US consumer prices rose 7.5 per cent last month compared with January last year — the fastest annual pace in 40 years. Average petrol prices nationally have jumped to $3.50 a gallon as of Tuesday, according to the AAA, an automobile association, their highest level in more than seven years. The rise in gas prices comes on the back of a steady escalation in crude prices over the past two years as global consumption has bounced back quicker than supplies in the wake of the pandemic. West Texas Intermediate, the US crude benchmark, rose above $95 a barrel this week for the first time since 2014. It has since receded to roughly $91.50 on hopes of a de-escalation of the Ukraine crisis. The Biden administration has already sought to employ various tactics to tackle high prices at the pump, but with limited results.In November, the White House announced the release of 50mn barrels of crude from the country’s strategic petroleum reserve in an effort to ease tight supply. Prices retreated before ultimately resuming their upward trajectory.Meanwhile, pleas to the Opec+ group of oil producing countries to increase supply have largely gone unheeded. Biden spoke to Saudi Arabia’s King Salman bin Abdulaziz as recently as last week about “ensuring the stability of global energy supplies”, the White House said.The White House has also leaned on US producers to increase production, which has yet to recover to its pre-pandemic levels, despite the high prices. But large operators on a tight leash from Wall Street have so far largely held off ramping up supply, arguing investors were insisting on capital discipline.Analysts expressed scepticism that a suspension of the gas tax would have any lasting effect on prices. “While it’s significant in that politicians continue to address the high prices, the [federal gas tax] is actually one of the smaller costs in gasoline,” said Patrick De Haan at Gas Buddy, a price tracking service, noting that suspending the levy would represent a just a 5 per cent discount to the current national average price.Bob McNally, president of Rapidan Energy Group, said any impact of tax changes would be quickly overtaken by geopolitical events driving crude markets. “It’s a nothing burger, a blip,” said McNally. “Crude price changes will quickly overshadow it and I’m not sure that an 18 to 19 cent decline is really going to matter from the consumer perspective.” More

Covid-19 hurt public finances everywhere. Many emerging economies, however, were heavily indebted to start with. Forced to spend on tackling the pandemic, while tax revenues collapsed, they quickly piled up unsustainable debts. Now the bill is coming due, with incipient sovereign debt crises in Sri Lanka, Zambia and several other economies. Handling these looming defaults will test the International Monetary Fund, new creditors such as China and the whole rickety architecture of sovereign debt restructuring.Sri Lanka illustrates the challenge. After slashing taxes in 2019, and suffering the evaporation of tourist revenues, its public debt now amounts to 110 per cent of gross domestic product — with $7bn in debt and interest payments due this year. It has a large budget deficit and financial markets will not lend more. This is a crisis of solvency, not just liquidity, and there is no way to muddle through. An IMF adjustment programme, accompanied by a debt restructuring, is the sensible way forward. The sooner Sri Lanka’s government accepts the inevitable, the less painful it will be.To handle such situations is why the IMF exists. After a decade marred by its troubled programmes for Greece and Argentina, the Washington-based guardian of the international financial system needs to show it is still the natural port of call for countries such as Sri Lanka and Zambia, that it will demand the reforms needed to put their economies back on track, and that it will not lend without sufficient restructuring to make any remaining debts sustainable.Zambia has already agreed in principle to a programme with the IMF, and been rewarded with a currency rebound and a dip in inflation. To draw down the loans, however, it needs to make progress on restructuring its $15bn in external debt. Doing so will depend at least in part on China, which has become over the last two decades a large creditor to emerging economies, via a multiplicity of state banks. Beijing rejects any suggestion that its lending creates a “debt trap” for emerging economies. Its willingness to accept a haircut in Zambia and in Sri Lanka, where China is also a significant creditor, will test whether that is true.More widely, the challenge in any sovereign debt restructuring is to co-ordinate all creditors. Unlike in the past, when most were countries grouped in the Paris Club, or a few large international banks forming the London Club, there is now a plethora of private and official lenders. As the World Bank notes in its new World Development Report, the average country seeking a restructuring now has more than 20 distinct creditors, not including bondholders. They may include non-traditional lenders, such as trading houses that paid in advance for years of commodity deliveries.What is needed is a modern equivalent of the Paris Club and the London Club: a framework where all creditors can get together and share the pain. In a tentative form, this exists. There is a G20 framework on debt restructuring to parallel the Paris Club for official creditors, while so-called Collective Action Clauses allow, in theory, for private bondholders to co-ordinate.But these emerging institutions are not yet sufficient for their weighty task. A top priority, then, should be the resolution of any remaining China-Paris Club differences via the G20. Sovereign debt overhangs can weigh on growth for years and even decades. The only way to end them is for all creditors to accept comparable treatment. As the Covid-19 aftermath throws countries into default, they must find ways to do exactly that. More

Soaring energy prices have taken a toll on the eurozone economy, combining with a jump in Chinese imports to drive the bloc’s trade deficit in goods to a 13-year high in December.Imports of goods into the eurozone rose 36.7 per cent in value in December, compared with the same month a year earlier, mainly driven by higher energy prices, Eurostat said on Tuesday. The eurozone relies on imports for most of its oil and gas supplies. The value of goods exports from the bloc rose 14.1 per cent over the same period. Its monthly trade balance was also hit by a 53 per cent year-on-year rise in imports from China. As a result, the 19-country single currency bloc’s seasonally adjusted trade deficit in goods rose to €9.7bn in the final month of last year, its highest level since August 2008. Over the whole of last year, the bloc’s long-running trade surplus with the rest of the world fell to €128.4bn, down 45 per cent from the previous year. “The eurozone trade surplus has suffered a violent reversal in the past six months,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics. “Higher costs of energy imports are part of the explanation, but the driver is a blowout deficit with China.”Figures for the EU showed an even larger seasonally adjusted trade deficit in goods of €17.2bn in December. For the full year, the EU increased its trade surplus in goods slightly with the US and the UK, but this was more than offset by its equivalent deficit with China widening 36 per cent from 2020 to €248.9bn. Trade between the EU and UK continued to show signs of disruption after the Brexit transition period expired at the end of 2020, leading to the introduction of tariffs on many goods traded between the two for the first time last year.EU goods exports to the UK rose 1.9 per cent last year — significantly smaller than increases to its other main trading partners — but EU imports of goods from the UK fell 13.6 per cent, in contrast to increased imports from most other countries. Eurostat said Brexit meant “data on trade with the UK are not fully comparable with data on trade with other extra-EU trade partners, and for reference periods before and after the end of 2020”.Europe’s heavy reliance on Russia, which supplies about 40 per cent of the EU’s natural gas imports and a third of its crude oil imports, has been exposed in recent months by the tensions over Ukraine that have driven up energy prices. The value of EU imports from Russia rose two-thirds last year, more than quadrupling the EU’s trade deficit in goods with Russia to €69.2bn.Separately, the European Central Bank on Tuesday published estimates showing that if natural gas prices remained high it would reduce gross domestic product in the euro area by 0.2 per cent this year. A “gas rationing shock”, where supplies to eurozone companies fell 10 per cent, would lower GDP by 0.7 per cent, the ECB added. More

LONDON (Reuters) -Worries about Ukraine and the removal of help for economies over COVID-19 will challenge markets, which were already showing signs of being overvalued and heading for sharp corrections over coming months, the European Union’s securities watchdog said on Tuesday.The threat of a possible invasion by Russia of Ukraine raises the risk of further bouts of volatility, especially in sectors such as energy and commodities, the European Securities and Markets Authority (ESMA) said in a report on trends in risks.”We maintain our assessment of very high market and liquidity risks; high credit, contagion and operational risks; and elevated environmental risks,” ESMA said.”Going forward, we continue to see high risks to institutional and retail investors of further – possibly significant – market corrections.”Western governments have warned Russia that it faces hefty sanctions if it invades Ukraine.Steffen Kern, head of risk analysis at ESMA, said exposures to Russia varied across the EU, and an escalation in tension would move beyond the energy sector and into commodities like metals.Exposures in the investment funds sector and derivatives to Russia were, however, limited, Kern said.”Commodities are high on our monitoring agenda, cyber risk is very high on our monitoring agenda,” Kern said, adding that ESMA was ready to help deal with any severe market disruptions.The watchdog is also monitoring how “zombie” or highly indebted companies would cope with rises in interest rates.It is also keeping an eye on higher premiums or “greeniums” on bonds which tout their green credentials, even though there are no official sustainability standards or independent checks.Combating potential “greenwashing” or over-inflated green credentials in investments has become a priority for ESMA. More