Raphael Stevens

It is now four years since the first poor countries were plunged into default because of spiralling costs from covid-19 spending and investors pulling capital from risky markets. It is two years since higher interest rates in the rich world began to put even more pressure on cash-strapped governments. But at the spring meetings of the IMF and the World Bank, held in Washington, DC, this week, many of the world’s policymakers were acting as if the worst debt crisis since the 1980s, by portion of world population affected, had come to an end. After all, the poorest countries in the world grew at a respectable 4% last year. Some, such as Kenya, are even borrowing from international markets again.In reality, the crisis rolls on. The governments that went bust still have not managed to restructure their debts and dig out of default. As such, they are stuck in limbo. Over time more—and bigger—countries could join them. So in between the spring meetings’ embassy dinners and think-tank soirées, the IMF’s board announced a radical new step to deal with the problem.The core of the difficulty in resolving debt crises has been that there are more creditors, with less in common, than in the past. Over 70 years of debt restructurings, Western countries and banks came to do things a certain way. Now decisions require the assent of a new group of lenders, some of which see no reason to comply. Each part of the process, even if it was once a rubber stamp, can be subject to a protracted negotiation.Chief among the new lenders is China. Even though the country is now the world’s biggest bilateral creditor, it has yet to write down a single loan. India has doubled its annual overseas lending from 2012 to 2022; it sent $3.3bn to Sri Lanka soon after the country was plunged into crisis. The United Arab Emirates and Saudi Arabia are in the group, too. They have together lent more than $30bn to Egypt. The Gulf creditors’ preferred method is to deposit dollars at the recipient’s central bank—a form of lending so novel that it has never been subject to a debt restructuring before.As a result, the seven countries that have sought restructuring since the start of the pandemic have been unable to strike a deal to whittle down what they owe. Only two small countries have made progress: Chad, which rescheduled rather than reduced debts, and Suriname, which reached a deal with all its creditors but the biggest, China. Zambia has waited four years for a deal. Since no creditor wants a worse bargain than any other, there has been next to no principal debt relief during the worst debt crisis in four decades. Four years ago G20 countries signed up to the Common Framework, an agreement to take equal cuts in restructurings, but creditors have split over the degree of generosity needed.The IMF, which usually cannot lend to countries with unsustainably high debts, has been unable to do much. Yet on April 16th it made a move. It said it would lend to countries that have defaulted on debts but have not negotiated a deal to restructure all their debts. The policy is known as “lending into arrears”.In the past the fund, worried about getting its cash back, has lent into arrears sparingly and only with the permission of creditors still tussling over restructuring. Now all it is asking for is a promise from borrowing countries and co-operative creditors that its cash injections will not be used to pay off the holdouts. The imf’s economists have long feared that such a step would antagonise problem creditors, which are also countries with stakes in the fund itself. It seems the fund’s patience has run out: officials want to get debt restructuring moving.The new policy has the potential to impose discipline on the holdouts. In theory, restructurings work because easing the burden on borrowers maximises creditors’ chances of getting some—perhaps most—of their money back. The fund lending into arrears sharpens the incentive to comply because lenders who hold up negotiations face the prospect of not getting anything. They would be the ones frozen in limbo, while everyone else strikes a deal and carries on. The policy also strengthens the hand of debtors. In the past they may have feared walking away from their debts to, say, China, which is an easy source of emergency cash even after a default. Now if they wish to do so, they will have an alternative lender in the form of the imf.Getting cash flowing would certainly be good for populations of the troubled countries. Doing so might also keep the fund honest. Its debt-sustainability analyses are used as a benchmark for restructurings, and it may have an incentive to be too optimistic about sustainability, to avoid pushing a borrower into restructuring limbo. In a process that does not depend on playing down poor countries’ problems so as to avoid impossible restructurings, the fund will probably become a better broker, distinguishing between countries that need debt write-downs and those that just need a little more liquidity to make their next payment.Arrears and tearsThe question is whether the IMF can stomach the costs. Its threat will only bring creditors into line if it chooses to make use of its new powers. But in Washington officials still worry about aggravating the newer creditors, particularly China, with which the fund prizes its relationship. They might turn their back on co-operative restructurings altogether. Some borrowers could walk away from the IMF and take bail-outs from elsewhere.In the end, though, the fund may have little choice. Too many countries are in crisis. A clutch of big developing countries that have avoided default are teetering closer than ever to the edge. To avoid a catastrophe for hundreds of millions of people, international financiers need a way to get governments out of default before a country like Egypt or Pakistan goes under. Lending into arrears is the best available tool. ■Read more from Free exchange, our column on economics:What will humans do if technology solves everything? (Apr 9th)Daniel Kahneman was a master of teasing questions (Apr 4th)How India could become an Asian tiger (Mar 27th)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

After Russia destroyed the Trypilska power plant on April 11th, Ukraine blamed a lack of anti-missile ammunition. The country’s leaders are also desperate for more financial support. The two shortages—of ammunition and money—reflect different constraints among Ukraine’s allies. Whereas the lack of ammunition is mostly the product of limited industrial capacity, the lack of money is the product of limited political will.In one area, though, there are signs of progress: over what to do with Russia’s frozen assets. After Vladimir Putin invaded Ukraine, Western governments quickly locked down €260bn-worth ($282bn) of Russian assets, which have remained frozen ever since. Proposals about what to do with them have ranged from the radical (seize them and hand them over to Ukraine) to the creative (force them to be reinvested in Ukrainian war bonds). Until recently, none has found widespread favour with Western governments.Could that soon change? On April 10th Daleep Singh, America’s deputy national security adviser for international economics, declared that the Biden administration now wanted to make use of interest income on frozen Russian assets in order to “maximise the impact of these revenues, both current and future, for the benefit of Ukraine today”. Six days later David Cameron, Britain’s foreign secretary, announced his support, too: “There is an emerging consensus that the interest on those assets can be used.”The approach is an elegant one. Income earned on Russia’s foreign holdings can be seized in a manner that is both legal and practical. Many of the country’s bonds have already matured. Cash from redemption of bonds is held by the depository in which it currently sits until it is withdrawn, paying no interest to the owner as per the depository’s usual terms and conditions. Any interest earned thus belongs to the depository—unless, that is, the state decides to tax it at a rate close to 100%.Next, as suggested by The Economist in February, would be to transfer the net present value of that income stream to Ukraine. Investing Russia’s cash holdings into five-year German bunds would yield €3.3bn a year, enough to service EU debt of about €116bn at the same maturity. The rest is financial plumbing: set up a G7-guaranteed fund that receives the depositories’ incomes on Russian cash, issue that fund’s debt to the markets and send the proceeds in bulk to Ukraine.Although the EU has agreed to seize profits from depositories, it has not agreed to the subsequent steps. Under the bloc’s current plans, the proceeds will be used to pay for Ukrainian ammunition by July if all goes well, with a small portion set aside to compensate depositories for any Russian legal action or retaliation. But many in Europe remain suspicious about America’s desire to unlock more money through financial engineering. On April 17th Christine Lagarde, president of the European Central Bank, suggested that such proposals face a “very serious legal obstacle”.A drip of funds would be welcomed by Ukraine, but a big wodge of cash, as promised by America’s proposal, would be better still. European politicians would therefore be wise to sign up to it before there is a new occupant of the White House. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Unmanageable and uninvestible. That is how investors have long considered Citigroup. For over a decade the bank, which was once the largest and most valuable in America, has been a basket case. It trades at half the value it did in 2006, making it the only big American bank to fetch a valuation lower than its peak before the global financial crisis. Pick any measure and Citi is invariably dead last compared with its rivals. The firm has more staff than Bank of America, yet makes only a third of the profit.Its prize for this miserable drubbing is not a participation trophy, but a consent order from regulators instructing it to improve internal oversight and change how it measures risk. The firm became the laughing-stock of Wall Street in 2020 when it accidentally wired $894m to creditors of Revlon, a failing company. That Jane Fraser became the first woman to run a Wall Street bank following the mess attached an asterisk to her appointment. “Glass cliff” is a term used to describe the phenomenon of women being appointed to top jobs at companies in deep crisis.It seemed as if Ms Fraser was bound to fall from that cliff. Some Citi staff grumbled that she was a consultant, not a real banker, because she spent a decade at McKinsey before joining the firm in 2004. Those who bought shares on her first day in 2021 were choking down annualised returns of -15% by mid-September last year. But a remarkable turnaround now appears under way. On September 13th Ms Fraser announced a restructuring. She later laid out plans to sack 20,000 people by the end of 2026, some 7,000 of whom have already been shown the door. Investors seem to be rediscovering their faith in the firm. Citi’s share price rose by more than 50% between September and March, meaning that Ms Fraser now appears to be on the path to an accolade far more elusive than “first woman to do something”. She may become the banker who turned around Citi.Chart: The EconomistTo understand what an achievement that would be, look to the bank’s creation in 1998. Citi was going to be “everything to everyone, everywhere”, recalls Ernesto Torres Cantú, who has worked at the bank for 22 years and runs its international business. That was its ambition under Sandy Weill, who was a legend on Wall Street. Mr Weill had bought and merged financial institutions to form a “financial supermarket”. In 2000 Citi was the largest bank in the world, as measured by its capital base.Flaws are clear in hindsight. Harmonies between businesses never materialised. Instead, Citi became bloated. Layers of management obscured what was happening—which was, in the mid-2000s, a vast amount of bad mortgage lending. In 2008 Citi required more bail-out money than any other bank. It laid off 75,000 people, a quarter of its workforce. Its share price, which at over $500 in 2007 had valued the firm at $270bn, had fallen to less than a dollar by 2009. After the financial crisis, Citi’s bosses promised to simplify the firm. Assets were sold. But “all of the other restructurings we have made, until this one, wanted to preserve that idea [of being in all businesses in all markets] in some way or another,” says Mr Torres Cantú.Ms Fraser has ditched the mission once and for all. Her first act was to outline plans to sell 13 consumer banks. Nine are gone; three are being wound down. Only one in Poland, where the process has stalled owing to war in Ukraine, remains.These cuts have paved the way for the next phase: restructuring. A tangled mess of reporting lines has been replaced by five businesses that report directly to Ms Fraser: markets, which includes debt and stock trading; banking, which houses investment banking; services, which is where Treasury management and securities services are located; wealth management; and the American consumer-bank and credit-card businesses. Citi now details the capital allocated to each of these and their returns, as well as their revenues and profits.The reorganisation has cut red tape. Before, “if you wanted to get something done with a client, you had to get the approval of the corporate-bank chain, and then you would move to the approval from the geography management and then you had to get the approval from the legal entity, from the CEO of the regional bank,” says Mr Torres Cantú. It has cut thousands of jobs. And it has also shed light on performance. “We want these business heads to compete with one another to achieve their return targets,” says Mark Mason, chief financial officer at the firm. “Everything is out in the open now.” What has become clear is that Citi has a crown jewel: its services arm, which uses a sixth of the firm’s capital and has returned 20-25% on that capital over the past year (excluding the fourth quarter of 2023, which included significant restructuring costs). Other business returns are poor or, at best, average.Get the polish outMs Fraser wants a bigger crown jewel. Because Citi is a global bank, it has an advantage with corporate clients that operate across borders. The bank now hopes to gain smaller mid-market customers. Ms Fraser would also like to turn around the two laggards—banking and wealth management—for which she has brought in new blood. Andy Sieg, who ran wealth management at Bank of America, joined in September. Vis Raghavan, the head of JPMorgan Chase’s investment-banking business, will join in the summer.Investors are delighted. Citi’s share price has risen by almost twice as much as those of America’s other large banks since September. But will the changes produce the goods? Citi is still under regulatory scrutiny. The firm’s results from the first quarter, released on April 12th, were mediocre; its share price slipped. Just because investors can now see how poorly wealth management and banking are performing does not mean those businesses will improve. And talent is expensive. As the firm sacked thousands, Mr Sieg was paid $11m for his first three months of work.There is nevertheless a sense that Citi is at last changing. Reflecting on the firm’s decision to abandon its global consumer-banking businesses, Anand Selva, the firm’s chief operating officer, recalls how “years ago we were competing with all of these big regional and global banks”. But as regulations changed, many packed up, leaving just local banks as competitors. “You decide where you want to focus…and build scale,” he says. Citi will no longer be everything, to everyone, everywhere. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

The law of supply and demand is one of the first things that students of economics learn. When the price of something goes up, producers bring more to market. What, then, is going on in global stockmarkets?Global share prices have never been higher, having risen by 14% over the past year. At the same time, the supply of stocks is shrinking. As analysts at JPMorgan Chase, a bank, note, the pace of company listings is slower this year than last, and last year was already a slow one. This means that equity issuance net of stock buy-backs so far this year is already negative, at minus $120bn—the lowest such figure since at least 1999. Companies including ByteDance, OpenAI, Stripe and SpaceX have valuations in the tens or even hundreds of billions of dollars, and remain private. More

TSMC beats revenue and profit expectations in the first quarter on strong AI chip demand.
TSMC is the world’s largest producer of advanced processors and counts companies such as Nvidia and Apple as its clients.
A strong demand for AI chips is being led by the proliferation of large language models such as ChatGPT and Chinese clones.

A logo of Taiwan Semiconductor Manufacturing Company (TSMC) is seen during the TSMC global RnD Center opening ceremony in Hsinchu on July 28, 2023. (Photo by Amber Wang / AFP)
Amber Wang | Afp | Getty Images

Taiwan Semiconductor Manufacturing Company on Thursday beat revenue and profit expectations in the first quarter, thanks to continued strong demand for advanced chips, particularly those used in AI applications.
Here are TSMC’s first-quarter results versus LSEG consensus estimates:

Net revenue: 592.64 billion New Taiwan dollars ($18.87 billion), vs. NT$582.94 billion expected
Net income: NT$225.49 billion, vs. NT$213.59 billion expected

TSMC reported net revenue rose 16.5% from a year ago to NT$592.64 billion, while net income increased 8.9% from a year ago to NT$225.49 billion. The firm guided first-quarter revenue to be between $18 billion and $18.8 billion.
TSMC is the world’s largest producer of advanced processors and counts companies such as Nvidia and Apple as its clients.
“For the second quarter of 2024, we expect our business to be supported by strong demand for industry-leading 3-nanometer and 5-nanometer technologies, partially offset by a continued smartphone seasonality,” CFO Wendell Huang said during the firm’s earnings call Thursday.
CEO C.C. Wei said TSMC expects 2024 to be a “healthy” growth year, supported by “our technology leadership and broader customer base.”
“Almost all the AI innovators are working with TSMC to address an insatiable AI-related demand for energy efficient computing power,” said Wei, adding that the firm estimates revenue contribution from server AI processors to “more than double this year.”

TSMC expects second-quarter revenue to be between $19.6 billion and $20.4 billion.
TSMC currently produces 3-nanometer chips and plans to commence mass production of 2-nanometer chips in 2025. Typically, a smaller nanometer size yields more powerful and efficient chips. 
Strong demand for AI chips led by the proliferation of large language models such as ChatGPT and Chinese clones has caused TSMC’s shares to surge 56% in the past one year.
“TSMC is well-positioned for strong performance based on key industry trends. The continued demand for advanced chips, particularly those used in AI applications, is a positive sign for both the short and long term. The focus on advanced chip development, like the shift towards 3nm technology, is another factor driving long-term growth for TSMC,” Brady Wang, associate director at Counterpoint Research, said on Monday ahead of the results.

TSMC accounted for 61% of global foundry revenue in the fourth quarter, according to Counterpoint Research data. Samsung Foundry came in second with 14% of the market.
“TSMC’s net profit margin continues to be one of the highest in the company’s history at 40%, against an industry average of 14%, demonstrating TSMC’s strong competitive position. The high margin is the result of an increased share of sales of 7nm and smaller chips, which have significantly higher margins,” Grzegorz Drozdz, market analyst at Conotoxia, said last week.
Last year, TSMC’s business was impacted by macroeconomic headwinds and inventory adjustment. Smartphone and PC makers stockpiled chips during the pandemic, leading to surplus inventories as Covid-era demand waned.
Earlier this month, Taiwan was hit by an earthquake – its strongest one in 25 years. A TSMC spokesperson said its construction sites were normal upon initial inspection, though workers from some fabs were briefly evacuated. Those workers subsequently returned to their workplaces.
“There were no power shortages, no structural damage to our fabs and there is no damage to our critical tools, including all of our extreme ultraviolet lithography tools,” CFO Huang told investors and analysts on Thursday.

EUV machines are critical in the production of the most advanced processors.
However, some wafers were affected and “had to be scrapped,” said Huang, adding that the firm expects most of the lost production to be recovered in second quarter, with “minimal impact” to revenue.
The U.S. also recently granted TSMC’s Arizona subsidiary preliminary approval for government funding worth up to $6.6 billion to build the world’s most advanced semiconductors. TSMC is also eligible for about $5 billion in proposed loans. More

Economists and strategists now see the Fed waiting until at least September to cut interest rates and are increasingly entertaining the possibility of no reductions at all this year.
Bank of America economists said there is a “real risk” that the Fed won’t cut until March 2025 “at the earliest,” though for now they’re still going with a December forecast.
Hope remains that the inflation data turns lower in the next few months and gives the Fed room to ease.

Federal Reserve Chair Jerome Powell speaks during a House Financial Services Committee hearing on the “Federal Reserve’s Semi-Annual Monetary Policy Report” on Capitol Hill in Washington, U.S., March 6, 2024. 
Bonnie Cash | Reuters

If there was any doubt before, Federal Reserve Chair Jerome Powell has pretty much cemented the likelihood that there won’t be interest rate reductions anytime soon.
Now, Wall Street is wondering if the central bank will cut at all this year.

That’s because Powell on Tuesday said there’s been “a lack of further progress” on lowering inflation back to the Fed’s 2% target, meaning “it’s likely to take longer than expected” to get enough confidence to start easing back on policy.
“They’ve got the economy right where they want it. They now are just focused on inflation numbers. The question is, what’s the bar here?” said Mark Zandi, chief economist at Moody’s Analytics. “My sense is they need two, probably three consecutive months of inflation numbers that are consistent with that 2% target. If that’s the bar, the earliest they can get there is September. I just don’t see rate cuts before that.”
With most readings putting inflation around 3% and not moving appreciably for several months, the Fed finds itself in a tough slog on the last mile toward its goal.
Market pricing for rate cuts has been highly volatile in recent weeks as Wall Street has chased fluctuating Fed rhetoric. As of Wednesday afternoon, traders were pricing in about a 71% probability that the central bank indeed most likely will wait until September, with the implied chance of a July cut at 44%, according to the CME Group’s FedWatch gauge.
As for a second rate cut, there was a tilt toward one in December, but that remains an open question.

“Right now, my base case is two — one in September and one in December, but I could easily see one rate cut, in November,” said Zandi, who thinks the presidential election could factor into the equation for Fed officials who insist they are not swayed by politics.

‘Real risk’ of no cuts until 2025

The uncertainty has spread through the Street. The market-implied odds for no cuts this year stood around 11% on Wednesday, but the possibility can’t be ignored at this point.
For instance, Bank of America economists said there is a “real risk” that the Fed won’t cut until March 2025 “at the earliest,” though for now they’re still going with a December forecast for the one and only cut this year. Markets at the onset of 2024 had been pricing in at least six quarter-percentage point reductions.
“We think policymakers will not feel comfortable starting the cutting cycle in June or even September,” BofA economist Stephen Juneau said in a client note. “In short, this is the reality of a data-dependent Fed. With the inflation data exceeding expectations to start the year, it comes as little surprise that the Fed would push back on any urgency to cut, especially given the strong activity data.”
To be sure, there’s still hope that the inflation data turns lower in the next few months and gives the central bank room to ease.
Citigroup, for example, still expects the Fed to begin easing in June or July and to cut rates several times this year. Powell and his fellow policymakers “will be pleasantly surprised” by inflation data in coming months, wrote Citi economist Andrew Hollenhorst, who added that the Fed “is poised to cut rates on either slower year-on-year core inflation or any signs of weakness in activity data.”
Elsewhere, Goldman Sachs pushed back the month that it expects policy to ease, but only to July from June, as “the broader disinflationary narrative remains intact,” wrote Jan Hatzius, the firm’s chief economist.

Danger looms

If that is true, then “the pause on rate cuts would be lifted and the Fed would move ahead,” wrote Krishna Guha, head of the global policy and central bank strategy team at Evercore ISI. However, Guha also noted the wide breadth of policy possibilities that Powell opened in his remarks Tuesday.
“We think it still leaves the Fed uncomfortably data-point dependent, and highly vulnerable to being skittled from three to two to one cut if near-term inflation data does not cooperate,” he added.
The possibility of a stubborn Fed raises the possibility of a policy mistake. Despite the resilient economy, higher rates for longer could threaten labor market stability, not to mention areas of the finance sector such as regional banks that are susceptible to duration risk posed to fixed income portfolios.
Zandi said the Fed already should have been cutting with inflation well off the boil from its mid-2022 highs, adding that factors related to housing are essentially the only thing standing between the central bank and its 2% inflation goal.
A Fed policy mistake “is the most significant risk to the economy at this point. They’ve already achieved their mandate on full employment. They’ve all but achieved their mandate on inflation,” Zandi said.
“Stuff happens, and I think we need to be humble here regarding the financial system,” he added. “They run the risk they are going to break something. And to what end? If I were on the committee, I would be strongly arguing we should go already.”

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