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    Japan PM Kishida says appropriate for BOJ to keep easy policy

    TOKYO (Reuters) -Japanese Prime Minister Fumio Kishida said on Thursday it was appropriate for the central bank to maintain accommodative monetary conditions.The government will continue to coordinate closely with the Bank of Japan to ensure wages continue to rise and the economy makes a complete exit from deflation, he said.”Japan is experiencing a historical chance to make a full exit from deflation,” Kishida told a news conference.”Some people may think that the government can declare that Japan is fully out of deflation. But we’re still half way there,” he added.Kishida said his administration’s key mandate was to ensure companies and households pull out of a deflationary mindset.”I will promise to ensure wages increase at a pace exceeding the inflation rate next year onward,” he said.The BOJ ended eight years of negative interest rates and other remnants of its unorthodox policy last week, making a historic shift away from its focus on reflating growth with decades of massive monetary stimulus.Kishida declined to comment, when asked by a reporter on whether the BOJ should hold off on raising interest rates too hastily. But he said he hoped the BOJ took into account the government’s focus on pulling Japan completely out of deflation, in guiding monetary policy.Kishida also said he told BOJ Governor Kazuo Ueda in a recent meeting that it was appropriate for the central bank to shift to a new dimension in monetary policy, while keeping monetary conditions accommodative. More

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    Explainer-Why did the Baltimore bridge collapse and what is the death toll?

    (Reuters) -Divers recovered the remains of two of the six missing workers more than a day after a cargo ship smashed into Baltimore’s Francis Scott Key Bridge. The bodies of two men were found in a red pickup truck submerged in the icy waters of the Patapsco River. Rescuers pulled two workers from the water alive on Tuesday, and one was hospitalized.WHEN DID THE BALTIMORE BRIDGE COLLAPSE?Shortly after 1 a.m. EDT (0500 GMT), a container ship named the Dali was sailing down the Patapsco River on its way to Sri Lanka. At 1:24 a.m., it suffered a total power failure and all its lights went out.Three minutes later, at 1:27 a.m., the container ship struck a pylon of the bridge, crumpling almost the entire structure into the water. The bridge was up to code and there were no known structural issues, Maryland Governor Wes Moore said.Tuesday’s disaster may be the worst U.S. bridge collapse since 2007, when a design error caused the I-35W bridge in Minneapolis to plunge into the Mississippi River, killing 13 people.WHAT IS THE DEATH TOLL SO FAR?The two men whose bodies were recovered on Wednesday were identified as Alejandro Hernandez Fuentes, 35, of Baltimore, originally from Mexico, and Dorlian Ronial Castillo Cabrera, 26, of nearby Dundalk, originally from Guatemala.The six workers who are presumed dead came from Mexico, Guatemala, Honduras and El Salvador, according to a press conference.Authorities have suspended efforts to recover bodies in the 50-foot-deep (15 m) waters surrounding the twisted ruins due to treacherous conditions.At the time of the crash, a construction crew was fixing potholes on the bridge and eight people fell 185 feet (56 meters) into the river where water temperatures were 47 degrees Fahrenheit (8 degrees Celsius). Two workers were rescued, one unharmed and one injured.Authorities saved lives by stopping vehicles from using the bridge after the ship sent out a mayday call, the Maryland governor said.The ship also dropped its anchors to slow the vessel, giving transportation authorities time to clear the bridge.WHY DID THE BRIDGE COLLAPSE?The metal truss-style bridge has a suspended deck, a design that contributed to its collapse, engineers say. The ship appeared to hit a main concrete pier, which rests on soil underwater and is part of the foundation.The head of the National Transportation Safety Board said the bridge lacked structural engineering redundancies common to newer spans, making it more vulnerable to catastrophic collapse.WHO WILL PAY FOR THE DAMAGE AND HOW MUCH WILL THE BRIDGE COST?President Joe Biden promised to visit Baltimore soon and said he wanted the federal government to pay to rebuild the bridge. The Transportation Department can award “quick release” emergency relief funds that are typically a few million dollars. To replace the bridge, Congress would need to approve funding. After the bridge collapse in 2007 in Minnesota, Congress allocated $250 million.Initial estimates put the cost of rebuilding the bridge at $600 million, according to economic analysis company IMPLAN. Insurers could face billions of dollars in claims, analysts said, with one putting the cost at as much as $4 billion, which would make the tragedy a record shipping insurance loss.HOW LONG WILL IT TAKE TO REBUILD THE BRIDGE?Rebuilding could be a lengthy process and will depend on whether any of the remaining structure can be salvaged. It took five years to construct the original bridge from 1972-1977.The closure of the port for just one month would cost Maryland $28 million in lost business, according to IMPLAN.WHAT SHIP HIT THE BALTIMORE BRIDGE?The Dali was leaving Baltimore en route to Colombo, Sri Lanka.None of the 22 crew members were hurt, the ship’s manager, Synergy Marine Group said.The registered owner of the Singapore-flagged ship is Grace Ocean Pte Ltd, LSEG data show. The ship measures 948 feet (289 meters) — as long as three football fields placed end to end. It was stacked high with containers but was capable of carrying twice as much cargo. Safety investigators recovered the ship’s black box, which can tell them the vessel’s position, speed, heading, radar, bridge audio, and radio communications as well as alarms.The same ship was involved in an incident in the port of Antwerp, Belgium, in 2016, when it hit a quay as it tried to exit the North Sea container terminal.A later inspection in June 2023 carried out in San Antonio, Chile, found the vessel had “propulsion and auxiliary machinery” deficiencies, according to data on the public Equasis website, which provides information on ships.WHAT DO WE KNOW ABOUT THE BRIDGE THAT COLLAPSED?The Francis Scott Key Bridge was one of three ways to cross the Baltimore Harbor and handled 31,000 cars per day or 11.3 million vehicles a year.The steel structure is four lanes wide and sits 185 feet (56 m) above the river.    It opened in 1977 and crosses the Patapsco River, where U.S. national anthem author Francis Scott Key wrote the “Star Spangled Banner (NASDAQ:BANR)” in 1814 after witnessing the British defeat at the Battle of Baltimore and the British bombing of Fort McHenry.HOW WILL THE BRIDGE COLLAPSE IMPACT THE BALTIMORE PORT? Traffic was suspended at the port, the 17th largest in the country.The flow of containers to Baltimore can likely be redistributed to bigger ports. However, there could be major disruptions in shipping cars, coal and sugar.It is the busiest U.S. port for car shipments, handling at least 750,000 vehicles in 2023, according to data from the Maryland Port Administration.In 2023, the port was the second busiest for coal exports.It is also the largest U.S. port by volume for handling farm and construction machinery, as well as agricultural products such as sugar and salt.      More

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    China will be a driving force for the world economic recovery, official says

    BOAO, China (Reuters) -China aims to be strong driving force for the world economic recovery this year, opening its markets wider to foreign investors and promoting high quality growth, the country’s top legislator Zhao Leji said on Thursday.China will make tech innovation a new point of economic growth and is willing to collaborate with other countries on it, Zhao, the chairman of the Standing Committee of the National People’s Congress, said at the opening plenary of the annual gathering of the Boao Forum for Asia.China’s import and export of goods is expected to exceed $32 trillion in the next five years, according to Zhao.Recent economic indicators have shown the world’s second-biggest economy made a bright start to the year, offering some relief to policymakers as they try to shore up growth amid weakness in the property sector and mounting local government debt.Zhao also promised greater openness in the country’s markets for foreign investors, with a further reduction of the “negative list” of sectors prohibited or restricted for investment from foreign companies without special approval.Many foreign businesses have been looking to “de-risk” supply chains and operations away from China. Inbound foreign direct investment shrank nearly 20% in the first two months of the year, data released last week showed.Earlier in March, Beijing announced a series of policies to prop up economic growth and a growth target of around 5% for 2024, which Zhao said conveyed confidence the country’s economy continuing to rebound and improve in the long term.China opposed trade protection and decoupling, said Zhao.”Investing in China is investing in the future.” ($1 = 7.2260 Chinese yuan renminbi) More

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    Where does the ECB go next?

    This article is an on-site version of Martin Sandbu’s Free Lunch newsletter. Sign up here to get the newsletter sent straight to your inbox every ThursdayIt is now clear that central bank interest rates have peaked in most advanced economies; the Swiss National Bank has even started the loosening cycle with a surprise cut last week. But this is no ordinary turn in the monetary cycle — because this has been no ordinary tightening process. Central banks, like everyone else, were taken by surprise by Russian President Vladimir Putin’s energy war and how it and other pressures drove up inflation. For the past two years, monetary policymakers have been in a situation of very high uncertainty and of learning on the job. If the coming months mark the turn in policy stance, it is also a good time for them to take stock of how they adapted their analyses in real time and what framework they will adopt for the next phase of the cycle.The decision makers at the European Central Bank have been doing precisely that in recent speeches and comments, not least at last week’s “ECB and Its Watchers” conference (programme and links to the speeches here). Here are some thoughts about what we have learnt. The ECB seems pretty likely to cut in the second quarter (most probably in June). President Christine Lagarde’s conference speech gave a road map to how the decision will be made. She said she and her colleagues would look particularly closely at three variables to determine if disinflation is on the right track: wage growth (which influences services prices); unit profits (which indicate how much business owners are willing to absorb costs — on which more below); and productivity (which determines how much can be shared between labour and capital without driving prices up). She also flagged important new data scheduled before June, including whether the inflation path from the ECB’s March forecast remains on track. So for those who need to guess the ECB’s near-term moves, Lagarde has told you where to look.But for everybody else, it is much more interesting to think about the longer-term questions for the ECB: how to assess the inflationary episode of the past three years, how the central bank’s approach has evolved through it, and where it goes from here, long-term. These are the questions I have had in mind when looking at the latest communications from Frankfurt.On the first question, ECB chief economist Philip Lane recently put out a comprehensive chronicle of the past three years, going through the shocks and surprises in detailed chronological order, and explaining how the ECB thought about its challenges in real time. Two observations, in particular, jumped out at me from that and Lane’s detailed conference slides.The first is that the ECB’s big misses in forecasting inflation in 2021-22 (shared, as Lane shows, with most other forecasters) were almost entirely down to energy and later food prices changing more than expected. Now, commodity prices are notoriously volatile and hard to predict. It’s not at all clear that we would want central banks to do anything else than go with market forecasts, and it’s abundantly clear that we can’t fault central banks for not guessing Putin’s next move. The second are the results from an ECB exercise of applying to eurozone inflation the method Ben Bernanke and Olivier Blanchard developed last year to decompose price dynamics in the US, which Free Lunch covered at the time. I interpreted the Bernanke-Blanchard analysis as showing that US inflation was predominantly supply-driven; the ECB exercise suggests an even more overwhelmingly supply-side story for the eurozone. (My colleague Chris Giles recently wrote an excellent deep dive into this sort of exercise for a number of major economies — I have stolen, I mean reproduced, his chart below.)You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.All this number-crunching strengthens my largely nihilistic view that there was little the ECB could do to either guess inflation better or to prevent it. As I have explained, there may sometimes simply be nothing central banks can do, and if so, we need to finesse our politics of inflation to fit this reality, at least so that central banks can content themselves with doing no further harm to the economy.What, then, about the ECB’s response over the past few years? Nobody from the ECB will say so explicitly but, from the outside, it looks like the new monetary policy strategy, unveiled as recently as 2021, unravelled or at least was put in the deep freeze once inflation became embarrassingly high. My impression is that ECB policymakers lost faith in their own institution’s forecasts (and those of others, no doubt) after the many big misses — which coincided with the harshest reputational pressure on the central bankers as inflation reached levels not seen in 40 years. Such a loss of self-confidence was clearly going to become a problem for a strategy centred on being permissive with current price growth so long as inflation was forecast to be under control towards the end of a multiyear forecast period.Instead, the dominant message from the ECB at the time of peaking inflation was what executive board member Isabel Schnabel called “robust control”. This was the notion that when the persistence of excessive inflation is highly uncertain (as one must have believed it was if forecasts were no longer informative), a central bank must err on the side of tightening.This perspective has receded. But a less strident version can be found in the view that there is a difficult “last mile” in getting inflation down the last bit towards the 2 per cent target. It looks to me like there is less agreement within the ECB on this than it likes to let on. That disagreement could intensify, given that both sides have data to support their case. The ECB’s official forecast shows that by mid-year inflation will be at 2.2 per cent — basically, job done (see chart below). But the fact that month-on-month inflation has risen quite strongly in the past two months on a seasonally adjusted basis could well cause ructions inside the ECB on the timing of any imminent loosening.This unsettled state of monetary thinking within the ECB can be gleaned from, for example, Lagarde’s choice to specify that “even after the first rate cut, we cannot pre-commit to a particular rate path”. In other words, the ECB reserves the right to wait and see after an initial cut, or even to do “one and done”. Observers may be forgiven for thinking that this is not much of a framework.Hence the important question of what analytical perspective the ECB will take on the inflation process in the longer term, and which lessons it will permanently absorb from the past three years. It’s too soon to answer this, but I want to highlight one important element that already seems clear. That is the by now consistent focus on profits. Lagarde has highlighted it many times, and it’s worth reading new executive board member Piero Cipollone’s speech from earlier this week, a large part of which is devoted to how understanding the evolution of profits should make us less single-mindedly worried about wage growth being temporarily high. Cipollone points out that the inflation target could also be threatened if insufficient wage growth reduces demand growth and in time holds back productivity and potential output. Monetary policymakers’ (re)discovery of profits is excellent news. It should be obvious that price pressures are related to profit dynamics as well as wage and input costs (and company and production taxes). Yet, until recently, the overwhelming focus of policymakers in Europe had been on labour costs. This got some central bankers in hot water at the start of the tightening cycle, when they sounded like they were blaming workers for inflation. That attitude is not just economically but also politically inept. And this goes not just for monetary policy: the handling of the eurozone debt crisis was marred by an excessive focus on labour costs (which made the solution seem like cutting wages) to the exclusion of profits (which would have pointed more to competition and financing).This more nuanced thinking around wages and profits is welcome, then. Beyond that, it is hard to distil an updated framework from ECB communication. There are good reasons why that is so. The previous framework was found unserviceable as soon as the going got tough, and it’s inevitably difficult to come up with a new one while we’re still trying to understand what is going on today. In particular, if disinflation goes further and faster than currently predicted, the old rather stimulative approach may come back into its own. In fact, those on the hawkish side may want to loosen sooner rather than later, precisely to prevent a return to the unconventional policies of yesteryear.There are many voices reminding the ECB that its tightening until now may still not have hit the economy fully. For example, Bank of Spain governor Pablo Hernández de Cos said in his conference speech that “a stronger than expected monetary policy impact remains a downside risk to the euro area growth outlook”. Even Axel Weber, former head of the not-known-to-be-dovish Bundesbank, said that “most of the impact of central bank tightening is still ahead of us”. Schnabel, meanwhile, devoted her conference speech to the difficulty of knowing “R-star” — that is to say, which level of ECB interest rate is neutral in the sense of neither stimulating nor restricting economic activity. Uncertainty all around, then. The sooner the ECB can tell us how it will now make sense of it all, the better.Other readablesEconomic and political logic dictates that the EU will become more aggressive in policing the production methods trade partners use to create the products imported into the bloc. The amount of euro-denominated safe assets has now topped a trillion.Did anyone tell China’s leader that if you have to deny things are bad, it will not reassure people? My colleagues report on the effort to make manufacturing replace infrastructure and real estate as the country’s engine of growth.Commuting is back — but not as we knew it!Recommended newsletters for youChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up hereTrade Secrets — A must-read on the changing face of international trade and globalisation. Sign up here More

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    Explainer-Why France is making a new push to reduce unemployment benefits

    WHAT DOES THE REFORM SEEK TO DO?The government considers that previous efforts to rein in unemployment benefits did not go far enough and a new push is necessary to get more people back into jobs.Prime Minister Gabriel Attal has suggested unemployment benefits could be limited to 12 months from up to 18 months or more currently and that people would have had to work longer to be eligible.He has put the onus on employers’ federations and unions, who are deeply opposed, to come up with proposals in the coming months so that the changes can be passed into law in the autumn.A 2023 reform already allowed for benefit duration to vary depending on labour market conditions, the idea being that it should be shorter if jobs are readily available.The latest reform aims in particular to get more older workers into jobs as long-term unemployment tends to increase with age. WHY IS A NEW REFORM NEEDED?After decades of stubbornly high unemployment, President Emmanuel Macron has promised to cut joblessness to 5% by the end of his five-year term in 2027.While current 7.5% unemployment rate is close to a 40-year low, Finance Minister Bruno Le Maire, who has been leading the calls for the reform, says that the rate will not go much lower without another push on benefits.    The aim is also to lift France’s employment rate which at 68.5% is lower than many other EU countries and significantly lags Germany at 77.4%. Le Maire frequently argues that bringing employment up to German levels would boost overall tax income and payroll contributions, helping to significantly reduce the public sector budget deficit.Ratings agencies and France’s EU partners are watching closely as the government struggles to meet its deficit reduction targets after overshooting in 2023.HOW DO FRENCH UNEMPLOYMENT BENEFITS COMPARE?The government says French benefits are more generous than those in other countries.An unemployed worker 53 years old or less gets up to 18 months of benefits plus six months if jobs are scarce. The duration extends to 22.5 months plus 7.5 months for workers aged 53-54, and 27 months plus nine months for those over 55.Other European countries such as Germany, Finland, Luxembourg, Portugal and Switzerland also modulate the duration according to workers age. Some countries also take into account how long people have previously worked as well as whether they have dependents.The duration in France is roughly in line with other European countries like Italy, the Netherlands and Spain where it can reach up to 24 months, according to UNEDIC, the French unemployment insurance fund.With French jobless benefits covering 57% of previous earnings, they are similar to what is found in other European countries except that others set lower ceilings while the monthly maximum in France is 8,359 euros. More

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    Hungary central bank says credible fiscal planning needed to cut risks

    BUDAPEST (Reuters) – Hungary’s central bank warned on Thursday the 2024 budget gap could exceed the government’s recently raised target of 4.5% of gross domestic product, calling for credible fiscal planning to cut market risks for central Europe’s most indebted economy.Eastern European Union neighbours Hungary and Romania have struggled since the COVID-19 pandemic to control their budget deficits, with their shortfalls averaging about 7% of GDP over the past four years, well above EU average levels.Data for the first two months showed a rise in the deficit in both countries, leading Hungary to abandon plans to cut the shortfall below the EU’s ceiling of 3% of GDP and raising risks to EU fund flows for Romania, one of the bloc’s poorest members.”For the debt ratio to decline continuously in 2024 and Hungary’s risk perception to improve, it is also necessary to achieve the set deficit targets in a credible manner,” the National Bank of Hungary said.”The high inflationary environment over the past two years has led to a significant increase in government interest expenditure, which will continue to be a heavy burden on the budget this year as well.”It said the shortfall could exceed the EU’s 3% of GDP threshold even in 2026, when nationalist Prime Minister Viktor Orban will face a parliamentary election.Despite tax hikes at the start of the year, the European Commission has warned that Romania’s shortfall could rise back to 7% of economic output this year, while Hungary’s central bank sees the 2024 budget deficit between 4.5% and 5% of GDP.”We have highlighted delayed fiscal consolidation among top credit risks for CEE sovereigns for 2024,” Karen Vartapetov, a sovereign ratings analyst at S&P Global Ratings, told Reuters.”Fiscal consolidation plans will be challenging due to a heavy election calendar, high interest bills and ambitious defence spending commitments,” he said in an emailed response to questions.Any loss of EU funding due to a failure to meet fiscal rules could hurt economic growth, Vartapetov added.S&P has projected general government interest spending at nearly a tenth of revenue for Hungary and more than 6% for Romania this year after an inflation surge into the double digits triggered aggressive rate hikes across central Europe.Hungary’s central bank, which has slashed borrowing costs by 975 basis points since May to 8.25%, slowed the pace of rate cuts this week, while a rise in inflation at the start of 2024 and other risks have so far prevented rate cuts in Romania.”Hungarian ministers are openly talking about a new deficit target of 4.5% of GDP, which is likely to be officially amended in the spring parliamentary session,” ING economist Peter Virovacz said in a note.”However, based on our technical projections, we can already see a slippage of around 1.0 to 1.5 ppt even on the soon-to-be-updated deficit target.” More

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    Analysis-Zambia’s debt-rework battle scars mar its Common Framework success

    LONDON (Reuters) – Zambia’s deal with bondholders this week suggests it will finally emerge from more than three years in default — and become the first successful restructuring under the debt-rework architecture designed by the G20.The deal is a much-needed win for the so-called Common Framework. The African nation’s President Hakainde Hichilema posted on X that “history has been made,” while International Monetary Fund (IMF) President Kristalina Georgieva lauded the “important achievement.”Global leaders hope that Ghana may soon reach its own deal with lenders, boosting the Framework before the IMF World Bank Spring Meetings in Washington, D.C. in mid-April.But the scars from Zambia’s drawn-out battles with creditors – and its years-long, stop-start progress – have left investors, observers and many policymakers themselves wary of the multilateral mechanism’s efficacy.It was designed to expedite talks between a myriad of lenders from Chinese state-owned institutions to London-based asset managers and New York banks.”I don’t think anyone is filled with a tremendous sense of confidence that the Common Framework is going to speed up the debt negotiation process,” said London-based Kevin Daly, head of emerging market debt at Abrdn, which held some of Zambia’s $3 billion worth of international bonds.Ricardo Klinger, Brazil’s Finance Ministry official in the G20 International Financial Architecture Working Group, said those involved in Zambia’s restructuring would discuss lessons learned. Brazil currently holds the G20 presidency.”The stages are being completed more quickly because it is a learning process,” Klinger said. He said they aim to publish a document in July incorporating feedback from all sides of Zambia’s restructuring to identify bottlenecks and potential improvements to gain time.”The document seeks to synthesize this learning in these recent cases to build a more refined process,” he said.FIRST TO FALLZambia was the first African country to default amid the economically punishing COVID-19 pandemic, doing so in late 2020.Foreseeing more collapses, the G20 launched the Common Framework to bring all creditors to low-income nations under one roof — particularly China, whose lending to developing countries exploded in the decade before the pandemic.For many, though, Zambia has been a cautionary tale — throwing into sharp focus disagreements around equal burden sharing and transparency.The delays have hamstrung much-needed investments in the country, curtailed economic growth and weighed on local financial markets. A devastating drought has exacerbated the pain, hitting hydropower and food production.In November, an unexpected official creditor smackdown of Zambia’s initial bondholder deal shocked its leaders — and bondholders like Daly.Members of the Official Creditor Committee (OCC), co-chaired by China and France, said it did not offer Comparability of Treatment, meaning bondholders were not taking a comparable hit to the debt relief that official lenders offered. Zambia has promised that the new deal has official creditor sign-off, but Daly and others said communication and transparency issues loom for other restructurings.”There is a major flaw,” Daly said.Bondholders, for example, do not have access to the terms official creditors give countries, effectively leaving them working in the dark. Details are sometimes published later, but not always, potentially leaving the public in the dark as well.”Improvements could … be made to transparency and information sharing between official and private creditors, as well as clearly defined rules on Comparability of Treatment to ensure agreements under the Common Framework are timely and equitable,” said Christian Libralato, EM Portfolio Manager at BlueBay Asset Management.AIMING TO REVISEOthers agree with Klinger that Zambia’s pain could help forge a successful Framework.”Some of those lessons will be put to work in Ghana, and some will be put to work in Ethiopia,” said Giulia Pellegrini, portfolio manager for emerging markets debt at Allianz (ETR:ALVG) Global Investors. “There will be some transferable skills and lessons.””There’s definitely a lot of push to have more successful cases,” she added.Ghana is currently in formal talks with holders of more than $13 billion in international bonds and wants to speed up remaining negotiations. Ethiopia defaulted on its sole $1 billion Eurobond in December, but talks with bondholders have been slow.The IMF is also working on key fixes; it is in the middle of a years-long revision of its debt-sustainability analyses (DSA) and has promised to share them earlier with creditors. DSAs detail how sustainable a country’s debt burden is and form the basis for restructurings.It also launched the Global Sovereign Debt Roundtable, bringing together representatives from the countries, private lenders, the World Bank and the G20 to identify and solve key problems with the Framework. Such issues include how to calculate comparability of treatment, how to treat debt to state-owned enterprises, and cut-off dates for debt included in reworks.”They are aware of these issues, and they have begun a process to address these, but it won’t be an easy announcement in the Spring Meetings,” Pellegrini said.That may not be much comfort to other countries in a similar situation.”I am not sure that the three years it took to get Zambia done will commend the Common Framework to other countries that may be technically eligible to apply for Common Framework treatment,” lawyer and veteran sovereign debt expert Lee Buchheit told Reuters. More

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    The risky economics of living without homeowners insurance

    NEW YORK (Reuters) – Owning a home can feel like risky business, from coming up with the mortgage payment every month to worrying about disasters like fires or floods or tornadoes.But here is something riskier still: Going without home insurance in the U.S. altogether.It is called “going bare,” and 12% of American homeowners report doing just that, according to a study from the Insurance Information Institute (III) and Munich Re. That is up from just 5% in 2015.In some areas, it is estimated to be even higher than that – between 15-20% of homeowners in Florida, the highest percentage in the country, according to the III.That means if disaster strikes, you are “self-insured” – a fancy way of saying you will have to find the funds to rebuild. Unless you happen to have hundreds of thousands of dollars just sitting around, that won’t be pleasant.“Thinking you can recover from a major catastrophe like a hurricane, tornado or wildfire without property insurance is unrealistic for 99% of U.S. homeowners,” says Mark Friedlander, III’s communications director. Going bare is still fairly uncommon: That is because if you take out a mortgage on the property, lenders typically require proof of home insurance.And yet, some homeowners are choosing to take on this risk. One reason for that is sky-rocketing costs: Average home insurance premiums are now $1,759 annually for $250,000 of dwelling coverage, according to financial information site Bankrate.com. That is a whopping 23% more than a year ago.Secondly, coverage may be hard to find, since some insurers are not writing new policies, or are pulling back altogether from high-risk areas. After all, they face their own rising costs, from severe weather events to increasingly expensive building materials.As a result, some homeowners are taking the biggest bet and going without any coverage at all – which is enough to make their financial planners tear their hair out.“I live in Florida, and there is no good solution here,” laments Dennis Hunt, a planner in Melbourne, Florida. “I have a couple of different client families that have chosen to drop their home insurance coverage due to the skyrocketing premiums. I obviously advised against this.”To avoid taking such a huge gamble, here are a few pointers.SHOP AROUND AND HUNT FOR DISCOUNTSBefore you give up, put the work in and see what kind of rates you can get. That means diligent comparison shopping – according to Bankrate research, the insurers Erie, Auto-Owners and USAA offer some of the lowest rates available.It also means loading up on any potential discounts, which you may not even realize you qualify for. These include bundling with another policy such as auto insurance (generates an average 10%-25% discount on both policies), being claims-free, loyalty discounts (being a long-time customer of your insurer), installing a security system, adding smart home devices or being a retiree or senior citizen, says Friedlander.CONSIDER PERSONAL CIRCUMSTANCEThere is no one-size-fits-all solution here – and some planners say that in limited, rare cases, self-insuring could be a legitimate option.“What if the land is worth more than the house?” asks Kevin Dunleavy, a financial planner in Orlando. “What if it’s a rental that it is really a teardown? What if the client has enough investable assets to consider self-insuring? I think there are cases when forgoing dwelling coverage for much less expensive liability-only coverage makes sense.”TWEAK THE POLICYIf the punishing premiums are scaring you off, there are ways to mitigate the costs. One common method is to increase the deductible. That means you will have to cover more modest claims out-of-pocket, but at least you will still be covered in the event of catastrophic loss.In addition, you could “change your policy type from an HO-3 to an HO-2,” suggests Bankrate insurance analyst Shannon Martin. An HO-2 policy is more basic coverage, where particular perils have to be named. “Both changes may offer significant savings,” Martin says.If you do decide to ‘go bare,’ just realize that the bill may eventually come, and it could be a very high one indeed.Just ask financial planner Paul Monax of Littleton, Colorado, whose town was ravaged by major hailstorms last summer, damaging roofs up and down his street.“I have a neighbor that decided to self-insure,” Monax remembers. “They are replacing their roof out-of-pocket – for about a decade’s worth of premiums.” More