Economy

CAIRO (Reuters) – A steady deterioration of the economy puts Egypt under pressure to take long-awaited measures following a presidential election, foremost among them a currency devaluation and a hike in interest rates, along with faster state asset sales. Analysts believe the government postponed painful steps until after Abdel Fattah al-Sisi swept to a third six-year term in a Dec. 10-12 vote that saw no serious challengers and was overshadowed by the war in Gaza.The focus now turns to how to deal with an overvalued currency, near-record inflation and massive debt, both domestic and foreign. “There are a lot of big choices for the government to make, but a credible currency is key for a meaningful economic recovery,” said Simon Williams of HSBC.A dollar that fetched 29 Egyptian pounds on the black market a year ago now buys more than 50 pounds, compared to an official rate of 30.85 pounds. Foreign exchange forward prices that predict where the pound will be in late January put it at 35 to the dollar while those that look a year ahead have it at nearly 50. Exchange rate uncertainty has led Egyptians abroad to withhold sending earnings home, wreaking havoc to a top source of foreign exchange. Remittances plunged by nearly $10 billion over a year to $22 billion in the 12 months to end-June 2023. “Remittances are about sentiment, not the level. Egyptians have to be persuaded that the currency is now stable. They have to have confidence in its value. If that happens remittances can turn around relatively quickly,” Williams said.Authorities have implemented three sharp devaluations of the currency since early 2022, but each time have reverted to fixing the rate despite pledges to the International Monetary Fund to shift to a permanently flexible system. “We think a step adjustment is more likely in the short term, rather than a transition to a floating arrangement,” Morgan Stanley Research said in a note. DEBT BURDENA $3 billion financial package reached with the IMF a year ago faltered after Egypt failed to let its currency float freely or make progress on the sale of state assets. The IMF has delayed disbursements of about $700 million due in 2023. Yet the IMF this month said it was in talks to expand the package due to economic risk from the Israel-Hamas conflict, and has appeared to shift its emphasis from the exchange rate to inflation targeting. “Our focus is to have the economy function as well as possible. In that sense, yes, we prioritise fighting inflation and then of course we would look at the exchange rate in that context,” IMF Managing Director Kristalina Georgieva told Sky News on Dec. 3.IMF spokesperson Julie Kozack later said Egypt’s programme included the need to tighten monetary and fiscal policy, together with a flexible exchange rate system, “to gradually move to an inflation targeting regime”. The impact of the Gaza crisis on tourism and attacks on Red Sea ships, deterring some from navigating through the Suez Canal, have created new threats to currency flows. Egypt in 2022/23 earned $13.6 billion from tourism and $8.8 billion from Suez Canal fees, according to central bank data. Egypt needs the currency to repay its medium- and long-term public foreign debt, which jumped by $8.4 billion in the six months to July 1 to $189.7 billion. At least $42.26 billion of foreign debt repayments are due in 2024. In January, the IMF estimated Egypt’s financing gap over 46 months at $17 billion.ASSET SALES Egypt also needs to clear a backlog of goods at ports, pay arrears to foreign oil companies and let companies send funds owed to their overseas offices — as well as meet pent-up demand for imports.It has traditionally leant on its wealthy Gulf allies for support, but none has made any announcements of major aid in recent months. The government has instead turned to multilateral finance organisations and a widening range of friendly states, raising funds this year from Japan, China, India and the UAE. It is also counting on raising cash from state asset sales, where progress in recent years has often stalled but some analysts now see a shift.”Egypt has made considerable progress in sales of state-owned assets, attracted historically high levels of net FDI inflows, and has met its fiscal targets in (2022-23) despite higher government spending due to the surge in inflation and borrowing costs,” Morgan Stanley wrote. More

1. Futures inch downU.S. stock futures were in the red on Wednesday, pointing to a possible breather in a multi-week rally in equities driven by hopes for interest rate cuts by the Federal Reserve early next year.By 05:00 ET (10:00 GMT), the Dow futures contract had shed 29 points or 0.1%, S&P 500 futures had dipped by 8 points or 0.2%, and Nasdaq 100 futures had fallen by 50 points or 0.3%.The main averages jumped in the prior session, fueled by mounting bets that the Fed will start to lower borrowing costs from 22-year highs as soon as March.Several officials at the U.S. central bank have attempted to temper these expectations in recent days. On Tuesday, Atlanta Fed President Raphael Bostic noted that there is “no urgency” to begin reducing rates due to the resilience of the broader economy and the slow pace at which inflation is easing back down to the Fed’s stated 2% target.Yet exhuberance amongst traders has showed few signs of abating. There is now a more than 72% chance that the Fed will roll out a 25 basis point cut in March, up from 43% last week, according to Investing.com’s Fed Rate Monitor Tool.2. FedEx slumps premarketShares in FedEx (NYSE:FDX) slipped in premarket trading in New York on Tuesday after the deliveries group slashed its full-year revenue guidance and posted weaker-than-anticipated quarterly profit.In a regulatory filing, the company warned that customer demand will face headwinds from “volatile macroeconomic conditions” for the rest of its fiscal year ending on May 31. FedEx subsequently said it now expects to see a low-single-digit percentage drop in annual revenues compared to last year, down from its prior forecast for “approximately flat” results.The outlook hinted at weakness in typically robust holiday spending activity in the U.S., as consumers continue to cope with high inflation and elevated interest rates.Adjusted per-share earnings of $3.99 for the three months until Nov. 30 missed Bloomberg estimates of $4.19, although the bottom-line figure rose sharply versus the corresponding period last year. Strength at FedEx’s ground business, which includes big-name clients like Walmart (NYSE:WMT), was undercut by a 60% fall in operating income at the firm’s air-based Express division.3. Toyota to suspend Daihatsu shipmentsCarmaking giant Toyota has temporarily halted global shipments of all its Daihatsu brand vehicles after an independent investigation into a recent safety test scandal found fresh issues involving 64 models.The probe revolved around Daihatsu’s admission earlier this year that it rigged side-collision safety examinations on some 88,000 small cars.Toyota revealed that the panel discovered “new irregularities” in some 174 items, suggesting that the scope of the scandal may be greater than initially thought. Of the 64 models impacted, 22 were sold by Toyota.Japan’s biggest vehicle manufacturer flagged that “fundamental reform” is needed to “revitalize” Daihatsu and prevent these problems from arising again. However, Toyota noted that this will be “an extremely significant task that cannot be accomplished overnight.”4. China keeps loan prime steady at record lowsThe People’s Bank of China kept its benchmark loan prime rate (LPR) unchanged at record lows on Wednesday, with monetary conditions set to remain loose for longer to help support a sluggish post-pandemic recovery in the world’s second-largest economy.The LPR is determined by the PBOC based on considerations from 18 designated commercial banks, and is used as a benchmark for lending rates.In the PBOC’s final rate decision in 2023, the central bank left its one-year LPR at 3.45%, while the five-year LPR, which is used to determine mortgage rates, was held at 4.20%. The move was largely telegraphed by the PBOC, given that it had left medium-term lending rates steady last week. The announcement comes after a recent clutch of November data showed continued weakness in China’s economy. Activity in the country’s key manufacturing sector remained in contraction, while sluggish consumer spending helped drag China deeper into deflationary territory.5. Oil steadies as U.S. inventories buildOil prices rose on Wednesday as traders monitored the unstable geopolitical situation in the Red Sea while digesting an unexpected build in U.S. crude stockpiles.By 05:00 ET, the U.S. crude futures traded 1.0% higher at $74.64 a barrel, while the Brent contract climbed 0.9% to $79.91 per barrel.Crude prices rebounded sharply from near five-month lows this week as oil companies and shipping operators announced plans to avoid the Suez Canal as a result of attacks by the Iran-backed Houthi group on vessels in the Red Sea, potentially disrupting oil supplies to the important Asian market.But gains have steadied after data from the American Petroleum Institute (API) showed that U.S. crude inventories unexpectedly increased by 900,000 barrels last week, defying expectations for a draw of 2.2 million barrels.The official reading from the Energy Information Administration is due later Wednesday, but the API reading points to U.S. production continuing at record-high levels. More

From girl dinners to ChatGPT, a look back at the trends that broke the internet and taught us about the American economy this year.This year, the world learned that some men just can’t stop thinking about the Roman Empire. Over here at The New York Times, we can’t stop thinking about what social trends like that one tell us about the American economy.We had no shortage of viral memes and moments to discuss in 2023. Americans flocked to Paris (and overseas in general). Millennial women stocked up on the Stanley thermoses their dads used to use, one of a range of female-powered consumer fads. Thanks partly to Barbie, Birkenstocks also came back harder than a ’90s trend. People spoke in Taylor Swift lyrics.Social developments like those can tell us a lot about the economy we’re living in. To wrap up 2023, we ran through some of the big cultural events and what they taught us about the labor market, economic growth and the outlook for 2024.‘He’s Just Ken’ Had Labor Market Tiebacks“Barbie,” the movie that launched a thousand think pieces, hit theaters this summer with a telling promotional catchphrase: “She’s everything. He’s just Ken.”This, clearly, was a movie about the labor market.The film pictured Barbie trying to grapple with the harshness of a real world that was not dominated by women, and Ken trying to find his footing after realizing that he lacked a clear place in Barbie’s fictional world.That was more than just social commentary. As in Barbieland, America has seen a real divergence in outcomes for young and middle-aged men and women in recent years — specifically in the labor market. Younger women were working at historically high rates before the pandemic, and they bounced right back after the 2020 downturn.Young Women Work at Near Record RatesWhile the employment rate for young women is near its peak, the employment rate for young men is below where it was in the 1990s.

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Share of people ages 25 to 34 who are employed
Source: Bureau of Labor StatisticsBy The New York TimesMen were a different story. Younger men’s employment bounced back, but they are still working at much lower rates than a few decades ago. Men in the 35- to 44-year-old group in particular have been working less and less over the years, and have recently failed to recapture their 2019 employment peak.Falling Employment Rates for Middle-Aged MenMiddle-aged women are employed at record levels while men in the same age group have been working less and less.

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Share of people ages 35 to 44 who are employed
Source: Bureau of Labor StatisticsBy The New York TimesIn 2023 specifically, women gained 1.4 jobs for every one that men did (through November).What is behind the long-run decline in male work? Economists and sociologists point to a number of causes: A shift away from marriage and the decline in childbearing have eroded one traditional social rationale for work. Men may be having something of an on-the-job identity crisis in a modern economy where many new jobs tilt toward “pink collar” service industries like child care and nursing.“Ken is trying to find his place in the world,” said Betsey Stevenson, an economist at the University of Michigan, explaining that it ties back to a world of different opportunities that have left some men searching for a new footing. “We moved from an economic model where the median job is making stuff to an economy where the median job is taking care of somebody.”Men are also less educated than today’s young women, which may leave some with less marketable résumés. (In the movie, Ken tries to get a job on the shoreline but is told he lacks the skills. He laments: “I can’t even beach here!”)Taylor Swift and Beyoncé Showed America’s Willingness to SpendIt wasn’t just the labor market that women dominated this year: It was a year of female-centric consumerism. Take, for instance, the two musical events of the summer. Both Beyoncé and Taylor Swift had huge concert tours that spurred lots of economic activity. They also released films of their shows, bringing the fun (and the money) to the box office.The concert spree itself was an example of a broader economic trend. Consumers continued to spend strongly in 2023, especially on services like live music and international travel. That was something of a surprise because forecasters had thought that much-higher interest rates from the Federal Reserve were likely to tip the economy into recession this year. ‘Girl Dinners’ Ranked Among Cheapish Food TrendsAnother place where ladies led the way in 2023? Culinary innovation. Young women posted viral TikToks about what might have, depending on one’s demographic patois, been termed a charcuterie board (millennial), a Ploughman’s (Brit) or a lunchable (Oscar Mayer). But to Generation Z, it was Girl Dinner.This, much like the Roman Empire and men meme, was an instance of a gender’s being applied to a pretty broad and basic concept. Girl dinners came in many shapes and sizes, but they were essentially just meals constructed from relatively affordable ingredients: Think leftover cheese chunks, boxed macaroni or chicken nuggets.What they did clearly echo was a broader economywide trend toward greater food thriftiness. Big retailers including Walmart and McDonald’s reported seeing a new group of shoppers as even comfortably middle-class consumers tried to save money on groceries after years of rapid food inflation. Overall price increases slowed markedly in 2023, but several years of rapid inflation have added up, leaving many prices notably higher for many basic necessities.Ozempic Worried Big FoodConsumer grocery trends saw another big and unexpected change this year. Some big food companies are worried that people are on the cusp of buying less food because of products like Ozempic and Wegovy, which rose to prominence this year as part of a new and effective set of weight-loss drugs. While that was a hopeful moment for many who have struggled with obesity and its health effects, it was one that caused consternation and adaptation at some retailers and fast-food chains. Walmart has said it already sees an impact on demand.ChatGPT Raised Eyebrows in EconomicsHealth care wasn’t the only sphere to see a big breakthrough in 2023. OpenAI’s ChatGPT chatbot rocketed to prominence this year for generating humanlike writing, and its competitors put up their own offerings (including one that fell in love with a Times columnist).Such technologies could have major economic implications, reshaping how we work, replacing some jobs and potentially boosting productivity. For now, office workers have used it to write emails. Students have used it to write papers. Your friendly economics correspondent tried to use it to write this story section, but artificial intelligence and Times editors have a different understanding of the term “brief.”The freely available version of ChatGPT is working from 2022 data, so it also declined to comment on another key development from this year.“If ‘rizz’ refers to something specific, please provide more context or clarify,” the chatbot responded when asked if it possessed Oxford’s word of the year, a Gen Z shorthand for “charisma.”With a little more prodding, it admitted, “I don’t have personal qualities.” More

MILAN (Reuters) – The first half of next year will offer favourable conditions for Italian government bonds after a stellar 2023, analysts say, but problems may surface from June onwards connected with politics and future moves by the European Central Bank. The sustainability of Italy’s 2.4 trillion euro ($2.6 trillion) public debt, one of the biggest government bond markets in the world, has long been seen as a potential weak link for the stability of the 20-nation currency bloc. Those worries have been exacerbated by a string of ECB rate hikes since last year to fight inflation that have taken euro zone interest rates to record highs.But Italian bonds have drawn strong demand through 2023 thanks to appealing returns, and are ending the year on a high note after Rome confounded expectations by weathering a series of potentially dangerous reviews by credit ratings agencies.The closely-watched gap between the yields on Italian 10-year BTPs and less risky German Bunds fell below 165 basis points (1.65 percentage points) on Tuesday, the lowest level since late August.Nonetheless it remains considerably higher than the spread versus Germany of any other euro zone country, a sign markets remain wary of Italy’s stubbornly high debt – equal to about 140% of national output. “In 2024 BTP spreads could widen just a little but not enough to justify an ‘underweight’ position,” said Bruno Rovelli, chief investment strategist at BlackRock (NYSE:BLK) in Italy. The world’s largest asset manager is “neutral” on BTPs, the same stance as it has on other European bonds.Gregorio De Felice, chief economist at Intesa Sanpaolo (OTC:ISNPY), was more upbeat.He predicted a trouble-free year for Italian bonds, bolstered by the stability of Giorgia Meloni’s 14-month-old government, and said the BTP-Bund spread could decline to 120-130 basis points by the end of the year. The narrowing of Italian spreads over the last few months confounded the expectations of analysts who had forecast the government’s deficit-hiking 2024 budget, presented in October, could trigger negative responses from the ratings agencies.Instead, S&P Global, DBRS and Fitch all left Italy’s position unchanged. Moody’s (NYSE:MCO), which rates Rome just one notch above junk, upgraded its outlook to stable from negative.”With Italy out of rating agencies’ crosshairs, foreign buyers could further increase their Italian debt holdings in 2024,” said Luca Cazzulani, head of strategy research at UniCredit.Despite a revival of interest last year, foreign holdings of Rome’s debt are still about 100 billion euros lower compared with the pre-pandemic level of 2019.CHALLENGES FROM MID-YEAR The picture could become less bright from the middle of the year, analysts warned, with risks posed by the phase-out of ECB purchases of government bonds, new EU budget rules, and European parliament elections.”The crunch point for Italy could come after the summer, when the government might have to make some difficult choices on the 2025 budget,” said Fabio Balboni, senior economist at HSBC.Last week’s announcement by the ECB that from June 30 it will end the full reinvestment of paper bought under its Pandemic Emergency Purchase Programme (PEPP) could have a significant impact on Italy, the scheme’s main beneficiary.”The early end to PEPP reinvestment could increase the risks for the BTP spread,” Balboni said.The June 6-9 European parliament elections may also hurt Italian debt if they throw up a strong result for parties less committed to integration, leaving fiscally weaker members like Italy in a more vulnerable position, analysts said.The outcome of EU negotiations to revamp the bloc’s fiscal rules, which have been suspended since 2020 due to the COVID-19 pandemic, should also be clear by the summer.If the new Stability and Growth Pact requires steep debt reduction Italy is more likely to fail to meet its terms, analysts said.This would increase friction with Brussels and the risk that the ECB would refuse to support Rome through its new Transmission Protection Instrument (TPI) which is only available to countries that are compliant with the EU’s fiscal framework.Italy will need to find buyers for a net debt supply of around 135 billion euros in 2024, some 20 billion more than this year, said Unicredit (BIT:CRDI)’s Cazzulani. The task is made more challenging as the ECB, a major holder of Italian bonds, continues to reduce its balance sheet.Small domestic savers will be an important buyer of Rome’s debt next year and foreign investors could also potentially be net subscribers, said Sylvain De Bus, deputy head of global bonds at international asset management firm Candriam.This year the Treasury made a major effort to tap Italian retail investors, who analysts expect will continue to play a significant but somewhat lesser role in 2024.Small savers’ holdings of Italian government bonds rose to 12.6% of the total in September from 7.5% a year earlier, according to the latest Bank of Italy data.Foreign holdings declined to 27.1% from 28.2%, well below a level of 34.6% in March 2020. ($1 = 0.9114 euros) More

LONDON (Reuters) – Global regulators published tougher rules on Wednesday for managers of open-ended investment funds to ensure they can meet investor cash calls in a crisis without the need for emergency liquidity from central banks.Regulators have been scrutinising the ability of open ended funds, a sector worth over $40 trillion globally, after central banks had to intervene to stop money market and other types of funds freezing in the face of a “dash for cash” when economies went into COVID-19 lockdowns in March 2020.Funds could not raise cash fast enough, though the industry has argued that many parts of the market came under severe stress at that time.The reforms from the G20’s Financial Stability Board and IOSCO, a global umbrella group for securities watchdogs, aim to end so-called first mover advantage or investors leaving a fund being less worse off than those who remain.The rules, which had been put out to public consultation, with some tweaks in the final recommendations, say that redemption terms must reflect how long it would take to sell assets in a fund to avoid a liquidity “mismatch”.Property funds, for example, were offering daily redemptions and some had to suspend them given the difficulty of selling property quickly.The FSB sets out “buckets” to categorise whether funds can offer daily redemptions.”In response to the public consultation, the FSB sought to clarify the categorisation approach and provide more flexibility to authorities in implementing the framework in their respective jurisdictions,” the FSB said in a statement.The FSB said the liquidity management tools (LMTs) that asset managers must have would be increasingly used by funds mainly invested in less liquid assets that typically take more time to sell.IOSCO said it has provided more flexibility in using LMTs, and has specified that the aim is to impose “fair and reasonable transaction costs” that are deducted from redemptions.The FSB and IOSCO, whose members commit to applying agreed rules in national handbooks, said they will assess by 2028 whether the changes have sufficiently addressed financial stability risks. More

Michael Pettis is a senior fellow at the Carnegie Endowment and teaches finance at Peking University. There’s naturally a lot of attention on China’s swelling debt burden, especially after Moody’s cut the outlook on the country’s credit rating based on the “broad downside risks” posed by the borrowing binge.That’s understandable, given that the IMF in its latest Global Debt Monitor highlighted how China’s overall debt-to-GDP ratio has increased fourfold since the 1980s. It has been particularly rapid over the past decade. Over half of the increase in the entire global economy’s debt-to-GDP ratio since 2008 is solely due to an “unparalleled” rise in China, according to the IMF. That $47.5tn total debt pile has grown further in 2023, which might mean that China has now finally overtaken the US in debt-to-GDP terms (zoomable version of the table below):However, the surge in Chinese debt is not itself the problem but rather a symptom of the problem. The real problem is the cumulative but unrecognised losses associated with the misallocation of investment over the past decade into excess property, infrastructure and, increasingly, manufacturing.This distinction is necessary because much of the discussion on resolving the debt has so far focused on preventing or minimising disruptions in the banking system and on the liability side of balance sheets. These matter — the way in which liabilities are resolved will drive the distribution of losses to various sectors of the economy — but it’s important to understand that the problems don’t emerge from the liability side of China’s balance sheets. They emerge from the asset side.That’s because the losses associated with the misallocation of investment over the past 10-15 years were capitalised, rather than recognised. In proper accounting, investment losses are treated as expenses, which result in a reduction of earnings and net capital. If, however, the entity responsible for the investment misallocation is able to avoid recognising the loss by carrying the investment on its balance sheets at cost, it has incorrectly capitalised the losses, ie converted what should have been an expense into a fictitious asset.The result is that the entity will report higher earnings than it should, along with a higher total value of assets. But this fictitious asset by definition is unable to generate returns, and so it cannot be used to service the debt that funded it. In an economy in which most activity occurs under hard-budget constraints, this is a self-correcting problem. Entities that systematically misallocate investment are forced into bankruptcy, during which the value of assets is written down and the losses recognised and assigned.But, as the Hungarian economist János Kornai explained many years ago, this process can go on for a very long time if it occurs in sectors of the economy that operate under soft-budget constraints, for example state-owned enterprises, local governments, and highly subsidised manufacturers. In these cases, state-sponsored access to credit allows non-productive investment to be sustained. And as economic activity shifts to these sectors, the result can be many years of unrecognised investment losses during which both earnings and the recorded value of assets substantially exceed their real values. Because the debt that funds this fictitious investment cannot be serviced by the investment, the longer it goes on, the more debt there is.But once these soft-budget entities are no longer able — or willing — to roll over and expand the debt, they will then be forced to recognise that the asset side of the balance sheet simply doesn’t generate enough value to service the liability side. Put another way, they will be forced to recognise that the real value of the assets on their balance sheets are less than their recorded value.That is the real, huge and intractable problem China faces. As long as local governments were able to increase debt at will, they could invest to meet excessively high GDP growth targets and could avoid recognising the associated investment losses. But once Beijing imposed debt constraints, either the fictitious assets would have to be written down and the costs allocated, or, which is the same thing, the debt would have to be serviced through transfers from other sectors of the economy.Either way, someone would have to absorb the losses, and as this happens, there are at least three impacts on the economy. The first impact does not involve the real welfare and value of the economy, but it may be politically embarrassing. It consists of reversing the former artificial boost to income. At the macroeconomic level, this means reversing the former additions to GDP.The second impact consists of the unwinding of a previous “wealth effect”. Households and other entities that assumed they were wealthier than they actually were tended collectively to spend more than they could have otherwise afforded — in the case of local governments, this included spending on facilities, employees and services. Once they are forced to recognise their reduced wealth, however, they must cut back on spending, with adverse effects on the economy.The third and most important impact is what finance specialists call “financial distress” costs. In order to protect themselves from being forced directly or indirectly to absorb part of the losses, a wide range of economic actors — workers, middle-class savers, the wealthy, businesses, exporters, banks, and even local governments — will change their behaviour in ways that undermine growth. Financial distress costs rise with the uncertainty associated with the allocation of losses, and what makes them so severe is that they are often self-reinforcing. As we’ve seen with the correction in China’s property sector, financial distress costs are almost always much higher than anyone expected.The point is that resolving China’s debt problem is not just about resolving the liability side of the balance sheet. What matters more to the overall economy is that asset-side losses are distributed quickly and in ways that minimise financial distress costs. That is why restructuring liabilities must be about more than protecting the financial system. It must be designed to minimise additional losses.In China, as in other countries, it is usually not the debt itself that is the main problem. Debt is just a transfer, and does not necessarily entail the assignment of losses. What matters is the value of fictitious assets that back the debt. That’s why Beijing should focus not just on managing the liability-side consequences of excessive debt in the system but also (and more importantly) on the asset-side consequences. It must recognise the full extent of the losses and move quickly to allocate them in the most economically and politically efficient ways. Postponing this recognition and focusing mainly on minimising financial disruption, as Japan did in the 1990s, will just increase the overall cost to the economy.Further reading:— China’s Japanification (FTAV)— The great Chinese flow reversal (FTAV)  More

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After hitting Russia with an unprecedented array of sanctions following its full-scale invasion of Ukraine, G7 allies are considering an even more drastic step: spending Moscow’s money.Western nations, including the US, are exploring ways to justify seizing Russian central bank assets that are frozen in the financial system, and using them to fund Kyiv.The idea has gained traction in recent weeks as the US and EU struggle to secure political approval for fresh funding packages for Ukraine worth tens of billions of dollars.But legal experts warn it would represent a dramatic departure from normal practice, carrying legal and economic risks. It is also highly contentious among the allies.Where are the frozen assets located?About €260bn of Moscow’s central bank assets were immobilised last year in G7 countries, the EU and Australia, according to a European Commission document seen by the Financial Times.The bulk of this — some €210bn — is held in the EU, including cash and government bonds denominated in euro, dollar and other currencies. The US by comparison has only frozen a small amount of Russian state assets: some $5bn, according to people briefed on the G7 talks.Within Europe, the bulk of the assets — about €191bn — are held at Euroclear, a central securities depository headquartered in Belgium. France has immobilised the second-largest amount, some €19bn, according to the French finance ministry. Other holdings are far smaller, with Germany holding about €210mn, according to people briefed on the figures.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.What is the US calling for?Washington has not publicly backed confiscation of the frozen assets, but it has made the case for it privately. One recent G7 discussion paper written by US officials described it as “a countermeasure”, permitted under international law, that would “induce Russia to end its aggression”.According to the paper, such a move would be considered a legitimate response to Russia’s illegal invasion of Ukraine if implemented by states “injured” and “specially affected” by its aggression. That could include allies of Ukraine who have bankrolled its economy and military during the war.The US officials suggested the seized assets could be disbursed to Ukraine in tranches, for instance through the World Bank or the European Bank for Reconstruction and Development. This is cast as an “advance” on the compensation to Ukraine that Russia would ultimately be required to pay under international law for its aggression.What are the legal grounds for this?The idea of confiscating Russian sovereign assets is legally fraught. Central bank assets are protected under customary international law; actions that appear to cast doubt over that principle would have profound implications for the financial system.But advocates argue that such a confiscation can, in this case, be justified under international law as an equitable remedy to push Russia to compensate Ukraine for war damages.Philip Zelikow, a former senior US diplomat now at Stanford University, has cited as a precedent the internationally imposed compensation after the 1990 Iraqi invasion of Kuwait.“This represents an enormous opportunity,” he said. “We have spent nearly two years working through legal thickets and can now begin to contemplate the possibilities that may be available. If this works, the money at stake — $300bn — would be a game-changer for Ukraine.”This reading of the law is contested, however. Ingrid Brunk, a professor of international law at Vanderbilt Law School, argues that countermeasures are not a method of obtaining compensation, but are instead designed to push a wrongful state to comply with its obligations.She told the FT the idea was “unwise”, adding: “Many countries have been damaged by many things that violated international law with no suggestion that we seize foreign currency reserves. These are the most sacrosanct kinds of assets in the global financial system.”The move would also likely require domestic legislation in many of the countries seeking to implement it, she added, although this may prove a less formidable barrier.What are the financial consequences?Opponents worry that such a move would damage the international rules-based order and undermine the trust that countries show when they place reserves with other nations.The latter argument carries considerable sway with some EU member states and the European Central Bank. Confiscating Russian assets would, for some, cross a line by suggesting to countries such as China or Saudi Arabia that sovereign assets stowed in euros or dollars might not always be safe.The ECB earlier this year warned member states of the risk of undermining the “legal and economic foundations” on which the international role of the euro rests. “The implications could be substantial,” it said, according to an internal EU note. It warned the bloc of the risks of acting alone and recommended for any action to be taken as part of a broad international coalition.One EU diplomat said: “Every major euro-denominated economy is treading very carefully on this because of the potential effects for the euro and for foreign investment and clearing in euro.”But advocates of the idea suggest these worries are overblown. Lord David Cameron, the UK foreign secretary, denied last week that there would be a “chilling effect” on inward investment. Affected investors would already “be pretty chilled” by their assets having been frozen, he said.How do the Europeans view these arguments?Officials are aiming for a consensus among G7 countries to seize the assets, but France, Germany and Italy remain extremely cautious.European officials fear possible retaliation if state immunity is undermined. One noted the US holds only a very small amount of Russian central bank assets by comparison. “From an EU perspective we have much more to lose,” the EU official said.Russia’s options to counter with litigation are limited. “However, Russia will find other ways to reciprocate . . . that would mean inflicting more harm on businesses in Russia and potential other damages,” said Armin Steinbach, professor of law and economics at HEC Paris.Steinbach also points out that sovereign immunity cuts both ways. “Germany is still in some countries the target of war damages . . . [going back to] the second world war,” he noted.What is Europe planning instead?Rather than seizing the assets themselves, the EU is working on a plan to skim off extraordinary profits that Euroclear generates by holding Russia’s assets. The Belgian central securities depository earned about €3bn last year from reinvesting cash from matured securities that cannot be paid out to Russia.But these proposals have proven controversial, with some countries fearing the repercussions from even this more limited step. Officials have acknowledged that the live discussion within the G7 could help move the EU proposals along.Additional reporting by Paola Tamma in Brussels, James Politi in Washington, Martin Arnold in Frankfurt and Richard Milne in Oslo More