Economy

There is perturbation among green campaigners. The Financial Times revealed this week that the UK is planning to eliminate its tariffs on Malaysian palm oil as the price of entering the Comprehensive and Progressive Trans-Pacific Partnership, the jewel in Britain’s otherwise unimpressive post-Brexit crown of trade agreements.Palm oil, which is used as a biofuel and the World Wildlife Fund estimates is also found in about half of all rich-world supermarket packaged products, has become a test for rewriting the world trading regime to protect the environment. The experiment is not producing encouraging results. Rich-world governments, particularly the EU, are struggling to create green trade-related regulations that are predictable, effective and comply with international law.Palm oil shot to fame, or notoriety, when it featured in a viral Greenpeace campaign starring Rang-tan, a cartoon orangutan whose forest habitat was destroyed by palm oil plantations. The oil and its derivative products now encounter multiple rich-world consumer and corporate boycotts and official restrictions. The EU has already in effect prevented imports of palm oil for biofuels under its renewable energy directive, and is bringing in a tough new deforestation law targeting the product along with cattle, soy, coffee, cocoa, timber and rubber.For Indonesia and Malaysia, the world’s two main palm oil producers and both former European imperial possessions, this is rich-world neocolonialism destroying the livelihoods of smallholders. The videoed annual statement of the Indonesian ministry of foreign affairs featured a brief scene of a jackboot marked “EU” trampling a palm oil plantation. Jakarta and Kuala Lumpur have already launched World Trade Organization cases against Brussels over the renewable energy directive, and the issue has jeopardised trade deals the EU is trying to sign in south-east Asia.Some of the producers’ arguments are reasonable. Blanket bans on palm oil imports make little sense. The WWF points out that palm plantations have impressively heavy yields. Replacing them with soya bean, coconut or sunflower would require between four and ten times as much land, leading to environmental degradation elsewhere. Criticisms of the UK’s cut in tariffs similarly miss the point. You can make a strong case in principle for placing green conditions on trade if you’re protecting a public good (carbon-sink forests and wildlife habitats), and they are equivalent to domestic environmental regulations. But tariffs are a bad way to do it. They do not discriminate between destructive and sustainable producers within each country, thus failing to create an incentive for individual growers to improve their practices.The EU says it is trying to address the latter issue through its new rules on deforestation, which apply to a much wider range of palm oil derivatives, not just biofuel. They set precise criteria for products being allowed into the EU single market, including banning those grown on land that was deforested after December 31 2020. This will require detailed technical efforts involving geolocation and record-keeping to prove compliance, and is much tougher than the UK’s anti-deforestation regime, which merely requires that producers follow local laws.Seen from Kuala Lumpur and Jakarta, the EU always has some kind of trade restriction in place — it’s just the rationales and instruments that change. There’s always a strong suspicion that its actions are driven by lobbying from European oilseeds producers. As well as the renewable energy directive, Brussels has also put antidumping duties on Indonesian biodiesel (which were later declared illegal by a WTO panel), and more recently on other products made from palm oil including fatty acids.On the related issue of logging, Indonesia spent five years between 2011 and 2016 agreeing a “voluntary partnership arrangement” with the EU to certify that its timber exports were from sustainably managed forests. Now the EU deforestation initiative, which involves onerous customs inspections of consignments, means starting a whole new process.Here too, the complainants have a point. Uncertain, onerous and ever-changing regulations act as an unfair trade barrier, whether or not the secret intent is nefarious protectionism. The European Commission is bracing itself for an onslaught of WTO cases over the deforestation rules, not least because Brazil, which has a record of successful litigation, is also affected. Future WTO rulings may at least sort out whether the EU regulations are proportionate and targeted. But WTO dispute settlement is a slow and painful process — the cases against the EU on biofuels are yet to produce rulings after years of litigation — and in the meantime millions of livelihoods are affected.The EU and other rich economies are failing to address concerns that their actions are arbitrary and lacking in good faith. There’s a case for environmental regulations on trade, but Brussels is making it poorly at the moment, and bringing the whole idea into [email protected] More

ZURICH/LONDON (Reuters) -Credit Suisse shares jumped over 20% on Thursday after the company secured a lifeline from the Swiss central bank to shore up investor confidence, though some analysts said the market relief could be shortlived. The Swiss bank’s announcement that it would make use of a $54-billion loan from the Swiss National Bank helped stem heavy selling in financial markets in Asia on Thursday and prompted a modest rally in European equities.While many in the market cheered the news, others were cautious. JPMorgan (NYSE:JPM) analysts said the loan from the SNB would not be enough to soothe investor concerns and the “status quo was no longer an option”, leaving a takeover of Credit Suisse as the most likely outcome.The collapse of two regional U.S. lenders in the last week has raised concern among investors and bank customers about the resilience of the financial system in the face of rising global interest rates.Credit Suisse has seen a steady stream of withdrawals from wealthy clients, which Luis Arenzana, founder of Shelter Island Capital Management, told Reuters was not “necessarily a panicky reaction to recent events in the U.S. alone”.”CS has not earned its cost of equity since 2013. The bank has lost a cumulative 2.5 francs per share since. This is not the result of just one or two big one offs as the bank reported a loss for five out of nine of those years,” Arenzana said. Credit Suisse shares surged by as much as 32% in the first few minutes of trade on news of the lifeline, and were last up 24% in heavy volume, reversing some of the losses that stripped off a quarter of its market value the day before. Shares were changing hands at a rate of 33.27 million per hour, the fastest on record, according to Refinitiv data.The bank’s shares fell 24% on Wednesday after its biggest backer said it could not offer any more financial assistance for regulatory reasons.In its statement early on Thursday, Credit Suisse said it would exercise an option to borrow from the central bank up to 50 billion Swiss francs ($54 billion). That followed assurances from Swiss authorities on Wednesday that Credit Suisse met “the capital and liquidity requirements imposed on systemically important banks” and that it could access central bank liquidity if needed. “Following yesterday’s extreme share price volatility, Swiss authorities offered their support. This is a strong and important signal. We hope the measures will calm down markets and break the negative spiral,” Bank Vontobel equity strategist Andreas Venditti said.”However, it will take time to fully regain trust in the franchise,” Venditti said.The Swiss franc was last up 0.5% against the U.S. dollar on Thursday, having fallen by 2.2% on Wednesday, marking its biggest one-day drop since the central bank loosened its currency peg in early 2015.TURBULENT WEEKThe cost of insuring against the risk of default on Credit Suisse bonds, which on Wednesday blew out to distressed levels, fell sharply on Thursday.Analysts at JPMorgan said in a note that a takeover was the most likely scenario for Credit Suisse, especially by rival UBS. “We see SNB liquidity support as indicated last night as not enough and believe CSG’s situation is about ongoing market confidence issues with its IB strategy and ongoing franchise erosion,” JPMorgan said.”In our view, the status quo is no longer an option as counterparty concerns are starting to emerge as reflected by credit/equity market weakness,” they said. The value of Credit Suisse’s bonds rose sharply. The bank’s additional tier 1 dollar-denominated bonds were up around 8.4 cents, having plummeted below 50 cents on the dollar the day before.”Credit Suisse is the first major bank, deemed too big to fail, to take up the offer of an emergency lifeline,” Susannah Streeter, head of money and markets at Hargreaves Lansdown, said.”The $54 billion rescue wad is staunching worries about a bigger run on Credit Suisse and the repercussions for other institutions around the world exposed to its operations,” she added.Shares in other major European banks were mixed, with France’s BNP Paribas (OTC:BNPQY) up 0.9% while those in Societe Generale (OTC:SCGLY) and Germany’s Deutsche Bank (ETR:DBKGn) fell 1.2% and 0.3%, respectively. French bank shares, in particular, were hit hard on Wednesday, posting their largest one-day drops since the depths of the COVID crisis three years ago.($1 = 0.9276 Swiss francs) More

ROME (Reuters) – Italy’s government will approve a bill on Thursday to cut income and corporate taxes, a draft seen by Reuters showed, while also reducing penalties for tax dodgers who come clean and agree to pay the overdue sums.Tax evasion is an chronic problem in Italy, costing state coffers some 90 billion euros ($95.54 billion) per year, according to the most recent Treasury data.The draft shows the government intends to eliminate the risk of criminal convictions for those who settle with the authorities and catch up on missed payments, betting on a cooperative approach with taxpayers.It also offers small firms and the self-employed the chance to agree in advance how much they should pay to the state in taxes over the coming two years, without fear of inspections.In its EU-funded post-COVID recovery plan, Italy promised the European Commission to cut the so-called “tax gap” — the difference between potential tax liabilities and the amount of taxes actually paid — to 15.7% in 2024 from 18.5% in 2019.This implies recouping around 7-8 billion euros over the period.In Rome’s 2023 budget Prime Minister Giorgia Meloni, who took office in October last year, raised a limit on cash payments to 5,000 euros from a previous limit of 1,000, drawing criticism from some economists who warned of fuelling evasion.The cabinet is scheduled to meet at 1530 GMT to discuss and approve the bill, Meloni’s office said in a statement.Looking to overhaul the fiscal system, Meloni aims to reduce current income tax bands from four to three within two years, with the final aim of achieving a single tax rate before national elections in 2027.The cabinet will consider setting the three bands at 23%, 33% and 43% in the short term, government officials said, adding that a more expensive solution being studied would lower the second band to 27%.The current income tax levy, named IRPEF, is based on rates running from a minimum of 23% on annual income up to 15,000 euros, to a top rate of 43% on income above 50,000 euros.In addition, Meloni wants to split the current 24% corporate income tax rate into two by introducing a second lower band at 15% to reward entrepreneurs who create jobs and invest in innovation to boost productivity.($1 = 0.9421 euros) (editing by Gavin Jones) More

The operational halt is expected to continue until March 21, said Virgin Orbit, which has furloughed nearly all its employees, a source familiar with the matter said on Wednesday.The furlough is intended to buy the company time to finalize a new investment plan, Chief Executive Dan Hart said in a staff meeting, according to the source.Shares sank 45% in premarket trading on Thursday, leaving Virgin Orbit with a market capitalization of just around $200 million. That’s a far cry from the more than $3 billion valuation the company fetched in 2021 when it went public through a blank-check deal. The stark drop reflects a downturn in investor appetite for space startups such as Virgin Orbit and Rocket Lab USA, which saw its stock fall about 70% last year, as well as the challenges faced by these companies in efforts to send their rockets to orbit. Virgin Orbit in November cut its target for mission launches in 2022. Its rocket LauncherOne in January failed a mission to deploy nine small satellites into lower Earth orbit due to an anomaly during its flight through space. The company booked a loss of nearly $44 million in the third quarter ended Sept. 30 and had cash reserves of about $71 million at the time, a sharp drop from $122.1 million as of June-end. It has not announced a date for its fourth-quarter results.It has since made efforts to boost its cash position; about$10 million was raised last month and a $25 million investment in November from Branson’s Virgin Investments – its majority shareholder with a stake of about 75%. More

Credit Suisse said on Thursday that it plans to borrow as much as $54 billion from the Swiss central bank to improve its liquidity after the lender’s shares plunged to a new low.The bank will also access a “short-term liquidity facility” and will buy back about $3 billion in debt, it said in a statement released on its website.Credit Suisse, a 166-year-old institution, ended Wednesday fighting for its life. Its shares tumbled 24 percent on the SIX Swiss Exchange, hitting a new low, and the price of its bonds dropped sharply as well. The cost of financial contracts that insure against a default by the bank spiked to their highest levels on record.After European markets closed on Wednesday, the Swiss National Bank and Finma, the country’s financial regulator, issued a joint statement certifying Credit Suisse’s financial health and saying the central bank would backstop the bank if needed. Hours later, Credit Suisse said it planned to borrow 50 billion Swiss francs from the Swiss National Bank.The immediate catalyst for a perilous drop in the bank’s stock price was a comment by Ammar al-Khudairy, the chairman of the Saudi National Bank, which is the bank’s largest shareholder. In a televised interview with Bloomberg News, Mr. al-Khudairy said that the state-owned bank would not put more money into Credit Suisse.Credit Suisse has been battered by years of mistakes and controversies that have cost it two chief executives over three years. These include huge trading losses tied to the implosions of the investment firm Archegos and the lender Greensill Capital; they also include an array of scandals, from involvement in money laundering to spying on former employees.The firm has embarked on a sweeping turnaround plan, which includes thousands of layoffs and the spinoff of its Wall Street investment bank. But investors have questioned whether continuing losses and client departures — the firm lost about $147 billion worth of customer deposits in the last three months of 2022 — have endangered that effort. More

Treasury secretary Janet Yellen will tell a Senate committee that the US banking system “remains sound” and defend the Biden administration’s actions to rescue depositors at two failed banks and thwart broader financial contagion, according to prepared testimony ahead of a hearing on Thursday.Yellen is expected to be grilled by lawmakers on the Senate finance committee regarding the aggressive intervention by US regulators and officials on Sunday to guarantee all deposits at Silicon Valley Bank and Signature Bank, two collapsed regional banks, and set up a new Federal Reserve facility to provide liquidity to other banks.“I can reassure the members of the committee that our banking system remains sound, and that Americans can feel confident that their deposits will be there when they need them,” Yellen will say at the hearing, which begins at 10am ET. “This week’s actions demonstrate our resolute commitment to ensure that depositors’ savings remain safe.”Although the US government’s actions stabilised markets early in the week, investors were again spooked on Wednesday by turmoil at Credit Suisse, the Swiss bank, which Yellen may have to address.Most Democratic lawmakers have praised President Joe Biden’s administration for taking action to protect the banking system, and blamed a rollback of financial regulation under Donald Trump for paving the way for the crisis.

But some Republicans have charged that US officials and regulators mismanaged the financial system by keeping borrowing costs too low for too long during the coronavirus pandemic, fuelling inflation and forcing the Fed to increase interest rates so quickly it hurt some banks.While some have suggested Biden’s actions were appropriate, others have criticised it as another dangerous bailout. But Yellen will defend the administration’s moves, along with those of the Fed and the Federal Deposit Insurance Corporation, according to her prepared remarks.“The government took decisive and forceful actions to strengthen public confidence in our banking system,” she will say. “On Monday morning, customers were able to access all of the money in their deposit accounts so they could make payroll and pay the bills.” More

Expressing optimism about Argentina might seem an act of madness.Inflation is running at over 100 per cent a year, the government is funding itself by printing money and crippling exchange controls mean a black market dollar is worth almost double the official rate.Cut off from international markets after its ninth default in 2020 and suffering a severe drought, the South American food exporter could lapse this year into hyperinflation or even economic collapse.Yet, look a little further out, and a tantalising series of opportunities come into view. These, together with a new government in October, could offer Argentina its best chance in a generation.“Nobody doubts this will be a very difficult year,” says Pierpaolo Barbieri, founder and chief executive of the internet bank Ualá. “But in the medium term, four sectors make me very optimistic: agribusiness, energy, mining and digital services.”The giant Vaca Muerta development in Patagonia is changing that. The world’s second biggest shale gasfield, Vaca Muerta will this year start pumping gas down a new pipeline to supply the Buenos Aires region. A second stage will open up exports to Brazil and Chile.© Tomas Cuesta/Getty Images“In two years, we could go from an energy trade deficit of $5bn a year to a surplus of $15bn,” explains Alfonso Prat-Gay, a former finance minister. “There are other low-hanging fruit; I am very optimistic about the potential for copper and lithium. Last year, Chile made nearly $50bn from mining exports while in Argentina it was $5bn. But we share the same mountain range.”Argentina’s lush pampas, succulent beef and prized Malbec wine mean the nation thinks of itself primarily as an agricultural powerhouse. But another boom is under way in the north of the country, which is rich in lithium, the “white gold” of the electric revolution. JPMorgan estimates that by 2030 Argentina will be the world’s number three lithium producer.In a nation almost as famous for squandering economic opportunities as for winning football World Cups, the question inevitably arises of whether this vision of prosperity is just another mirage.“Just because Argentina has enormous possibilities to improve its economy doesn’t mean it will necessarily happen,” said Diana Mondino, an economist at the CEMA university in Buenos Aires. “There’s phenomenal uncertainty over the potential direction of Argentina policy.”Mondino points out that Argentina has about 7mn citizens living on welfare, many of whom have never worked and have little incentive to do so. Millions more enjoy heavily subsidised energy prices. Removing such perks will be hard.© Martin Silva/AFP/Getty ImagesMarcos Casarín, of Oxford Economics, is sceptical about Argentina, pointing to the IMF’s extreme generosity in rolling over $45bn of Argentine debt while demanding little in the way of belt-tightening. “It’s a super-lax programme,” he says. “It’s giving a false sense of prosperity.”Much depends on the next government, which will take office in December. President Alberto Fernández and his radical vice-president Cristina Fernández de Kirchner are too unpopular to win again and it is unclear whom the ruling Peronists will field.

The opposition is divided, with a far-right libertarian, Javier Milei, polling strongly against more established candidates, such as Buenos Aires mayor Horacio Larreta or former security minister Patricia Bullrich.But the most likely scenario is victory for a more pro-business government. If it moves quickly to deregulate the economy, cut spending, and restore confidence in the battered peso, Argentina could take off — and the worse the crisis when it takes over, the easier it may be to adopt radical measures.“The economy is still functioning even with all the distortions which have been created,” says Fernando Jorge Díaz, an Argentine economist at Citi. “If you can bring some stability, it will start growing very fast.”Argentina won’t need to do much to look good against the rest of Latin America. Sickly growth is the order of the day from Mexico to Chile, as the region’s mainly leftwing leaders put wealth distribution before wealth creation. The perennial let down, Argentina may yet spring a [email protected] More

Ah, the memories a good bank run can bring back. I was in Brussels earlier this week, and enjoyed reminiscing with veterans of the global financial crisis and the eurozone debt crisis over FT front pages plastered in downward-pointing charts and pictures of worried traders. For a moment, it felt like 2008 (or 2009, or 2010) all over again.

Hopefully, the fallout from the Silicon Valley Bank collapse will not come anywhere near that, although as Credit Suisse’s troubles show, nervousness has already crossed the Atlantic. At least one difference from 15 years ago is that we gained quite a lot of understanding from how those crises unfolded. Nevertheless, the SVB story tells me that we did not fully learn the lessons from last time. In fact, we are still not in agreement on what those lessons are.For some — including, it seems, the US government — the lesson was that nobody should ever lose any money they deposit in a bank, even if the “somebody” is a sophisticated midsize business and the amount is far above the deposit insurance limit. For me, the lesson was that we must have a financial system where private banks can never blackmail governments into bailing them out, lest panicked depositors bring the whole economy down.As Matthew Klein so memorably puts it, banks are “speculative investment funds grafted on top of critical infrastructure. This structure is designed to extract subsidies from the rest of society by threatening civilians with crises if the banks’ bets are ever allowed to fail. [The SVB bailout] is a reminder that those threats usually work.” The policy challenge has always been to end this state of affairs.I’m with former US regulator Sheila Bair, who slams her successors for ruling the SVB situation a risk to the entire US financial system: “Is that system really so fragile that it can’t absorb some small haircut on these banks’ uninsured deposits?” But even if you agree with retroactively guaranteeing SVB’s uninsured depositors, you must admit it reflects a policy failure. If all bank deposits should always have the government’s backing in full, then why didn’t we abolish outright the deposit insurance limit of $250,000, which is now presumably only notional? (It is €100,000 in Europe, which means the question there is even more pressing.)Note, by the way, that no one has questioned the wisdom of the part of the US bank resolution system that has worked as it is supposed to: unsecured bondholders in the failed banks will be written down — depositors, even uninsured ones, come first. Back in the eurozone crisis days, such “depositor preference” was seen as anathema, and as a result, a lot of Irish taxpayers are still shouldering the burden that the eurozone made Dublin take off the backs of Irish banks’ bond investors.The real question SVB throws up is one that has received far too little attention in the debate since the crisis broke. Do we need our financial system to offer an instrument where anyone can store any amount of money with absolute safety (in nominal terms)? That is what guaranteeing deposits in full amounts to.There are reasons why such guarantees have been kept limited — although the limits have been increased in crises. It gives banks an incentive to be prudent if they know they will not be bailed out. It provides incentives to bank customers too. As Bair points out: “The uninsured depositors of SVB are not a needy group.” It is obvious why individuals and households need a safe place to receive their salaries, manage their spending and hold an amount of liquid savings. But their need is met by the existing insurance schemes. The question is whether it is necessary to provide medium-sized businesses that need to keep millions in cash buffers with the same safety.Even for those of us who are sceptical of the SVB bailout, it is not obvious how such businesses should go about managing their liquidity needs. The current model requires companies either to take a forensic look at their bank’s balance sheet — essentially treating a deposit as the unsecured loan it really is — or to spread their cash buffers across dozens of banks so as to stay below the limit everywhere. Neither is particularly practical. And many businesses’ exposure to bank deposits could be indirect: the Washington Post’s blow-by-blow account cites the case of a payroll processor that used SVB for helping its client companies pay about 1mn employees.Once we start thinking about this, it becomes hard to see how a banking system designed along current lines could ever address this problem. That is why I think the main criticisms SVB has triggered — of management failure and regulatory failure — are legitimate but somewhat beside the point. SVB had a lot of bonds on its balance sheet of the type that are ultra-safe (US government and agency debt), but not if you have to sell before maturity, in which case the price you get depends on current interest rates. Since the Federal Reserve has raised interest rates drastically in the past year, selling its bonds would have wiped out SVB’s equity cushion. Not hedging against this risk was the management failure. The regulatory failure was in letting this go under the radar, after all, but the biggest banks a few years ago were spared the stress tests required by the hard-won Dodd-Frank rules imposed after the global financial crisis.Both accusations have merit but miss the bigger point. After all, Treasuries and US agency bonds are the most liquid assets you can invest in, and as guaranteed as anything ever gets to pay out its promised value in full. If even this is problematic from the point of view of banks’ ability to offer safe homes for large depositors, what about their supposed function of channelling savings to things such as mortgages and business loans, which are much riskier and much harder to liquidate? SVB’s critics say they should have bought hedging instruments that eliminated the interest rate risk in case of having to sell their assets before maturity. But that is essentially saying that banks should refrain from their other traditional function of maturity transformation — pooling immediately redeemable deposits against investments locked up for the long term.Ultimately, then, the SVB crisis should make us ask: what is the point of banks? If providing safe storage of money for business depositors requires them to hold riskless assets with no effective duration, they may as well simply hold central bank reserves. Or — what amounts to the same thing — be promised access to cash from the Fed against the full value of government bonds, which is what the central bank’s latest emergency programme offers. But these are very roundabout ways to secure economic stability, which we now seem to say require completely safe business deposits in arbitrary amounts. If we need those deposits to be backed by central bank reserves or something very much like them, what is gained by interposing private banks out to make profits on the intermediation?Which is why, in Brussels this week, I asked Paschal Donohoe, the president of the eurogroup of finance ministers, and Paolo Gentiloni, the EU commissioner for the economy, whether they and the assembled ministers had drawn the link between the SVB crisis and the project for a digital euro, which was also on their agenda. Because a central bank digital currency would provide precisely what seems to be missing today: a means by which businesses could keep cash completely safe, without any need for banks. If a CBDC is issued by the European Central Bank, which could be decided this year, any business with liquidity buffers greater than the deposit insurance limit should see the interest in keeping those buffers in digital euros. Here is an answer to those who dismissively ask what the use case is for a CBDC: it would eliminate the type of systemic risk identified by US regulators in which ordinary business depositors doubt the safety of their deposits. But it would only do so if users are allowed to hold more than the very low limits the ECB is at present contemplating.From Donohoe’s and Gentiloni’s answers, it is clear that ministers have not drawn this link. I rather suspect that they will have to think about it soon.Other readablesMy colleague Richard Milne takes a deep dive into the industrial adventure that is Northvolt, the Swedish battery manufacturing start-up.Can Europe’s start-up sector innovate its way out of a plastic bag? A new Sifted report gives some answers on how we might get to a post-plastic future. Numbers newsThe latest US inflation numbers — with stubbornly high month-on-month consumer price increases — were taken as bad news for the Federal Reserve. I disagree. There is only one sector where inflation is misbehaving, and that is shelter — outside of housing, inflation has been back to normal since last summer.But for shelter prices, then, we would declare the inflation danger over. And we know that the CPI measure of housing costs is backward-looking — it reflects changes that have already happened. This means current movements in shelter prices will show up in the CPI measure over the next year. So this component should fall too. If you look at a private rent index such as the Zillow Observed Rent Index, you find that rental prices have hardly moved since September. More