Economy

LONDON (Reuters) – Signs that the European Union may jointly fund the bloc’s response to the energy crisis would mark the next milestone on the path towards permanent joint debt sales in the bloc.Last week, European Economic Commissioner Paolo Gentiloni and Internal Market Commissioner Thierry Breton called for joint borrowing to finance a response to the energy crisis, which has raised recession risks. The idea resurfaced again after Bloomberg reported on Monday that German Chancellor Olaf Scholz will reverse the country’s position and support EU debt issuance if new funds are disbursed as loans, not grants. But a government source told Reuters Germany has no plans to back such a joint issuance and a spokesperson said member states could use money remaining in the EU’s recovery fund.”The genie is out of the bottle. This is probably going to come in some form,” Danske Bank chief analyst Piet Christiansen said.Here’s a look at the significance behind a possible shift in Germany’s stance.1/ Why would a shift in Germany’s position matter?While supporting a post-pandemic recovery fund that gave member states access to grants and loans, Germany and other richer bloc members stressed this was a one-off and opposed further shared borrowing or a move towards a fiscal union. A shift from Germany would be a powerful signal of European cohesion, coming in response to criticism from EU peers of its energy support programme dwarfing French and Italian ones.Further joint issuance would help indebted member states that have sharply higher borrowing costs than top-rated Germany and so have less leeway to respond to the energy shock. And it would expand Europe’s pool of safe assets, lifting the euro. 2/ But the EU already issues joint bonds?Indeed. The EU issues joint bonds for an up-to 800 billion euro ($879 bln) post-COVID recovery fund, on top of 92 billion euros sold for its SURE unemployment scheme. But there are no plans for significant further issuance or making the facilities permanent. However, Russia’s invasion of Ukraine and the resulting energy crisis have raised calls for further bond issuance since it increases demand for funding in defence and energy security. 3/ How would joint issuance be funded? EU officials calling for joint borrowing said it could resemble the SURE work programme.To fund SURE, the EU sold bonds in response to loan requests and transferred the proceeds directly to the countries on the same terms it received on the markets. 4/ What does this mean for markets?German bond yields jumped after Monday’s report as investors bet further fiscal spending will lead to more rate hikes.But Italy’s borrowing costs fell and the risk premium over Germany tightened. Covering some of the debt poorer member states would otherwise have to issue for the energy crisis would take the heat off highly-indebted states such as Italy.Italy currently pays 4.7% on 10-year debt, while the EU pays 3.2% — that lower borrowing cost would get passed on to Italy through loans. 5/ Will this finally create a euro-zone safe asset?Since October 2020, the EU has raised just 260 billion euros for the recovery fund and SURE. Any further issuance would boost the pool of high-quality EU bonds, especially as some 220 billion euros out of a 360 billion euros available in recovery fund loans have not yet been requested by member states, according to BNP Paribas (OTC:BNPQY). That means recovery fund issuance may end up lower than 800 billion euros without changes to that programme, denting the EU’s ambitions of becoming a top borrower. But ultimately, a new programme is unlikely to scale up EU debt to a level where it can compete with Germany’s 1.6 trillion euro bond market, the euro zone’s safe asset. More

The IMF has said there is a growing risk that the global economy will slide into recession next year as households and businesses in most countries face “stormy waters”.China’s zero-Covid policy and fragile housing market, the need to raise interest rates to control inflation in advanced economies, and higher energy and food prices following Russia’s invasion of Ukraine will lower world economic growth from 3.2 per cent in 2022 to 2.7 per cent next year, the fund predicted.The growth forecast for 2023 is the lowest for the year ahead that the IMF has published since 2001, apart from the years of the coronavirus pandemic and following the global financial crisis. The fund’s economists judged that there was a greater than even chance that the world economy would perform worse than its central forecast and a 25 per cent chance that growth would fall below 2 per cent. That would represent global economic weakness seen only one year in 10 and only in 1973, 1981, 1982, 2009 and 2020 over the past half a century. In an interview with the Financial Times, Pierre Olivier Gourinchas, the IMF’s chief economist, said there was as much as a 15 per cent chance global growth could fall below 1 per cent eventually. This level would likely meet the threshold of a recession and would be “very, very painful for a lot of people”.“We are not in a crisis yet, but things are really not looking good,” he said, adding that 2023 would be the “darkest hour” for the global economy.Financial turmoil, triggered by a shift into dollar assets, threatened to compound the economic threat. “As the global economy is headed for stormy waters, financial turmoil may well erupt, prompting investors to seek the protection of safe-haven investments, such as US Treasuries, and pushing the dollar even higher,” Gourinchas added in his statement that accompanied the report.Although the sharp rises in interest rates around the world were weighing on growth, the IMF said they were necessary to ensure inflation came back under control and restored the global economy to a more stable footing.The fund forecasts inflation in advanced economies will hit 7.2 per cent this year and 4.4 per cent next year, both more than 1 percentage point higher than its previous April forecasts for 2023. For emerging and developing economies, consumer price growth will peak at an annual pace of almost 10 per cent this year before moderating to 8.1 per cent in 2023.“On the front lines, you have the central banks. That’s their job, that’s their mandate [and] their whole reputation is at stake,” said Gourinchas. The fund said that monetary authorities must “stay the course” rather than repeat the mistakes of the 1970s when most monetary policymakers did not have the nerve to keep raising interest rates when their economies slowed or stalled.There was a chance of tightening monetary policy too much, the IMF admitted, but it said the risks of doing too much were not as serious as letting inflation become normalised and ingrained into everyday life.For the US Federal Reserve in particular, Gourinchas warned it was too soon for it to back off from its aggressive campaign to tighten monetary policy.“We are far from having won that battle,” said the chief economist, adding that any signal that the Fed would not raise rates further could, at this point, be interpreted by financial markets as a sign policymakers were unwilling “to do what it takes”.“Inflation expectations could de-anchor and we could have a more persistent process,” he said. The IMF expanded on its recent criticism of UK economic policy, advising all countries not to have highly expansionary policies of taxation and public spending, despite the surge in energy and food prices.There was a need to lower deficits and rebuild fiscal buffers, Gourinchas said. “Doing otherwise will only prolong the fight to bring inflation down, risk de-anchoring inflation expectations, increase funding costs, and stoke further financial instability, complicating the task of fiscal as well as monetary and financial authorities, as recent events illustrated,” he said in his statement.Likening it to two drivers, each with their own steering wheels, Gourinchas told the FT that opposing fiscal and monetary policies prompted financial markets to question, “which way is that car going? Are we really fighting inflation or are we really stimulating economic activity?”In the revised forecasts, 93 per cent of countries received downgrades to their growth outlook. The 2022 global growth forecast has declined from 4.9 per cent in the fund’s report a year ago to 3.2 per cent now. The 2023 growth estimate was cut from 3.6 per cent a year ago to 2.3 per cent, with the downgrades concentrated in advanced economies rather than in the emerging world.In what will be a difficult report for Beijing’s government as it prepared for the 20th national congress of the Communist party, China’s economy was forecast to grow only 4.4 per cent this year, well below the government’s 5.5 per cent growth target. The IMF expects this annual growth rate to improve only to 4.6 per cent over the next five years.

The US economy is expected to stagnate over the four quarters of 2022 and then maintain a sluggish 1 per cent growth rate in 2023. Many European countries will fall into recession, the IMF predicted, as households and companies struggle to cope with natural gas prices five times 2021 levels.The fund was no more optimistic about the future. The downgrades were likely to be permanent, it said. Scarring from the pandemic and the war in Ukraine would leave the global economy 4.3 per cent smaller in 2024 than it expected in January 2020 as coronavirus began to spread globally. More

By Arsh Tushar MogreBENGALURU (Reuters) -India’s retail inflation accelerated to a five month high of 7.30% in September due to surging food prices, staying well above the Reserve Bank of India’s (RBI) upper tolerance band for a ninth month, a Reuters poll found.Fueled by erratic rainfall and supply shocks from Russia’s invasion of Ukraine, prices of daily consumables like cereals and vegetables which form the largest category in the inflation basket have climbed over the past two years.Already reeling from COVID-19 pandemic-induced economic shocks, India’s poor and middle classes will be further hit by the increases as they spend a large chunk of income on food.The Oct. 3-7 Reuters poll of 47 economists suggested inflation – as measured by the Consumer Price Index – rose to an annual 7.30% in September from 7.00% the previous month. If realised, that would be the highest since May 2022.Forecasts for the data, due at 1200 GMT on Oct. 12, ranged between 6.60% and 7.80%. Some 91% of economists, 43 of 47, expected inflation to be 7.00% or higher, suggesting the bias was for prices to go up further.”There is a strong pressure from food that is playing out,” said Dharmakirti Joshi, chief economist at Crisil.The Indian government has introduced measures to calm local prices, including some export restrictions on rice to temper inflation. But consumer prices have remained defiant and stayed above the RBI’s upper tolerance limit this year.A weakening currency is also not helping. The battered Indian rupee hit a new low of 82.32/$ on Friday and was expected to remain under pressure over the next six months, a separate Reuters poll of FX analysts showed. That is likely to pressure the RBI, which has raised its key repo rate by 190 basis points in four moves this year, to intensify its interest rates hikes.”Against a more hostile global backdrop and a stickier inflation trajectory at home, we now expect a terminal rate of 6.75% – previously 6.25% – in this cycle,” said Sajjid Chinoy, chief India economist at J.P. Morgan.”To the extent the rupee weakens, there will be passthrough effects to the CPI trajectory.” More

WARSAW (Reuters) -Poland’s central bank Governor Adam Glapinski and four other rate setters threatened legal action on Tuesday against some members of the Monetary Policy Council over public statements they have made about policy.The group did not identify which colleagues they were referring to but their joint statement follows criticism of the functioning of the Monetary Policy Council (MPC) on Monday by two of its members, Przemyslaw Litwiniuk and Joanna Tyrowicz.Litwiniuk said in an interview that MPC members’ freedom to operate was limited, while Tyrowicz posted an altered version of the MPC’s most recent post-meeting press release on social media in which she wrote that the rate-setting body was not taking the necessary action to curb inflation.”We do not accept and express our extreme disapproval of actions which, in our opinion, may constitute a violation of the aforementioned provisions of the law and, therefore, we consider it justified to consider sending a notification of a suspected crime in this case,” Glapinski and his colleagues said in a joint statement.The statement was signed by Glapinski, Cezary Kochalski, Wieslaw Janczyk, Ireneusz Dabrowski and Henryk Wnorowski.The other members of the MPC are Tyrowicz, Litwiniuk and Ludwik Kotecki, a former deputy finance minister who has been critical of monetary policy.All three were appointed to the MPC by the Senate, which is controlled by the opposition.Litwiniuk told private broadcaster Radio Zet that he did not take the statement as being in reference to him, and compared its language to Trybuna Ludu, a Communist-era newspaper.At a press conference last Thursday, Glapinski criticised MPC members who “take 37,300 zlotys ($7,437.69) a month for participating in one meeting during the month and criticise the actions of the whole body”.The central bank kept its main interest rate at 6.75% at its Oct. 5 meeting following a run of 11 consecutive hikes.Tyrowicz continued her criticism of the direction of policy on Tuesday in a live interview just before publication of the statement, saying that rates should rise by several percentage points more. “As an economist, I haven’t understood the decisions made by the MPC for a very long time,” she told the Gazeta.pl website.Last Thursday Poland’s parliament approved the appointment of Iwona Duda and Gabriela Maslowska to the MPC to fill vacancies on the 10-member council.($1 = 5.0150 zlotys) More

The People’s Bank of China (PBOC) also said that the yuan did not necessarily need to weaken against the dollar when the index measuring the U.S. currency’s performance against a currency basket rises.There have been cases in recent years where “the dollar appreciates, but the yuan is stronger,” it said. The PBOC will “take comprehensive measures, stabilise expectations, resolutely curb big ups and downs in exchange rates,” the central bank said in an article posted on its website. It would also act to “keep the yuan basically stable on a rational, equilibrium level,” the PBOC added.The yuan has slumped more than 11% against the dollar this year, touching at one point its weakest level since the 2008 global financial crisis, weighed down by U.S. monetary tightening, China’s economic slowdown and capital outflows.The central bank said it has ample policy room, many tools and “rich experience in effectively managing market expectations, and safeguarding exchange rate stability”. The PBOC said that China’s solid economic fundamentals were the best stabilizer for exchange rates, adding yuan assets were safe and “global recognition of the yuan will keep rising.” The central bank also said it will deepen currency market reforms, improve flexibility of the yuan, and warned against one-way bets.”There’s no way to predict exchange rates accurately, and two-way fluctuation is the norm,” the PBOC said.Also on Tuesday, China’s foreign currency regulator said it has been pushing banks to provide better risk-hedging services to companies amid greater yuan flexibility.The Sichuan branch of the State Administration of Foreign Exchange (SAFE) launched a campaign to promote yuan derivatives, so that companies are “daring, willing, and able” to hedge risks, the watchdog said. More

LONDON (Reuters) – The United Nations’ Development Programme (UNDP) joined on Tuesday the chorus of institutions and charities warning that a serious debt crisis is now taking hold in the poorest parts of the world.In a new report, the UNDP estimated that 54 countries, accounting for more than half of the world’s poorest people, now needed immediate debt relief to avoid even more extreme poverty and give them a chance of dealing with climate change.”A serious debt crisis is unfolding across developing economies, and the likelihood of a worsening outlook is high,” the report published on Tuesday said.The warning comes as the International Monetary Fund and World Bank hold meetings in Washington this week amid rising global recession worries and a crop of debt crises from Sri Lanka and Pakistan to Chad, Ethiopia and Zambia. Achim Steiner, UNDP administrator, urged a string of measures, including writing off debt, offering wider relief to greater numbers of countries and even adding special clauses to bond contracts to provide breathing space during crises.”It is urgent for us to step up and find ways in which we can deal with these issues before they become at least less manageable and perhaps unmanageable,” he told reporters.Without effective debt restructuring, poverty will rise and desperately needed investments in climate adaptation and mitigation will not happen. The UNDP’s report also called for a recalibration of the G20-led Common Framework – the plan designed to help countries pushed into financial trouble by COVID-19 pandemic restructure debt. Only Chad, Ethiopia and Zambia have used it so far.Its proposal was to expand the Common Framework’s eligibility so that all heavily indebted countries could utilise it rather just the 70 or so poorest countries, and for any debt payments to be automatically suspended during the process.”Both will act as an incentive for creditors to participate and to maintain a reasonable timeline, and it could also remove some of the hesitancy caused by rating fears for debtor countries,” the report said.It also recommended creditors should have a legal duty to cooperate “in good faith” in a Common Framework restructurings and that countries could offer to take eco-friendly measures to encourage creditors to write their down debt.”It makes a lot of sense,” the report said. “Not only have these countries contributed the least to, but bear the highest cost of, climate change”. More

WASHINGTON (Reuters) – U.S. Treasury Secretary Janet Yellen urged Group of 20 finance and agriculture ministers on Tuesday to take urgent steps to help the 70 million people at risk of acute food insecurity as a result of Russian President Vladimir Putin’s war in Ukraine.Yellen told the inaugural meeting of G20 joint finance and agriculture ministers that Putin and his officials – including those taking part in meetings in Washington this week – were responsible for “immense human suffering” caused by the war, a Treasury official said.”That includes the innocent lives taken by President Putin’s barbaric missile attacks across Ukraine yesterday,” she said, referring to the most widespread wave of air strikes to hit away from the front line since the start of the war on Feb. 24.Russia says it is waging a “special military operation” in Ukraine to rid it of nationalists and protect Russian-speaking communities. Ukraine and the West say it is an unprovoked war of aggression.Yellen said Russia’s blockade of ports and destruction of agricultural infrastructure had disrupted global supply chains and food production, with the impact felt particularly in developing countries that Russia “falsely claims to support.”She stressed that U.S. sanctions on Russia do not target the production, manufacture, sale, or transport of agricultural commodities, including fertilizer, and urged G20 officials to ensure their industries knew that sanctions should not impede the flow of agricultural commodities to those who need them.She also called on G20 countries to increase financial aid to initiatives such as the Global Agriculture and Food Security Program, to which Washington just gave $155 million, and to avoid all food export restrictions.The United States had announced nearly $10 billion in assistance this year to provide critical support to food-insecure countries, Yellen said.She said G20 members should urge international financial institutions to continue implementing commitments made in their Action Plan to Tackle Food Insecurity.Washington would also support temporary debt service standstills for countries that needed debt relief and sought help under the G20 Common Framework adopted in late 2020, she said. The group as a whole offered a freeze in debt service payments to low-income countries from May 2020 through the end of 2021, suspending $12.9 billion in debt-service payments, but refused to extend it into 2022. More

Financing the energy crisis and a shift towards green transition could be financed via the EU “Next Generation” fund which was created to support the bloc’s recovery during the coronavirus pandemic, the spokesperson said.Only a fifth of approved available funds has been paid out, and the remainder could be used to tackle crises and finance the energy transition.”To this end, an agreement must now be reached quickly with the European Parliament in order to be able to use these funds promptly,” the spokesperson added.A government source on Monday told Reuters that Berlin had no plans to back a joint EU debt issuance. Germany’s Economic Council criticised the EU plan, calling it irresponsible in light of current inflation levels.Citing sources, Bloomberg on Monday said Germany will change its position and support a joint issuance of EU debt through loans, pushing German government bonds yields higher.”Currently we are seeing a worrying flight of capital from the euro area, which will gain further momentum through more and more debt and the resulting weakening of future government budgets,” the council’s secretary general, Wolfgang Steiger, said on Tuesday.German chancellor Olaf Scholz had suggested at an informal EU summit last Friday using unused funds from the European recovery fund created during the coronavirus pandemic to fight the energy crisis. ($1 = 1.0305 euros) More