Economy

Isbank and Denizbank on Monday announced separately they had suspended the use of Mir after Washington expanded its sanctions last week to include the head of the entity running the payment system, which is popular with the tens of thousands of Russian tourists who arrived in Turkey this year.The suspension by two of the five Turkish banks that had been using Mir reflect their efforts to avoid the financial cross-fire between the West and Russia, as the Turkish government takes a balanced diplomatic stance. “The steps these banks took make a lot of sense. Cutting off Mir is one of the best ways to protect a bank from the sanctions risk that comes from doing business with Russia,” the U.S. official said, speaking on condition of anonymity. “We expect more banks to cut off Mir because they don’t want to risk being on the wrong side of the coalition’s sanctions.” Washington and its allies have imposed several rafts of sanctions targeting Moscow following Russia’s Feb. 24 invasion of Ukraine, including targeting Russian banks and President Vladimir Putin.NATO member Turkey opposes Western sanctions on Russia on principle and has close ties with both Moscow and Kyiv, its Black Sea neighbors. It also condemned Russia’s invasion and sent armed drones to Ukraine as part of its diplomatic balance.Yet Western nations are growing concerned over increased economic ties between Turkey and Russia, diplomats say, particularly after several meetings between leaders Tayyip Erdogan and Vladimir Putin, including last week in Uzbekistan.Last month the U.S. Treasury sent a letter to big Turkish businesses warning they risked penalties if they maintained commercial ties with sanctioned Russians. More

In a big week for monetary policy, the US Federal Reserve and Bank of England are under pressure to show they are serious about tackling stubbornly high inflation. Last week’s US inflation figure for August of 8.3 per cent — above expectations and still near 40-year highs — spooked the financial markets. A slight fall to 9.9 per cent in the UK in August was also hardly cause for celebration. While both central banks have been rapidly raising interest rates this year to rein back demand, this week they will set policy amid an increasingly frail growth outlook. Increasing the cost of credit further will hurt already ailing households and businesses, but both central banks will need to hold firm.In America, a drop in price growth over the summer from a 9.1 per cent peak in June had generated some optimism. News of easing global supply chain pressures and high retail inventories gave hope that price growth would be tamed quickly. But the case for the Fed to go slower on rate increases at its meeting on Wednesday, after its 75 basis point increase in July, has not strengthened. Core inflation — which strips out volatile items like energy and food — pushed higher last month and shows the US economy is still overheating. The labour market remains resilient too, with high demand for workers sustaining upwards pressure on wages. The US has however been relatively less affected by the energy inflation ravaging Europe. In Britain, the government’s recent plan to cap energy bills for households and businesses, with more details of the latter due to be unveiled on Wednesday, should help to lower near-term inflation. But the package — estimated to cost around £150bn — risks keeping demand and inflation higher over the medium term. This boosts the case for the Bank of England to continue to decisively raise rates on Thursday. Indeed, further stimulus, in the form of tax cuts expected to be unveiled at Friday’s “mini-Budget”, will give a jolt to spending too.Wage pressures also remain firm in the UK: unemployment has fallen to its lowest rate since 1974, while high levels of inactivity continue to strain the labour supply. Indeed, at 5.5 per cent, wage growth remains inconsistent with the BoE’s 2 per cent inflation target. The collapse of sterling to a 37-year low last week against the dollar, which adds imported price pressures, also means the BoE will need to be wary of falling too far behind the Fed.The challenge for both central banks is raising rates while recession risks remain strong. While the US economy has shown some resilience, business activity has been losing momentum. In the UK, the energy package will cushion the impact of surging energy prices, but many will still face a testing winter. Global headwinds from Europe’s energy crisis and China’s ongoing Covid-19 lockdowns will also damp growth prospects in the months ahead. Higher interest rates will only add to the pain.Yet the risk of high inflation becoming entrenched is the greater danger. The longer it stays elevated the greater the damage it will do to households and businesses. While inflation expectations have fallen recently, US consumers still expect it to be over twice the Fed’s target in a year’s time. Many will be looking for officials’ interest rate projections to signal a robust monetary policy for the rest of 2022 and potentially into 2023. Meanwhile, in the UK, public satisfaction with the BoE’s handling of inflation recently fell to its lowest on record.Both central banks need to bolster their credibility, after falling behind the curve on inflation. Acting firmly and quickly now will be important — especially as the damping growth outlook may make rate rises harder to pull off in the near future. More

The Dutch government has raised the country’s minimum wage by 10 per cent, as lower paid workers grapple with the impact of the soaring cost of food and fuel and housing. The measure, the centrepiece of an €18bn aid package to help households cope with rising inflation and energy prices, was unveiled in the budget on Tuesday.King Willem-Alexander, who outlined the government plan in his annual Speech from the Throne, an address to parliament that precedes the budget, said: “It is a painful reality that more and more people in the Netherlands are struggling to pay their rent, grocery bills, health insurance and energy bill.” Several European countries, including France, Germany, Italy and Spain have announced minimum wage increases, but the Dutch measure — a rise from €1,756 a month — is the highest jump. Social benefits, including child allowances and pensions, will rise and income taxes will fall slightly to combat the surge in price pressures. Inflation hit 12 per cent in the year to August and is expected to remain high next year despite a cap on energy prices. The Dutch government is joining many countries in imposing a windfall tax on firms extracting oil and gas, after thrashing out a deal with industry on Monday night. EU governments in recent weeks have been locked in negotiations on how to structure an EU-wide windfall tax and price cap on energy companies and the Netherlands is likely to set the level in line with that. Energy prices across Europe have surged following Russia’s invasion of Ukraine at the end of February. The budget also prolonged cuts on transport fuel duty until next July, costing €1.2bn. The king acknowledged that the measures, aimed primarily at low- and middle-income households, could not prevent some from being worse off. “Even with a package of this magnitude, not everyone can be compensated fully for all the price rises,” he said. To fund the package, corporation taxes will rise. The oil and gas windfall tax will raise about €2.8bn in 2023 and 2024 combined. Bumper revenues from the Groningen gasfield will also help fund the measures.Finance minister Sigrid Kaag has also shifted spending from other departments, delaying plans to recruit more teachers.The budget deficit will be 3 per cent in 2023, just within EU fiscal rules, with debt falling to 49.5 per cent of gross domestic product because of inflation.Frank van Es, a senior economist with Rabobank in Utrecht, said the support for households could increase price pressures. “It is a quite expansionary budget that will drive up inflation,” he said. “They have overcompensated for the shock from energy prices.”Rabobank expects 5 per cent inflation and just 0.2 per cent growth next year, against government forecasts of 2.6 per cent inflation and 1.5 per cent growth. The Netherlands Bureau for Economic Policy Analysis, a government agency, has calculated that up to 1mn people are at risk of falling into poverty as a result of rising prices. More

The country is returning to a more normal life. But it will not be that normal. Liz Truss will see to that.On Friday, Kwasi Kwarteng, chancellor of the exchequer, will follow up his emergency energy package with a mini-Budget. The latter is expected to reverse the rise in national insurance contributions and stop a planned increase in corporation tax. It will also set a target of annual growth at 2.5 per cent. Should we take that seriously? No and yes. No, because the idea that the government of a market economy can meet a growth target is ridiculous. Yes, because it will guide policy. The question is whether it will guide it for good or bad. My bet is on the latter.Neither Hayek nor Friedman would have thought a growth target at all sensible. That is planning. Hayek would rightly insist we have neither the knowledge nor tools to deliver one. In Britannia Unchained, published in 2012 (two of whose authors were Kwarteng and Truss), Brazil was proposed as a model. Ten years later, that looks silly.A growth target is not just unworkable, but a danger. Suppose Kwarteng tells the Treasury and Office for Budget Responsibility they must assume this target in their forecasts (if they are allowed to make any.) If he is wrong, deteriorating public finances could generate a crisis of confidence, as happened in the 1970s. He seems to dismiss such worries as mere “managerialism”.

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So, let us put the target to one side and consider policy. Truss says “the economic debate for the past 20 years has been dominated by discussions about distribution.” Yet, says the OECD, the UK has, after the US, the highest inequality in the distribution of household disposable incomes of all high-income countries. Nor were George Osborne’s post-crisis austerity policies at all concerned with “distribution”. Her view of the UK’s past debate is a red herring.We need to recognise instead that 40 years on, Thatcherism is a zombie idea, for two opposing reasons — both what was achieved and what was not.

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Thatcher did liberalise labour markets, curb trade unions, privatise nationalised industries and slash top tax rates. Her policies (which included promotion of the EU’s single market), as well as those of later governments, also strengthened competition in product markets. Overall, today’s UK is a low-tax country, by the standards of other high-income economies. It has a deregulated economy, in which the successful are well rewarded, but those who do less well are penalised. Such Thatcherite aims then are now a reality. What then did Thatcher and those who followed her fail to achieve? They did not liberalise the biggest distortion in the economy, which is land use. They did not transform the skills of the population, which has been made harder by the conditions in which many children grow up. They failed to address defects in corporate governance, which bias spending against investment. They allowed the search for safety in corporate pensions to shift portfolios away from the supply of risk capital to business to ownership of government bonds. This in effect turned the plans into state-backed pay-as-you-go schemes.In all, economic performance has not been durably transformed for the better. In 2019, output per hour worked in the UK was much the same, relative to France and Germany, as it had been in 1979. Above all, productivity has stagnated since the financial crisis. Investment is the lowest as a share of GDP of all big high-income countries. Business investment has remained below its peak in real terms since the Brexit referendum. The previous implosion of the financial sector under “light touch regulation” did not help. Nor did post-crisis austerity or the folly of Brexit itself. The uncertainty alone is bad for confidence and so for investmentThe idea that further tax cuts and deregulation (such as lifting the cap on bankers’ bonuses) will transform this performance is a fantasy. What is simple has already been done. What is left is hard to do. To take one example: higher investment requires higher savings. From where are these to come? There are also the linked complexities of climate change and energy. Moreover, the evidence is that both better economic performance and political stability may depend on lower inequality, not still more than the country has today.The Truss government is not just devoted to tax cuts and deregulation. It also continues to suggest the possibility of breaking with the EU over the Northern Ireland protocol, which would also be a breach with the US. This would undermine confidence in the UK’s probity, add to uncertainty, prove that Brexit has not been done and suggest that the government cannot live with the choices it made on its own flagship policy. To add to all this, Truss seems set on breaking with China, too. Her UK seems determined to be friendless.Furthermore, the Tories won their majority under Boris Johnson on getting Brexit done, strengthening the NHS and “levelling up” poorer areas. In so doing, they created a new coalition of traditional supporters with former Labour voters. Today, Brexit is not done, the NHS is in crisis and levelling up seems on the way to oblivion. Just 81,000 Tory party members have chosen as prime minister someone who was not even the first choice of their elected members of parliament. She has no mandate for the policies she wishes to pursue. One can imagine little better designed to exacerbate today’s pervasive cynicism about politics and politicians.Trust is easy to destroy, but hard to recover. This is why keeping one’s word matters. Britannia is not “unchained”. It is instead sailing in perilous waters. Can the new captain and first mate even see the rocks that lie [email protected] Martin Wolf with myFT and on Twitter More

WASHINGTON (Reuters) – A top adviser to U.S. Treasury Secretary Janet Yellen will warn on Tuesday that China’s foot-dragging on debt relief could burden dozens of low- and middle-income countries with years of debt servicing problems, lower growth and underinvestment.Yellen’s counselor Brent Neiman plans to criticize China’s “unconventional” debt practices and its failure to move forward with debt relief at an event at the Peterson Institute for International Economics, a text of his prepared remarks obtained by Reuters shows.”China’s enormous scale as a lender means its participation is essential,” Neiman said in the speech, citing estimates that China has $500 billion to $1 trillion in outstanding official loans, mainly to low and middle-income countries.Many of those countries are facing debt distress after borrowing heavily to combat COVID-19 and its economic fallout. Now Russia’s war in Ukraine has caused food and energy prices to soar, while rising interest rates in advanced economies have triggered the biggest net capital outflows from emerging markets since the global financial crisis, Neiman said.He said a systemic debt crisis had not materialized, but economic stresses and domestic vulnerabilities were increasing and could grow worse.China had a unique responsibility on debt issues since it is the world’s largest bilateral creditor, with claims surpassing those of the World Bank, International Monetary Fund and all Paris Club official creditors combined, Neiman said.Neiman’s critique of China’s debt practices marks the latest salvo by Western officials and the leaders of the World Bank and International Monetary Fund, who have grown weary of delays and broken promises by China and private lenders.As many as 44 countries each owed debt equivalent to more than 10% of their gross domestic product to Chinese lenders, but Beijing has consistently failed to write down debts when countries needed help, Neiman said.Instead, China has opted to lengthen maturities or grace periods, and in some cases, such as that of Congo in 2018, even wound up increasing the net value of its loans.Neiman said China’s lack of transparency and its frequent use of non-disclosure agreements complicated coordinated debt restructuring efforts, and meant liabilities to China were “systematically excluded” from multilateral surveillance.Beijing signed up to the Common Framework for debt treatments agreed by the Group of 20 major economies and the Paris Club in late 2020, but it had delayed formation of creditor committees for Chad and Ethiopia, two of the three countries that had sought help under the framework.In July, it said it and other official creditors would provide debt treatments for the third, Zambia, but the delays had prolonged uncertainty, and could discourage other countries from requesting help, Neiman said.All three cases should be resolved quickly, he said, adding that some middle income countries like Sri Lanka also needed urgent debt restructuring.Neiman warned that IMF financing should not be used by countries to repay select creditors, and called for more transparent reporting and tracking of financing assurances.He noted that China had engaged in “unconventional” practices that had allowed the IMF to move forward without obtaining standard financing assurances.He cited China’s past actions on Ecuador’s debt in 2020 and its refusal to restructure its debt service for Argentina, even though Paris Club creditors were likely to do so. “In many of these cases, China is not the only creditor holding back quick and effective implementation of the typical (debt restructuring) playbook. But across the international lending landscape, China’s lack of participation in coordinated debt relief is the most common and the most consequential.” More

MOSCOW (Reuters) – Prime Minister Mikhail Mishustin said on Tuesday Russia’s budget deficit would come in at 2% of gross domestic product in 2023 before narrowing to 0.7% in 2025. In televised remarks, Mishustin said the budget gap would be covered mainly by borrowing. Last week, the Finance Ministry returned to local debt markets for the first time since Russia sent tens of thousands of troops into Ukraine, triggering unprecedented Western sanctions that have locked Moscow out of international debt markets.Mishustin’s prediction that Russia would run a budget deficit for at least the next three years came just two weeks after President Vladimir Putin said Russia would post a surplus in 2022, contrary to most expectations.Mishustin estimated government revenues of around 26 trillion roubles ($433.6 billion) versus outlays of 29 trillion roubles for 2023 ($483.7 billion).The government deficit will come in at 1.4% of GDP in 2024, falling to 0.7% of GDP in 2025, Mishustin said.($1 = 59.96 roubles) More

Investing.com — Two Russian-backed regions in eastern Ukraine announced on Tuesday they will hold referenda on joining the Russian Federation this weekend, a move that could lead to Russia claiming that Ukraine had carried the war onto its own territory.The self-appointed governments of the so-called Donetsk and Luhansk People’s Republics, which were set up with the Kremlin’s blessing and the backing of the Russian military in 2014, both said they will hold votes from September 23rd-27th.Russian Foreign Minister Sergey Lavrov was quoted by Russian newswires as saying that the decision was “a matter for the people who live there.”The republics’ actions come barely a week after the course of Russia’s war in Ukraine shifted dramatically in Ukraine’s favor, as a successful counterattack recaptured thousands of square miles of territory around the eastern city of Kharkiv, threatening the supply lines of Russia’s troops in Donetsk, Luhansk and further to the west and south. They also coincide with a potentially momentous meeting in Moscow between Russian President Vladimir Putin and the heads of the country’s defense industry, amid speculation that Putin will call for a drastic intensification of the campaign in Ukraine.Russia’s benchmark stock index lost 9.3% in morning trading in Moscow although the ruble was stable at just below 60 to the dollar. The ruble market has been dominated by the central bank since February when it intervened heavily to stop undesired volatility. More

BENGALURU (Reuters) – The latest turmoil in major sovereign debt markets is far from over as bond strategists in a Reuters poll expected yields to stay elevated well into next year, with risks firmly skewed towards their moving higher than currently predicted.More than a decade of rock-bottom sovereign bond yields came to an abrupt end earlier this year as major central banks, which kept them artificially subdued, dumped pandemic-era policies in pursuit of price stability which so far has remained elusive.With inflation now running multiple times higher than major central bank targets, bond yields, along with policy rates, are unlikely to drop significantly in the short- to medium-term.The Sept. 12-19 Reuters poll of over 40 fixed income strategists and economists showed major sovereign bond yields trading near current levels in one, three, six and 12 months from now.However, given the backdrop of stubbornly high inflation, the bias was clearly for yields to move higher. An overwhelming 86% of strategists, 38 of 44, said that was the risk to their forecasts.The U.S. Federal Reserve, which sets the rate for the cost of capital globally by default, was forecast to go for a third consecutive jumbo 75 basis point hike on Wednesday, with a one in five chance of a bigger 100 basis point hike. [ECILT/US]”A hawkish Fed keeps our core rates strategy unchanged: stay underweight front-end and lean, long back-end with increased risks of a hard landing,” noted Mark Cabana, head of U.S. rates strategy at Bank of America (NYSE:BAC) Securities.While bond yields were forecast to remain high, much of the rise was expected to come from shorter duration securities, which are the most sensitive to central bank rate hikes. That is set to continue given the Fed is not yet close to being done.”If clients are looking to take an outright duration long, we still recommend waiting until the Fed delivers the last hike. For now, the curve is still biased flatter with a hawkish Fed,” Cabana wrote. There is no real consensus yet – but plenty of worry – about how far central banks need to go and how active they will be offloading their bloated balance sheets while raising rates.Yields on U.S, German and UK two-year notes were trading at levels not seen for at least a decade as markets and economists expect the Fed, the European Central Bank and the Bank of England to continue raising interest rates.”In the near-term the risks are to higher yields than we are currently forecasting,” said James Knightley, chief international economist at ING. GRAPHIC: Reuters Poll- Major sovereign bond market outlook https://fingfx.thomsonreuters.com/gfx/polling/gdvzyxldopw/Reuters%20Poll-%20Major%20sovereign%20bond%20market%20outlook.PNG Poll medians showed U.S. Treasury two-year notes were expected to yield in a 3.6%-3.7% range over the next six months and then dip slightly to 3.3% in a year.The story was similar on the other side of the Atlantic, with the German two-year note forecast to yield 1.51% and 1.75% in the next three to six months respectively. UK two-year gilts were forecast to yield around 3.0% over the next six months.A sharp rise in short-term borrowing costs is likely to restrict economic activity and so also prevent yields on longer-term maturities from rising too much.Benchmark 10-year bond yields for the U.S. and the UK were expected to dip below two-year notes in the next 12 months, inverting the yield curve, which in the past has forecast a recession was coming in the next 12-24 months. GRAPHIC: Reuters poll-U.S. treasury yield outlook https://fingfx.thomsonreuters.com/gfx/polling/znpnewakavl/Reuters%20poll-U.S.%20treasury%20yield%20outlook.PNG In the euro zone, the yield curve was expected to be at its flattest since the beginning of the global financial crisis back in 2007.”The recent significant rise in rates has been global in nature and has been a function of central bank hiking expectations as well as rising term premiums,” noted Priya Misra, head of global rates strategy at TD Securities.”We would argue that a faster pace of hikes by central banks and a higher terminal rate have been more dominant as evidenced by the flattening of the global sovereign curves.”(For other stories on major government bond yields and money market rates:) More