Economy

In Germany and elsewhere, leaders are growing more confident that months of work to stockpile and line up alternate energy sources may help them blunt Russia’s weaponization of exports.BERLIN — Not long after Russian forces invaded Ukraine, another mobilization began. European energy ministers and diplomats started jetting across the world and inking energy deals — racing to prepare for a rough winter should Russia choose to cut off its cheap gas in retaliation for Western sanctions.Since then, President Vladimir V. Putin of Russia has fiddled with the gas tap to Europe repeatedly. Through Gazprom, the Kremlin-controlled gas monopoly, Russia has vastly reduced supplies or suspended them for days at a time — until last week, when it announced that it would indefinitely halt flows through the Nord Stream 1 pipeline that supplies Germany, and through it, much of Europe.Yet when the blow finally came, it provoked more ridicule than outrage among European leaders, who say that by now they would expect nothing less from Mr. Putin and that they have accepted that the era of cheap Russian gas is over, unimaginable as that might have seemed just months ago.In some corners, even as Europe’s leaders scramble to blunt the blow from lower gas supplies and higher prices, there is a growing sense that perhaps Russia’s weaponizing of gas exports is a strategy of diminishing returns — and that Mr. Putin may have overplayed his hand.“It would have been surprising the other way around,” Robert Habeck, Germany’s economy minister, said this week of Russia’s announcement that Nord Stream 1 would remain shut. “The only thing from Russia that is reliable is the lies.”Even the markets seemed to take the latest disruption in stride. After rising 5 percent on the heels of Gazprom’s announcement, prices are now lower than they were at the start of last week.That does not mean that European nations are not feeling the pain, or have skirted the risk that the energy crunch could sow social unrest, fracturing their unity against the Kremlin this winter. But a lot of the damage has already been done, with gas prices several times above anything that would be considered normal and pressure mounting on consumers and businesses.The question remains, then, of just how successful the hard pivot from Russian energy actually is — whether Europe has lined up enough new sources, whether its stockpiles can get it through the winter, whether conservation efforts can make a difference and whether governments can help shield consumers from rising prices.“The only thing from Russia that is reliable is the lies,” said Robert Habeck, right, Germany’s economy minister, with Chancellor Olaf Schulz, center, and Christian Lindner, the finance minister.Tobias Schwarz/Agence France-Presse — Getty ImagesRussian officials are watching and waiting for what they believe is the inevitable collapse of European resolve as the economic pain bites.“I think that the coming winter will show how real their belief is in the possibility of refusing Russian gas,” the Russian energy minister, Nikolai Shulginov, said in an interview with the Russian state-run news agency Tass. “This will be a completely new life for the Europeans. I think that, most likely, they will not be able to refuse.”Russian state news outlets are full of reports of protests in Europe. Italians, Russian state media reported, are being told to boil their pasta for just two minutes before turning off the heat, while Germans are forgoing showers.The message: Sooner or later, the Europeans’ unity against Russia will crumble under the weight of high gas prices, while Russia’s standing has been elevated.“We have not lost anything and will not lose anything,” Mr. Putin said on Wednesday.But increasingly, Europe’s leaders are signaling that, having spent months preparing for this moment, they are ready for the showdown.“Now our work is paying off!” the European Commission president, Ursula von der Leyen, said on Wednesday in Brussels. “At the beginning of the war, Russia’s pipeline gas was 40 percent of all imported gas. Today it is now down to only 9 percent of our gas imports.”That is because European leaders — especially those from Italy and Germany, which rely most on Russian energy — have crisscrossed the globe. From Algeria to Qatar, Senegal, Congo and Canada, they have been negotiating deals to replace Russian supplies.Gazprom’s Orenburg gas processing plant in Russia. Steep energy prices netted the company $41.75 billion profit in the first half of the year — $10 billion of which went to the Kremlin.Alexander Manzyuk/ReutersGermany has also leaned heavily on Norway and the Netherlands, which agreed to extend the life of its biggest gas field to combat the energy crisis.As a result, Germany’s dependency on cheap Russian gas — once more than half its overall gas imports — decreased to less than 10 percent in August.In Italy, consumption from Moscow has dropped to 23 percent from 40 percent.Chancellor Olaf Scholz of Germany and other European leaders are defiantly claiming the end of an era.For decades, dating to the days of the Soviet Union, Moscow had insisted to Germany and others that it was a reliable energy partner, no matter the political context. But now, European leaders say, Mr. Putin has shattered that understanding.“Something that held true throughout the Cold War no longer applies,” Mr. Scholz said last weekend. “Russia is no longer a reliable energy supplier. That is part of the new reality.”That new reality, perhaps, should not have come as such a shock. Mr. Putin’s gas brinkmanship dates to 2004, when Gazprom cut deliveries to Belarus, in a battle for control of a transit pipeline into Western Europe.In 2009, as Ukraine sought NATO membership under a pro-Western president, Mr. Putin ordered a sharp reduction in gas flows through the country; after Ukraine elected a pro-Russian president a year later, the Kremlin rewarded him with a 30 percent cut in natural gas prices.And even before Russia invaded Ukraine, it reduced exports in the summer of 2021, and did not refill Gazprom-owned storage sites in Europe.A compressor station near the German-Polish border for Russian gas through the Yamal-Europe pipeline.Filip Singer/EPA, via ShutterstockSergey Vakulenko, an analyst in Bonn, Germany, who worked for years in Russia’s energy industry, said that over the last two decades Russian officials had seen the geopolitical power that the United States derived from its influence over the global financial system, and sought to harness Russia’s status as a major energy exporter in a similar way.“There was a great desire, as a superpower, to have something similar,” he said. “There was the feeling that oil and gas was the answer.”Yet Russia’s cuts in gas exports to Europe since its invasion of Ukraine are of a different order of magnitude. “This is now just blackmail,” said Mikhail Krutikhin, a Russian energy analyst. “We haven’t seen it on this scale before.”In going so far, Mr. Putin has also invited greater risks. An internal Russian government economic forecast described this week by Bloomberg News estimated that a full cutoff of gas to Europe would cost as much as $6.6 billion in lost tax revenues.But with Gazprom netting a record profit of $41.75 billion in the first half of the year — $10 billion of which it passed on to the Kremlin — that is a cost Mr. Putin has calculated to be acceptable.For Russia, oil is the biggest revenue source, and Mr. Putin may be keen to use gas as a political weapon while he can, said Thomas O’Donnell, an energy expert at the Hertie School, a public policy school in Berlin.“This is where he’s got his biggest leverage to cause the most trouble in the European Union,” Mr. O’Donnell said. He added, “It’s a lever that he knows he’s going to lose in a year — or even maybe after this winter.”And a lot may depend on the severity of the winter. Even if liquid natural gas imports to Europe from other sources continue at their record high rate, a study released this week by the research institute Bruegel estimated that a complete stop to Russian supplies would require all of Europe to cut its consumption by 15 percent.European nations that used to rely on Russian gas imports for big chunks of their domestic energy production have been racing to fill gas storage facilities. Germany’s are now at 86 percent capacity, Italy’s at almost 84 percent.In Germany, large industry players have so far managed to drop their consumption by around 20 percent. A similar amount would have to be shaved off household usage, according to German energy and economy ministry models, should Russian gas remain shut off. If households don’t cut back, Germany’s gas regulator has repeatedly warned, the option could be rationing.Lights switched off in apartments in Frankfurt. German energy officials have repeatedly warned that households must conserve energy or face rationing.Michael Probst/Associated PressEurope is aiming to have enough liquid natural gas solutions in place by next year. Germany recently signed a deal for a fifth floating L.N.G. terminal, while terminals in Belgium, France and the Netherlands are fully booked.The key to surviving this winter in the face of a Nord Stream shutdown will be how well European states work together.So far, only Hungary has signed a deal for additional supplies with Gazprom.France and Germany, in contrast, agreed this week that Paris would send any excess gas to Germany, where it is badly needed, and in return Berlin promised to send its extra electricity.The tricky issue will be what happens should more critical German industry have to cut back, and voters begin to insist supplies not be diverted to neighbors — like the Czech Republic, where 70,000 people already came out in protest of soaring prices. It is a challenge many European leaders may face this winter, warned Annalena Baerbock, Germany’s foreign minister.“That will be the central question that will really put us to the test in the coming months,” Ms. Baerbock said, at a meeting of German ambassadors in Berlin this week. “Will we be able to secure our energy supply for all people in Europe together in solidarity, or not?”Gaia Pianigiani More

Good eveningThe widening chasm in interest rate policies around the world has sparked turmoil in Asian currency markets. The yen plunged to its lowest level in 24 years against the dollar as hedge funds in Europe and the US resumed bets that the Bank of Japan’s ultra-loose monetary policy would continue.Japan’s currency declined to ¥144 against the dollar, its weakest level since August 1998. The sell-off began yesterday and continued today, leaving it down a fifth in value this year despite a shift in tone from the Japanese government, which threatened to intervene if the currency’s value fell further.The storm had been seen coming in recent weeks as the worsening economic outlook for the US economy pushed Federal Reserve officials to hint at multiple aggressive rate rises in the US in months to come. It may have even been exacerbated by the Japanese government’s decision to lift Covid travel restrictions, fuelling yen outflows by Japanese tourists visiting other countries.South Korea’s government was also talking tough today to stem a run on the country’s currency, which fell for a fifth consecutive session to hit its weakest level since the 2009 global financial crisis. The cause here was a combination of the US Federal Reserve’s aggressive monetary tightening and South Korea’s ballooning trade deficits.Interest rates will be in the news again tomorrow when the European Central Bank’s rate-setting governing council gathers to decide how much to tighten monetary policy for the eurozone. Its members are widely expected to plump for a 0.75 percentage point rise this week, equalling the highest increase in the central bank’s 24-year life.

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Concerns arise. A forceful ECB rate rise may fail to curb market tensions given the different economic factors impacting Europe, other than inflation, FT European comment editor Tony Barber notes.Interest rates are also in the news in the UK with new prime minister Liz Truss set for a policy clash with the Bank of England’s monetary policy committee, according to FT economics editor Chris Giles.An early indication of this came today when the BoE chief economist told a Treasury select committee that plans by Truss for a freeze in energy bills for households and businesses was likely to force the central bank to raise interest rates despite bringing down the inflation rate in coming months.Latest newsVladimir Putin criticises grain deal agreed with UkraineEU seeks windfall tax trigger well below market rateNorway open to discussing EU gas price cap, says PMFor up-to-the-minute news updates, visit our live blogNeed to know: the economyChina’s exports significantly missed expectations in August, as overseas demand flattened and the wave of Covid-19 lockdowns across the country disrupted domestic production and logistics. The figures were doubly disappointing because trade had been one of the few economic bright spots for the world’s second-largest economy. Latest for the UK and EuropeEurope’s metals industry bosses have warned of an “existential threat” to the sector’s future if the EU does not step in with emergency measures. An aluminium smelter in Slovakia and a zinc plant in the Netherlands have already halted production indefinitely with the threat of more closures to follow, according to Eurometaux, the nonferrous metals trade body.The long resilient UK housing market is showing signs of a slowdown as interest rate rises and inflation bite. London housebuilder Berkeley Group said this week that it is taking a more cautious approach to buying land with expectations of a property downturn growing.The country’s largest housebuilder Barratt Developments still expects house prices to grow, but more moderately, according to its annual results statement today. FT columnist Helen Thomas is more pessimistic, warning that with the era of rock bottom interest rates and government support for buyers over the housing market is now on shaky ground.Global latestCalifornia’s governor Gavin Newsom has warned businesses and households to prepare for a second wave of blackouts in two years amid the US state’s record-breaking heatwave. California’s grid operator placed the state on its highest alert setting, prompting San Francisco-based Pacific Gas and Electric to warn about 525,000 customers to prepare for potential rolling power outages.Argentina wants to help ease global food and energy shortages by raising oil and gas production and incentivising exports of grain from the country, economy minister Sergio Massa told the FT’s Michael Stott. The comments, made on the first day of a visit to the US, will be welcomed by the White House, which needs friendly nations that can alleviate food shortages created by the Russian invasion of Ukraine. Argentina, for all its economic and political problems, is a natural resources powerhouse.Need to know: businessSpain’s biggest oil company Repsol has taken an innovative route to helping cut carbon levels by selling a 25 per cent stake in its exploration and production business in order to fund renewable investments. Repsol said the deal, which values its upstream business at about $19bn, would “crystallise value” in the division while freeing up capital for greater investments in greener forms of energy.Revolut has taken cost cutting to a new level by pulling graduate job offers just days before the successful candidates were due to start work with the financial technology company. Fintechs have had to make significant cuts to counter the impact of the economic downturn and interest rate rises, with investors now far less willing to bankroll growth without profits. At least Revolut hire received a work laptop before being told their offer had been revoked.Ocado Retail has appointed Hannah Gibson as its new chief executive as the pandemic-fuelled boom in online grocery shopping fades, an additional challenge as she seeks to meet the company’s growth ambitions amid a cost of living crisis when consumers are tightening their belts. Elon Musk has added world war three to his list of excuses for pulling back from his $44bn takeover of Twitter. The claim was made in texts between the billionaire entrepreneur and his bankers revealed in a court hearing.The World of WorkOne of the bright spots of 2022 has been the jobs market, which remains buoyant for those seeking employment. How long that will last is uncertain; however there are good indications that business school graduates will be in demand for some time to come, according to the FT’s report on Masters in Management degree courses.Getting the most out of hybrid workers, balancing time spent in the office with working at home, is the greatest management challenge of this moment, according to Stefan Stern, author of ‘How to Be a Better Leader’ and visiting professor at Bayes Business School, City, University of London.Get the latest worldwide picture with our vaccine trackerSome good news . . .We live in remarkable times for medical breakthroughs, as the rapid development of Covid vaccines has proved, and this is true for endangered animal species as well as humans. Lucas, a prominent member of the San Diego Zoo’s African penguin colony, has been given a new lease of life with a pair of orthopaedic boots to allay a degenerative foot condition known as bumblefoot.

Lucas, the African penguin, shows off his new footwear to his keepers © San Diego Zoo More

The writer is vice-provost for global initiatives at the University of Pennsylvania. Scott Moore and Amy Gadsden also contributed to this articleChina’s catastrophic handling of surges in Covid-19 cases signals that it is turning inward, with worrying implications for global peace and prosperity. Yet bad as this inward turn is for the world, it will be even worse for China. Beijing’s approach to fighting Covid has been a mirror image of Washington’s. Early in the pandemic, as the US struggled with public health debates about lockdowns and masking policy, China implemented restrictions that curbed the spread of the virus. The Chinese economy quickly recovered from its initial dip, and there was popular support for the government’s zero-Covid policy. But the emergence of the Omicron variant changed all that. The US and Europe marshalled scientific capacities to produce highly effective vaccines that are allowing the world to transition to endemic Covid. In almost every country except China, people are increasingly leading relatively normal lives. China’s vaunted biotechnology industry failed to produce an effective vaccine. And its pharmaceutical industry failed to develop a life-saving antiviral such as Pfizer’s Paxlovid. Perhaps most damaging of all is Beijing’s insistence on punitive lockdowns. Rather than phasing out harsh public health measures, Beijing is extending them. Today, over 65mn people are under lockdown, with more than 20 million in Chengdu alone, despite Monday’s fatal earthquake. Meanwhile, the government continues to refuse to buy non-Chinese vaccines and therapeutics or abandon lockdowns because doing so would acknowledge its own failings.The zero-Covid policy is imposing costs that go well beyond the public health sphere. Youth unemployment is nearly 20 per cent. Exports are dropping. And in June, the IMF and World Bank estimated that strict Covid restrictions are likely to shave a full point off China’s 2022 growth target. And with the country accounting for a full fifth of global growth, a slump there will heap significant economic pain on the rest of the world. Since its admission to the World Trade Organization in 2001, China’s economy has grown tenfold, largely on the strength of growing exports and foreign investment. But despite the clear historical lesson that China benefits from openness to the world and suffers from turning inward, Beijing seems bent on pulling back from global engagement. Consequently, the world must prepare for the disruption that its inward turn might cause. For foreign companies, depending on China is increasingly risky, and more are shifting production and supply chain links to countries such as Vietnam, Thailand, India, Mexico and even home. Meanwhile, for universities and other non-governmental organisations, Beijing’s inward turn will force new thinking. Observers increasingly fear the Communist party may actively discourage students from going abroad. Chinese student enrolment, often critical to US undergraduate colleges and professional masters degree programmes, is likely to suffer. Geopolitically, China’s turn inward means it will endeavour to showcase its accomplishments and belittle the west. In some cases, this will be relatively benign. Just as in the cold war with the Soviet Union, we could see a renewed space race played out in Mars exploration, Moon landings and space stations. But we can also expect rising tensions over Taiwan, multiple tiny islands claimed by Japan, Taiwan and China, and other faultlines. For much of the world, the end of the pandemic is in sight. But for China, controlling Covid will remain the overriding priority, at great cost. The task now for the US and the rest of the west will be ensuring that the price is not prohibitively high, even if the Chinese government imposes terrible costs on its own citizens. More

Canada’s central bank raised its key interest rate by 0.75 percentage points to 3.25 per cent and warned of further increases in its fight to prevent high inflation from becoming entrenched.The rate rise brings the key interest rate above 3 per cent for the first time since mid-2008 and into so-called restrictive territory, where monetary policy hampers economic growth. “Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further,” the Bank of Canada said in a statement on Wednesday. “Quantitative tightening is complementing increases in the policy rate.”The BoC said it would assess how much higher interest rates would need to rise to return to its inflation target of 2 per cent.The rate increase is the central bank’s fifth this year, and was in-line with economists’ expectations, according to Refinitiv polling. It brings the cumulative tightening so far this year to 3 percentage points, “the fastest pace since the mid-1990s,” Bank of Montreal economist Benjamin Reitzes said.BoC governor Tiff Macklem had previously spoken about a so-called soft landing where the bank would attempt to curb inflation without causing a recession. The central bank omitted such language in a short release on Wednesday.Canada’s inflation rate moderated slightly in July as a result of lower petrol prices, but consumer prices were still up 7.6 per cent that month against a year earlier, Statistics Canada reported last month.The central bank said it remained concerned about “a further broadening of price pressures”, particularly in services. The bank’s core measures of inflation moved up to a range of 5-5.5 per cent in July.“The longer this continues, the greater the risk that elevated inflation becomes entrenched,” the bank said.Officials highlighted that indicators of domestic demand — consumption and business investment — remained “very strong”.The Wednesday rate rise comes after the BoC caught some market observers off-guard in July by raising its key interest rate 1 percentage point to 2.5 per cent. This was the largest rate increase since 1998.“This is a short and sweet statement that buys time for them to reassess the outlook with new forecasts and surveys of inflation expectations into the October decisions,” said Derek Holt, the head of capital markets economics at Scotiabank.Scotiabank and the Bank of Montreal both expect a 0.5 percentage point rate rise from the BoC at its next scheduled meeting on October 26. More

These are extraordinary times and they call for extraordinary measures: gas price caps, cash for power producers, massive handouts to consumers. That’s all fine, depending on the detail. What’s concerning is that emergency actions might lay the ground for trying to run a wartime state-led economy at times of economic peace. In both the EU and the US, the forces of heavy handed and possibly counterproductive industrial policy are massing.To be frank, the common invocations of war (France’s President Emmanuel Macron used the term over the summer) aren’t always helpful. The most destructive European conflict since the second world war is taking place on the EU’s eastern border. But the direct economic effect on most of the rest of Europe is largely limited to gas prices and associated shocks, particularly the cost of energy-intensive fertiliser and initially food, though global food prices are falling back. These can cause serious hardship, of course. But the solutions can be largely temporary and precisely targeted.This is not a total war requiring a fundamental economic shift towards producing “guns not butter”. A rise in defence spending would be helpful, obviously — and this was the context of Macron’s remarks. But that’s 1 or 2 per cent of gross domestic product, not the kind of thing that needs government ministries to assume sweeping powers to direct production.In this context, the drift towards creating expansive tools of intervention in the US and the EU is concerning. The Biden administration has discovered the proverbial hammer with a magical ability to transmute all problems into nails in the form of the Defense Production Act, which it has used to procure such military necessities as baby formula.The EU’s interventionists are similarly on manoeuvres. A proposed Single Market Emergency Instrument (SMEI) allowing the European Commission to intervene to keep essential goods flowing during crises is due to be signed off by commissioners next week, and EU officials say goods such as fertiliser are an obvious target.As it happens, the draft version of the SMEI has some potentially very useful features. One is a set of new tools to deter member state authorities blocking the movement of vital goods within the EU during a crisis, a tactic used over personal protective equipment in the early months of the pandemic. Another good idea would allow the Commission to direct member states to build up stockpiles and reserves, which Germany is belatedly rushing to do with gas now.But the plan also contains a good dose of DPA envy in the form of provisions allowing the EU to override private contracts and put itself at the front of procurement queues for essential goods. This clearly bears the imprint of internal markets commissioner Thierry Breton, fresh from driving through the €43bn Chips Act to subsidise EU semiconductor production. Like many of his ideas, it has the potential to create problems.As the economist Chad Bown has pointed out, the limitations of the DPA were evident during the Covid vaccine drive of 2020-21. The US was quick off the mark with a massive procurement programme stimulating the creation of jabs. But that allowed the government to jump the queue rather than expanding capacity, and constrained companies to produce only for the US market. By the end of 2021, because of the DPA’s inflexibility, US vaccine production was far behind that of the EU and India.Imagine this approach being used with nitrogen fertiliser. The issue currently isn’t really a serious market failure in terms of the price mechanism not working. It’s a massive cost increase in the main input of fertiliser production, natural gas. If there’s a problem with unaffordability, the government can give temporary financial help to buyers and longer-term subsidies for stockpiling. It doesn’t have to crash in with its own procurement, still less try to micromanage the system on a longer-term basis.To the EU’s credit, it has managed to resist the more destructive impulses of US industrial policy in recent years, particularly those involving restrictions on trade. Brussels created the capacity for limiting Covid vaccine exports but it was used as a temporary threat more than a sustained attempt to manage trade. As with many of the EU’s new instruments to intervene in the single market and trade, the impact of the new emergency tool will depend on the discretion with which it is used. But it’s a worry if the official instinct is to assume Europe’s economy is in permanent crisis and intervene rather than getting open markets to do their work.European economies, still less the US, are not on a total war footing. They have a particular problem with the costs of energy and energy-intensive goods, caused by a specific issue with gas supply. They can cushion the immediate impact and get to work on building resilience to future energy shocks without resorting to the kind of meddling that is more likely to do harm than [email protected] More

The Bank of England’s chief economist said on Wednesday that plans by Liz Truss for a freeze in energy bills for households and businesses was likely to force the central bank to raise interest rates despite bringing down the rate of inflation in the months ahead. Asked by MPs on the House of Commons Treasury select committee specifically about whether the package would mean higher interest rates, Huw Pill said: “In response to the question, will fiscal policies generate inflation — we are here to ensure that they don’t generate inflation . . . Our remit is to get inflation back to target.” “We do have work to do,” he added.The comments by Pill, who was appearing alongside governor Andrew Bailey and two other Monetary Policy Committee members, came after they were repeatedly asked by MPs to comment on the new UK prime minister’s expected £150bn-plus rescue package that will be met by government borrowing.Bailey declined to comment specifically on the expected bailout explaining that the government had yet to announce the measures, which Truss confirmed she would outline on Thursday. But he added: “We have to take the actions we have to take to hit the inflation target, hard as though those may be in terms of the consequences,” explaining the bank’s focus was on bringing inflation back down to its 2 per cent target. Pill told the committee that the energy crisis was hitting households hard. “High gas prices have an income implication for the UK,” adding that if the pain was absorbed by increased public borrowing it would have two effects on inflation.In the coming months, the effect of freezing energy bills would probably stop inflation rising much further this autumn from the 10.1 per cent level it reached in July, he said. “This will lower headline inflation relative to what we were forecasting in our August report.”But he added that interest rates did not depend on price movements in the weeks ahead. “That very short term implication on inflation may not be the most important thing for the monetary policy point of view. For the monetary policy point of view it is what is the implication of the package of measures . . . for inflation at longer horizons,” Pill said.He added that the likely result of freezing energy bills and cutting taxes would be to raise spending in the economy and this would “probably lead to slightly stronger inflation”. When asked whether a recession was necessary, all four of the BoE officials blamed Russian president Vladimir Putin’s invasion of Ukraine and his decision to cut off gas supplies to western Europe for the downturn they expect this winter in the UK. Bailey, however, accepted that the MPC had not tried to offset a recession by lowering interest rates in August because his job was to worry about prices.

There were some differences of view among the BoE officials about how fast interest rates needed to rise to offset the inflationary threat. Catherine Mann, one of the external MPC members, said faster rate rises would help to lower inflation expectations, which she said had already risen too far. Another external MPC member, Silvana Tenreyro, however, said that even if the BoE had held interest rates at 1.25 per cent in August rather than raising them to 1.75 per cent, that was likely to be enough to bring inflation back to target in the medium term. She has been in a minority of one on the committee in urging caution and added that raising interest rates was best to be done “slowly when there is a lot of uncertainty”. More

Gabriel Sterne is head of EM macro at Oxford Economics and a former senior economist at the IMF. Here he argues that the Fund’s governance badly needs an overhaul.Despite the IMF’s “lived experience” of 66 years of crisis resolution, its policy response to the biggest breaking wave of sovereign debt crises since the 1980s is falling short of being timely, efficient, and fair for debtors and creditors alike.When it receives a loan request from a stricken country, the Fund should respond according to the golden guidelines of crisis resolution:1. Establish the resource envelope through a debt sustainability analysis (DSA).2. Distribute haircuts fairly across creditors, commensurate with debt exposure.3. Use the IMF’s lending into arrears (LIA) policy to deal with holdout creditors. That means the Fund can pursue a lending program to a country in default, as long as the country continues to engage in good-faith negotiations with that creditor.A couple more crucial points should ensure the resolution process minimises the pain and best allows debtors and creditors to move on from the debacle. A case-by-case approach has long been appreciated as the best way to deal with the complexities of circumstances (and, of course, resist costly procrastination).Some creditors are more equal than othersWhich creditors are most likely to be the main obstacle to crisis resolution nowadays? Probably not bondholders any more. Market discipline does most of the job ­— a bond price of 50 per cent below par (for example) is normally ample to get most private creditors to accept a 20 per cent haircut — and clauses in bond contracts can nowadays generally mop up any unreasonable resistance. Restructuring private sector debt does still present some challenges, for example when debt has been collateralised. But hopefully that’s an issue lawyers can sort out. Still, one key deficiency in the crisis resolution toolkit appears impossible to resolve. Namely, the IMF’s role of honest broker crumbles whenever the world’s biggest economies have a stake in the game. It looks like simply a matter of bad governance: a few major creditors have undue influence over the institution charged with ensuring fair treatment of all creditors and the debtor. How could that possibly work? Specifically, the US, China, and the eurozone are the largest shareholders at the Fund and have a virtual veto over IMF board decisions, which they are willing to use whenever it suits them. For instance, the US has had a major influence over the IMF’s Argentine misadventures, and Europe had a poisonous influence on the Fund decisions during the eurozone crisis.And now its China’s turn to be treated too softly by the IMF.Don’t mention China!The IMF set out its stall on crisis resolution in sponsoring the Common Framework, launched in November 2020. It was a much-trumpeted initiative. Given the tools already at the Fund’s disposal though, it looks more like a solution in search of a problem. And it probably reflects the IMF’s attempt to never waste a good crisis to achieve its own longstanding objective of getting China’s massive EM lending programmes to be more in line with the Paris Club of mainly western government creditors.But it may go down in the annals of history as the latest attempt by the IMF to placate a key shareholder (China) at the expense of crisis resolution best practice.Currently, the dollar-denominated debt of around 25 emerging market sovereigns is trading at yields of more than 1000 bps, and most of these distressed economies have significant shares of their debt in loans from China.

Sure, the involvement of China has sometimes led to policy procrastination even before requests for help arrive in the IMF’s inbox. China’s inclination has been to provide IMF-lite emergency funding to the likes of Sri Lanka, without any of the policy adjustment traditionally demanded by the Fund. In Sri Lanka’s case that only made the inevitable more painful. The IMF has little or no influence over this stage of procrastination.But once a stricken country enters a Fund-supported program, it needs a strong backbone to stand up to holdout creditors; and China’s loans present a major challenge to efficient crisis resolution. A brilliant study of China’s secretive loan contracts by Anna Gelpern, Sebastian Horn, Scott Morris, Brad Parks and Christoph Trebesch highlights clauses that would appear objectionable to many observers — such as seniority to the Paris Club and termination of diplomatic relations in the event of default, to name two.These clauses may have more bark than bite. It’s possible they may serve (in legalistic terms) expressive purpose — in other words, to dissuade the debtor from taking steps adverse to the creditor’s interest. As such, the clauses may not be legally enforceable and perhaps wouldn’t torpedo the IMF’s lending into arrears (LIA) policy should China strive to become a holdout creditor.Good governanceA fully-independent IMF would have made it clear it stood ready to implement LIA, which enables it to lend to stricken countries even when they are in arrears to holdout creditors. But politically it is way easier for the Fund to use its LIA policy to deal with private sector holdouts rather than major governments who are its main shareholders.In May the Fund’s revamped its guidelines for “lending into arrears to the official sector” (LIOA). These may have gone slightly under the radar, but are important because they lay out the cryptic compromises the Fund needs to make in dealing with an unreasonable official lender. The two main criteria under which the IMF can lend when there are arrears to China or any other non-Paris Club bilateral creditor are:If the official creditor (eg China) consents! There are some circumstances in which this is less ludicrous than it sounds. The IMF lent to Iraq after its debt restructuring, even Iraq was in arrears to Kuwait. Having been invaded by Iraq many years previously, Kuwait could tolerate arrears but providing debt forgiveness was too much.If the bilateral creditor (eg China) doesn’t consent but the IMF Board decides the decision to provide financing despite the arrears would not have an undue negative effect on the Funds’ ability to mobilise official financing packages in future cases.For most readers, the latter criteria wouldn’t be an issue. After all, if the IMF is to function properly, you’d think it would actively discourage financing from a creditor inclined to delay the IMF mobilising official financing packages.But to those familiar with the Fund, the drafting could be enough to provide China an effective veto over IMF lending where there are arrears to the Chinese state, and therefore drive the Fund to risk solutions such as the Common Framework, which appear prone to procrastination risk.No wonder progress has not been timely, efficient or fair.The IMF has called for the framework to be stepped up. But the fact it doesn’t attach any blame to anyone in particular suggests to me that stepping down the framework might be just as valid a solution. Just get on with it. More restructuring will happen anyway — if the borrower can’t pay, then at some point they won’t.It’s encouraging that Zambia finally appears on the road to a restructuring package, and Sri Lanka appears close. But much more needs to be done to ensure other sovereigns are able to move on from crisis.During the Greek shambles I argued in FT Alphaville for a Transparency Revolution at the IMF. No surprise that it never happened. And the Fund, despite writing so much on crisis resolution since then, has never had the courage to reflect deeply on its own governance as a barrier to efficient solutions.China has not made crisis resolution easy, but there is a bigger issue. Every creditor tries to secure the best deal for itself, and the governance should be in place to squash such attempts. But unless the IMF reflects publicly about its own governance issues — and demonstrates a willingness to stand up to its own major shareholders — its legitimacy as a trusted vehicle for crisis-resolution will continue to be undermined.  More

Investing.com — Europe stepped up its preparations for a winter without Russian energy supplies on Wednesday, proposing price caps and demand suppression for electricity, along with a price cap on imports of Russian natural gas. Speaking two days ahead of a meeting of EU energy ministers, European Commission President Ursula von der Leyen laid out five proposals to address the looming crisis. The proposals, which will need the approval of the EU’s member states to take effect are: 1. A mandatory target for cutting electricity demand at peak hours, which typically generate the highest prices. 2. A cap on revenues for non-fossil fuel power generators, restricting the scope of renewable generators and hydropower companies to make excess profits as ‘price-takers’ on a wholesale market where reference prices are usually set by the price of gas-powered electricity. 3. A “solidarity contribution” (in other words, windfall taxes) levied on the excess profits of fossil fuel companies. 4. Liquidity support for participants in the bloc’s power markets, who have been hit with a massive rise in collateral requirements as the price of their future buying commitments has exploded. This will include a temporary relaxation of the EU’s state aid rules. 5. A cap on the price of natural gas imports from Russia. “The objective here is very clear,” von der Leyen said. “We must cut Russia’s revenues which Putin uses to finance this atrocious war against Ukraine.”The measures represent another escalation in the ‘energy war’ between Russia and Europe that was triggered by Russia’s invasion of Ukraine in February. They come only days after G-7 ministers agreed to impose a price cap on Russian oil exports, trusting to western dominance of maritime insurance markets to enforce it. Russia had suspended all shipments of natural gas to Germany through the Nord Stream pipeline as a result, raising the likelihood that Europe will have to get through the coming winter without any supplies of Russian gas.Russian President Vladimir Putin raised the stakes again earlier on Wednesday, telling a conference in Vladivostok in Russia’s Far East that the country would not supply any fuel of any sort to Europe if it tried to impose a price cap on its gas exports. “Will there be any political decisions that contradict the contracts? Yes, we just won’t fulfil them. We will not supply anything at all if it contradicts our interests,” Reuters quoted Putin as saying. “We will not supply gas, oil, coal, heating oil – we will not supply anything.” Europe usually imports about 40% of its gas and 30% of its oil from Russia.Von der Leyen noted that the small amounts of Russian gas still reaching the EU, chiefly through the Yamal-Europe pipeline, represent only 9% of current imports. The bloc has also made better progress than first seemed likely in filling its storage facilities ahead of the peak winter demand season. According to data from Gas Infrastructure Europe, they are now 82% full, having reached the Commission’s 80% target almost two months ahead of schedule.  More