Economy

Sri Lanka’s finance ministry has suspended payments on its government bonds, breaking what it called its “unblemished record of external debt service” in a deepening economic and currency crisis.In a statement on Tuesday, the ministry said keeping up with repayments had “become impossible”, adding that “although the government has taken extraordinary steps in an effort to remain current on all of its external indebtedness, it is now clear that is no longer a tenable policy”. It described the suspension as a “last resort”.A “comprehensive restructuring of these obligations” was needed, the ministry said, adding that it had turned to the IMF for help in making a recovery plan and for financial assistance. Meetings with the IMF are due to start this month. Confirmation that Sri Lanka could not service its debt pushed down their prices from already depressed levels, leaving a $1bn dollar bond maturing on July 25 further below face value at a record low of less than 47 cents on the dollar. The country has a total of about $35bn in external government debt outstanding, with $7bn in payments due this year. The IMF said last month that Sri Lanka’s public debt was at “unsustainable levels”.The finance ministry advised creditors they could calculate Sri Lanka’s missed payments after Tuesday, and add interest, for eventual repayment. It committed to “good faith discussions” with other countries that had lent it money, the largest of which was China, as well as with commercial creditors.Sri Lanka’s foreign reserves fell to under $2bn in March, and a dollar shortage has significantly cut imports, leading to shortages of vital commodities such as fuel. The Sri Lankan rupee has fallen more than 37 per cent against the dollar this year, making it the world’s worst-performing currency.

Colombo has been embroiled in a political crisis this month, after widespread protests against the government prompted a mass cabinet resignation. Protesters have blamed President Gotabaya Rajapaksa’s government for mishandling Sri Lanka’s economy and causing the crisis. The finance ministry said the hit to tourism from Covid-19 and the surge in commodity prices caused by the Ukraine crisis had “eroded Sri Lanka’s fiscal position”.Sri Lankans have been suffering from soaring inflation, 13-hour electricity blackouts and shortages of basic commodities. But Prime Minister Mahinda Rajapaksa, brother of the president and a former president himself, chastised demonstrators in a speech on Monday.“Friends, every second you protest on the streets our country loses opportunities to receive potential dollars,” the prime minister said.The statement from the finance ministry comes after Sri Lanka’s central bank surprised markets with a 7 percentage point rise to the country’s benchmark policy rate on Friday in a bid to curb inflation. But analysts had warned the move was not sufficient to alleviate concerns over a potential default. More

European shares fell on Tuesday, while government debt came under pressure and oil rebounded, as investors prepared for the latest US inflation figures and weighed up what it might mean for central bank interest rate policy.The regional Stoxx 600 index declined 0.6 per cent, Germany’s Dax fell 1 per cent and France’s Cac 40 lost 0.8 per cent. London’s FTSE 100 fell 0.4 per cent. European bank stocks were among the worst performers, with shares in German lenders Deutsche Bank and Commerzbank both down more than 8 per cent. Andrew McCaffery, global chief investment officer at Fidelity International, said he was “particularly cautious” on European equities and the euro — down 0.1 per cent against the dollar on Tuesday — given the “likelihood” of recession. The war in Ukraine would weigh on economic growth and stoke inflation, he added, leaving central bank policymakers and markets facing “an extremely complex picture”.Investor attention will be focused on the latest US inflation measurements due out later on Tuesday, with the consumer price index for March forecast to have risen 8.4 per cent year over year, according to a Reuters poll. “This kind of number should support market expectations that the [US Federal Reserve] will take the policy rate towards the 2.5 per cent area by year end,” analysts at ING said in a note. The Fed last month lifted its benchmark interest rate a quarter of a percentage point to 0.5 per cent, the first increase since 2018.Selling of US government debt moderated on Tuesday ahead of the inflation reading. The yield on the 10-year US Treasury note, which underpins global borrowing costs, rose 0.01 percentage point to 2.79 per cent, hovering close to its highest level since late 2018. The yield on the interest rate-sensitive two-year note rose 0.01 percentage point to 2.52 per cent. The yield on the 10-year German Bund, a proxy for European borrowing costs, added 0.03 percentage points to 0.84 per cent, its highest level since 2015. The yield on the government note stood at about minus 0.12 per cent at the beginning of the year. US futures pointed lower, with contracts tracking Wall Street’s S&P 500 and the technology-focused Nasdaq 100 both down. White House press secretary Jen Psaki told reporters on Monday that March’s headline CPI inflation was expected to be “extraordinarily elevated”, pushed higher by rising prices for energy since Russian president Vladimir Putin’s invasion of Ukraine in late February. So-called core inflation, which strips out volatile food and energy prices, was forecast to come in lower, she added.The average cost of a barrel of oil in March was about $110, Psaki noted, up from about $75 at the beginning of the year. Oil prices, which fell on Monday, rebounded back above $100 a barrel on Tuesday. Brent crude, the international oil benchmark, rose 4.3 per cent to $102.71 a barrel, while US marker West Texas Intermediate climbed 3.5 per cent to $97.63In Asia, Hong Kong’s Hang Seng index closed up 0.5 per cent. China’s CSI 300 added 1.9 per cent. Japan’s Topix shed 1.4 per cent and South Korea’s Kospi declined 1 per cent. More

“It’s a manoeuvre by Emmanuel Macron to try to win over, or at least to mitigate the opposition of the left-leaning voters”, said Le Pen on Tuesday, speaking in an interview with France Inter radio. Campaigning in France’s former industrial heartland, Macron on Monday said he was prepared to readjust his planned pension reform, which is at the core of his programme for re-election. “I am ready to change the timeline and say we don’t necessarily have to do a reform by 2030 if I feel that people are too anxious”, Macron said. He was also prepared, he said, to “open the door” on pushing the country’s retirement age from 62 at the moment to 64, rather than 65, his initial proposal. “There is nothing to expect here from Emmanuel Macron. He will go all the way to the end with obsession, because it’s a reality that the minimum (retirement) age of 65 is his obsession”, said Le Pen. French Finance Minister Bruno Le Maire, an ally of Macron, told broadcaster CNews that Macron had not changed his plans on the pensions reform and is still “totally determined” to carry out the reform. “We will stick to (the minimum age of) 65, but there will be options for discussing details,” said Le Maire. Manuel Bompard, the head of the campaign of far-left candidate Jean-Luc Melenchon, who came in third in the first round, said he did not agree with Macron’s or Le Pen’s retirement proposals.”I tell Macron this: If he really wants to appeal to our voters … he has to make a clear commitment,” he said.Speaking on Public Senat television, Bompard pointed to the possibility mentioned by Macron of carrying out a national referendum on the minimum pension age.An Ipsos-Sopra Steria poll cited by Public Senat said 23% of Melenchon voters would now support Macron, 15% Le Pen and a further 62% did not take a position.Macron and Le Pen traded blows on Monday as they sought to appeal to left-leaning voters who now face the tough decision whether to give their vote to a far-right populist or to a liberal many opponents branded a “president of the rich”. Election Take-A-Look: More

LONDON (Reuters) -Supply chain snags hammered first-half profit at ASOS (LON:ASOS) and the British online fashion retailer warned its expectations for a much better second half could be disrupted by surging inflation. Shares in the company, which sells fast-fashion aimed at 20-somethings, dropped as much as 6% in early Tuesday trading after it reported an 87% plunge in first-half adjusted earnings. However, they bounced back to last trade over 2% higher after it said stock levels – heavily affected in recent months by industry-wide supply chain problems – were much improved. ASOS, which had warned on full-year profits in October when parting ways with then CEO Nick Beighton, said it was sticking with its latest annual guidance – excluding the already-flagged impact of quitting Russia following the invasion of Ukraine. But it cautioned there was a greater risk to forecasting that normal as the full impact of recent inflationary pressure on consumers was yet to be felt.Chief operating officer Mat Dunn said he expected analysts to trim about 14 million pounds ($18 million) from full-year profit guidance of 110-140 million pounds, to take account of the withdrawal from Russia. ASOS made an adjusted profit of 193.6 million pounds in its 2020-21 financial year.The company said its forecasts reflected an improved stock profile, the easing of comparative growth rates, the return of event and holiday-led demand, increased marketing investment and improved lead-times as supply chain pressures ease.”We’ve opened the (spring/summer) season with a very good level of stock,” Dunn told Reuters.”There is some uncertainty around (supply from) China, but we’re in a much better situation than we were at the start of autumn/winter.”Dunn said ASOS had raised prices by a low to mid-single percentage in January, but not since.”We’re making sure that our value proposition is as attractive to customers as it can be and we’ve definitely absorbed some of the inflationary pressures in order to do that,” he said.Dunn said the process to recruit a new CEO was ongoing.Adjusted profit before tax was 14.8 million pounds for the six months to Feb. 28, down from 112.9 million pounds a year earlier. Revenue was up 4% to 2.0 billion pounds.($1 = 0.7685 pounds) More

SINGAPORE (Reuters) – Singapore’s economy likely expanded at a slower pace in the first quarter, but is expected to stay on its recovery path this year as border controls are relaxed further, giving the central bank room to tighten monetary policy to tackle inflation.Advance data on Thursday is seen showing gross domestic product (GDP) expanded 3.8% in January-March from a year ago, according to the median forecast of 15 economists in a Reuters poll, as the manufacturing sector comes off a high base and amid travel curbs to curb a COVID-19 outbreak driven by Omicron.Manufacturing remained the main growth engine, helped in part by demand for semiconductors, analysts said. The city-state’s economy expanded 6.1% year-on-year in the fourth quarter of 2021. Singapore’s recent easing of border controls and COVID-19 rules are expected to boost services from the second quarter, partly offsetting the negative impact of the Ukraine-Russia war, supply disruptions and rising energy prices, Maybank economists Chua Hak Bin and Lee Ju Ye said.The trade-reliant economy grew 7.6% last year, the fastest pace in a decade, recovering from a 4.1% contraction in 2020. The government had projected GDP growth of 3-5% in 2022, though this was before Russia began what it calls “a special military operation” in Ukraine on Feb. 24.Inflation has become the key risk this year and while economists expect GDP to continue to grow they are watching to see whether official forecasts are revised when the central bank gives its monetary policy statement, also on Thursday. Sixteen economists expect the Monetary Authority of Singapore to tighten its policy, but are divided on how aggressive it will be and which of its settings will change.Instead of interest rates, the MAS manages policy by letting the local dollar rise or fall against currencies of its main trading partners within an undisclosed band, known as the Nominal Effective Exchange Rate (NEER). It adjusts its policy via three levers: the slope, mid-point and width of the policy band.DBS Senior FX Strategist Philip Wee expects a third steepening in the slope of the SGD NEER policy band to 3%.”We expect the authority to keep the door open for another tightening in October. The MAS could re-centre the policy band higher six months after returning to a 3% slope, as they did in April 2008 and April 2011,” he said. More

Like many Germans, Otmar Issing is alarmed by the surge in inflation to 40-year highs in his country and worried by the “misguided” response of the European Central Bank. But, as one of the founding fathers of the euro, Issing’s complaints carry more weight than most of his countrymen.The ECB’s first chief economist when it was created in 1998 said the central bank was suffering from a “misdiagnosis” of the factors behind the surge in prices, having “lived in a fantasy” that played down the danger of inflation spiralling out of control.“The ECB has contributed massively to this trap in which it is now caught because we are heading towards the risk of a stagflationary environment,” said the 86-year-old, who is credited with shaping the central bank’s use of money supply measures to decide interest rate policy.His criticism that the ECB is being too slow to raise interest rates underscores the fractious debate in Germany and much of the 19-country euro area about how fast it should reverse eight years of ultra-loose monetary policy, including negative rates and €4.9tn of bond purchases.After struggling to lift inflation up to its 2 per cent target for the past decade, the ECB is now confronting the opposite problem. Consumer prices have been shooting upwards as the European economy rebounds from the deep recession caused by the pandemic. In March, eurozone inflation hit a new record of 7.5 per cent. “Inflation was a sleeping dragon; this dragon has now awoken,” said Issing, speaking to the Financial Times at his home in Würzburg. The ECB’s governing council meets this week in Frankfurt to discuss whether to speed up a plan for gradually withdrawing its stimulus by ending net bond-buying in the third quarter. Some of its policymakers argued at its meeting last month for an earlier end to its bond purchases to prepare the ground for raising interest rates this summer.Many central banks, including the US Federal Reserve and the Bank of England, have already stopped buying bonds and started raising interest rates. “It is obvious the ECB is late to react, while the Fed might be even more behind the curve,” said Issing, who has been president of the Centre for Financial Studies at Goethe University in Frankfurt since leaving the ECB in 2006.His former colleagues at the ECB predict that many of the factors pushing up the price of energy, food and other commodities will fade quickly from the end of this year, helping inflation to fall back below 2 per cent by 2024.But Issing said this ignored the risk that the pandemic and Russia’s invasion of Ukraine will keep inflation higher by reversing 30 years of globalisation as trade tensions rise, companies make supply chains more resilient and Europe accelerates its switch away from fossil fuels.“The ECB relied on its forecasting model and this model cannot give the right signals because it is based on the past and cyclical experience, and the pandemic did not cause a cyclical downturn,” said Issing.“You need a much broader approach to explaining inflation in a time of structural changes. If you have a misdiagnosis, of course, you have a misguided policy.” Other German financial figures have stepped up their criticism of the ECB. Christian Sewing, chief executive of Deutsche Bank, Germany’s biggest lender, said last week that soaring inflation was “poison for the stability of our economy and society” and it was “urgent” for the ECB to act.Axel Weber, the outgoing chair of UBS and former head of Germany’s central bank, told financial newspaper Handelsblatt it was “incomprehensible” the ECB was taking so long to turn its policy around. Bild Zeitung, the country’s top-selling tabloid paper, has started referring to ECB president Christine Lagarde as “Madame Inflation”.Germans have a deep-seated fear of inflation, which Issing said “goes back to the hyperinflation in the 1920s and currency reform in the 1940s . . . It is almost entrenched in the genes of the public”. But he said the concerns were “not just the Germans being pathological about inflation — you can observe this in all countries”.Several ECB policymakers, including chief economist Philip Lane, have said they can do little to address external factors driving up energy prices, while they fear raising interest rates too soon could precipitate a severe downturn — especially if war in Ukraine disrupts the flow of oil and gas from Russia to Europe.Both Lagarde and Lane have said the ECB could even introduce a “new instrument” to support countries facing a sharp increase in borrowing costs as rates rise. Their staff are already working on such a “crisis tool” to make targeted purchases of sovereign or corporate bonds if needed.Issing agreed now was “not the time to raise interest rates to elevated levels”. But he said the ECB had already kept its stimulus in place for too long, which was “very hard to defend” given the rebound in growth and inflation while unemployment has fallen to a record low.

“The ECB lived in the fantasy of continuing this policy without any negative consequences,” he said. “They would be in a better, or at least a less bad, situation if they had started to normalise policy before, the war should not distract from this fact.”The prospect for a “stagflationary” situation of rising inflation and slowing growth is “the worst combination” for a central bank, said Issing, who contrasted monetary policymakers’ responses to the two oil shocks of the 1970s. “The Bundesbank tried to control inflation and the consequence was moderate inflation and a mild recession,” said Issing, who joined the German central bank in 1990. But “the Fed waited too long” and the US had “double-digit inflation and a deep, deep recession”. More

Thomas Piketty put inequality in the advanced market economies at the heart of political debate. The French economist’s 2013 bestseller Capital in the 21st Century used long runs of historical data on incomes and wealth to demonstrate how wide the gap between the rich and the rest has become. Thick with data and the famous “r >g” formula, it was published after a decade or more of median incomes stagnating, validating righteous outrage about the chasms scarring early 21st-century society. It was a rather gloomy book, arguing in effect that as “r” — the rate of return on capital — usually is greater than “g” — the growth rate of the economy and hence labour incomes, it takes a cataclysm to reduce inequality. War, destroying the value of the assets held by the rentier classes, is generally required. That underlying pessimism is also present in this new book, A Brief History of Equality. “[T]he most fundamental transformations seen in the history of inegalitarian regimes involve social conflicts and large-scale political crises,” Piketty writes, referring to the French Revolution and the two world wars: the assets of the wealth are destroyed and, alongside this levelling down, crises generate a more egalitarian sentiment, at least for a while.Yet there is an unexpected seam of optimism too — reflected in the choice of the word “equality” in the book’s title, running counter to the Piketty-the-pessimist brand. This is not because we are currently experiencing pestilence and war (the book was written before the Russian attack on Ukraine). Rather, it is because Piketty focuses instead on the promise of socialism to reduce inequalities. The book advocates for positive political change — though it does not map out any practicalities of how such positive change might be achieved. Rather, social struggles, labour movements and taxes in the mid-20th century are highlighted. “We have to deepen and generalize the institutions that made the movement toward equality, human progress, and prosperity possible . . . starting with the welfare state and progressive taxation,” writes Piketty. These institutions include unions to fight for higher earnings, redistribution through progressive taxes and generous benefits, and universal public services.

The author envisions “a democratic and federal socialism, decentralized and participatory, ecological and multicultural”. Thanks to the revival of the political debate about redistribution and justice, we will have power-sharing in business, reparations for colonialism and slavery, and will have driven the influence of money out of politics and the media, according to this extraordinarily rose-tinted agenda.The tension between the pessimistic and optimistic Pikettys runs through A Brief History. It condenses the 3,000 pages of his previous books (Top Incomes in France in the 20th Century, Capital in the 21st Century and Capital and Ideology) into 250 pages, with a greater focus on the global political perspective of the last of these than on the long-run economic trends of the first two. The sins of empire feature prominently, from the horror of the slave trade to the protection of the imperial centre’s markets and extraction of colonial resources. It is a unidimensional history: exploitation is the only reason for the rise of the west, and that other dimensions exist is not even mentioned. Indeed, the end of empire is introduced as a key explanatory factor for the “Great Redistribution” that occurred between 1914 and 1980. While world wars and the Depression paved the way for subsequent social struggles internal to the west, the liquidation of foreign and colonial assets “helped to reduce inequalities and destroy perceptions of private property as sacred”.

A Brief History of Equality is a route into Piketty’s arguments in his earlier books, with their luxuriantly extensive data and historical detail. Anybody who has not been able to face those tomes (the third so bulky it came with its own sturdy canvas tote bag) should read this one. But it will probably be less influential. Although economists nitpicked holes in the theory and data of Capital in the 21st Century, and while historians challenged the, well, ideological interpretations of global history in Capital and Ideology, the huge mass of detail in those earlier volumes was the source of their rhetorical impact in the inequality debate. There was no need for most people to read them cover to cover — and they did not; it was enough to know that their argument rested on so many pages of evidence. Strip away the detail and what remains is an all-too-apparent underlying abstraction from the practical politics of change, an abstraction emphasised by the book’s very literal translation by Steven Rendall from intellectual French. If “r” really is greater than “g”, then perhaps inequality does have its own internal dynamics, but achieving a turn to “democratic, decentralized socialism” surely demands some attention to how it might come about? The issue is that Piketty’s theory of change is motivated by ideology, so articulating a persuasive alternative ideology is enough. And surely a vision of a fair, green, participatory future is persuasive enough? Sadly, what convinces readers in the salon differs from what drives action on the streets, or even in the corridors of power, where Pessimistic Piketty is likely to prove more persuasive than this newly Optimistic Piketty. A Brief History of Equality by Thomas Piketty, translated by Steven Rendall, Belknap (Harvard) £22.95, 288 pagesDiane Coyle is professor of public policy at the University of CambridgeJoin our online book group on Facebook at FT Books Café More

The writer is a senior fellow at Harvard Kennedy School and chief economist at KrollLike the swallows of Capistrano, the dollar doomsayers have returned. The sanctions against Russia for its war on Ukraine are built around denying Russia access to foreign currencies, particularly the dollar, which dominates global trade and investment. It therefore must follow that countries wanting to avoid a similar fate would seek to diversify away from the US currency. There is a certain logic to that, but the reality is the dollar can’t be avoided and it will remain the dominant currency in trading and transactions.Central banks have been diversifying their reserves and that will continue. The dollar’s share in foreign exchange reserves has fallen from 71 per cent in 2000 to 59 per cent in the third quarter of 2021. But this is still roughly triple that of the second-placed euro. One quarter of former dollar reserves flowed into renminbi. The remainder have gone into smaller economies like Australia, Canada, Singapore, South Korea and Sweden.China excepted, these economies have all joined in the sanctions against Russia. It is difficult to imagine future geopolitical conflicts involving a serious split among these allies. Given the size of their economies, shifting reserves into the loonie, won or krona is unlikely to offer a way around financial sanctions. Anyway, in an emergency, all these currencies are ultimately protected by US dollar swap lines.China has not joined in the sanctions officially, leading some to argue renminbi could be a way around US financial weaponisation. But just because China hasn’t imposed sanctions in this instance doesn’t mean it won’t in others — just ask Lithuania. While renminbi account for less than 3 per cent of global foreign reserves, some see the Russian invasion as an opportunity to increase this. Credit Suisse’s financial plumbing expert Zoltan Pozsar suggests China could buy up cheap Russian commodities and deploy them alongside Chinese commodities to create a global financial system revolving around a commodity-backed renminbi.Even if China wanted to do this, there are major obstacles. Some Chinese banks have restricted financing for Russian commodities, fearing secondary sanctions. It would be difficult for China and Russia to transact just in roubles and renminbi. The Chinese currency isn’t convertible outside the country. And what would China do with roubles? Before the war, the vast majority of Russian exports to China were denominated in dollars and euros. Finally, how would China find the money to purchase Russian commodities en masse? It could sell Treasury holdings, but this would erode the value of China’s remaining US debt. Alternatively, it could print the money, but this would generate inflation at a time when the Communist party is trying to stabilise economic growth.

Beyond this, China shows little interest in giving up the micromanagement of its economy by pegging its currency to commodities it cannot control. There is a reason the gold standard failed. Pegging a currency to a commodity ties one hand behind a central bank’s back in terms of supporting growth or leaning against inflation.Having the renminbi as a global reserve currency would also require full convertibility and an open capital account. As China tries to balance longer-term goals such as financial stability, common prosperity and climate change with shorter-term economic growth, it is unlikely to relinquish control over the financial system and capital account.On the contrary, China seems to have an enduring commitment to the dollar, selling sovereign bonds denominated in greenbacks for five years running. In doing so, the government is creating an offshore dollar bond market with different maturities to make it easier for Chinese companies to borrow in dollars.If there is no fiat, or government-issued, currency that could usurp the dollar, what about a digital one? Cryptocurrencies as a whole are worth roughly $2tn today — and who knows how much tomorrow. That is just over 15 per cent of global foreign exchange reserves. Digital wallets are cumbersome and still can’t be used to buy groceries or pay taxes, let alone a tanker full of oil. Stable coins, meanwhile, could actually bolster King Dollar. According to Bloomberg, there are well over a dozen stable coins with significant market caps linked to the greenback. Their growth only boosts the need for dollars.As Pozsar says, “Empires fall and rise. Currencies fall and rise. Wars have winners and losers.” That is true. And in a multipolar world, we may eventually be talking about alternatives to the dollar. But we won’t be replacing it.  More