Economy

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LONDON (Reuters) – Some World Bank staff have criticised an assessment of Ethiopia’s finances conducted with the International Monetary Fund, questioning whether the analysis that underpins the country’s debt restructuring may be “faulty”.In an internal paper seen by Reuters, World Bank consultant Brian Pinto and its chief economist Indermit Gill assess the Debt Sustainability Analysis (DSA), dated July and prepared by the IMF and staff of the International Development Association (IDA), the World Bank’s fund for poorest nations.The authors suggest that based on the DSA, Ethiopia is facing a short-term liquidity crunch, and not a long-term solvency issue, a point of contention between the government and holders of its $1 billion international bond that is in default. “We found that the bondholders have interpreted the DSA correctly, but the DSA itself may be faulty,” Pinto and Gill wrote in the paper from earlier this month. “The disagreements about Ethiopia’s debt sustainability will be repeated as other countries become debt distressed.” Asked about the paper, a World Bank spokesperson said: “We generally don’t comment on internal deliberations between the World Bank and the IMF, or any of our partner institutions.”Ethiopian State Finance Minister Eyob Tekalign told Reuters IMF and World Bank teams had just revisited the DSA as part of the latest review of the Fund’s loan programme and there had been no major change to the position. A spokesperson for the IMF confirmed its staff visited Ethiopia in November for the second review of the Fund’s loan programme, adding that each review includes an update to the DSA, without elaborating on its contents. The spokesperson did not comment on the memo. Pinto and Gill did not respond to a request for comment.Bondholders and Ethiopian officials have been in a tense standoff. At the heart of the debate is whether Ethiopia – as bondholders argue – faces a liquidity crunch, which could be addressed by rescheduling debt, or whether it has longer-term solvency problems that require debt writedowns known as haircuts.The DSA said that some export-related indicators pointed to both liquidity and solvency pressures.In October, Eyob told Reuters that writedowns were unavoidable and the DSA showed a solvency issue. Investors, in rejecting the assessment, have also slammed a government proposal that indicates an 18% haircut. The comments in the paper suggest some World Bank staff sympathise with bondholders’ views. “Based on the July 2024 DSA, Ethiopia should be trying to find ways to lengthen debt maturity and increase exports to address its liquidity problem, not asking bondholders to take a haircut,” Pinto and Gill wrote.FINANCIAL LIFELINEThe report gives credence to years of complaints by the private sector over the DSAs and the levels of debt that countries can manage – and thus what amount lenders must write off when a country defaults.Ethiopia became Africa’s third country to default on its international bonds in as many years in December 2023. Despite the relatively small size of its bond debt – compared with Zambia’s $3 billion and Ghana’s $13 billion – progress on restructuring has been slow and tangled in controversy.IMF funding is often the sole financial lifeline available to countries in a debt crunch, and key to unlocking other financing sources – including World Bank backing – with delays in debt reworks adding yet more pressure on government finances, companies and populations.Pinto and Gill have argued for some time for a change to the Debt Sustainability Framework for low-income nations, designed to inform borrowing decisions by poor countries. The framework requires regular joint World Bank and Fund DSAs which analyse a country’s debt burden and vulnerabilities over the coming decade.”It is hard not to conclude that Bank-Fund DSAs for Ethiopia have not provided accurate information to markets, nor perhaps to the Ethiopian government,” the authors said. More

The Fed slashed interest rates by 25 bps at its latest FOMC meeting this month, aligning with market expectations. This marks the fourth cut since September, bringing the total reduction to 100 basis points and placing the policy target range at 4.25%-4.5%.However, the updated dot plot presented a more hawkish stance than anticipated. The median projection now reflects only 50 basis points of cuts for 2025, a notable shift from the 100 basis points indicated in the September dot plot. The Fed’s outlook suggests that policy adjustments could extend through 2027.Markets reacted negatively to the announcement. Equities fell sharply, bond yields climbed, and the dollar strengthened.During the post-meeting press conference, Fed Chair Jerome Powell conveyed optimism about the state of the economy and the outlook for 2025. Powell acknowledged that economic growth had surpassed the Fed’s recent expectations, while inflation remains above the 2% target. As a result, the central bank intends to adopt a more measured approach to further rate reductions.”Our own views on the economic outlook are similar to the Fed’s, and we therefore have adjusted our rate cut forecast in line with the new dot plot,” UBS senior economist Brian Rose said in a note.The bank now anticipates 25 basis point cuts in both June and September, totaling 50 basis points for 2025, down from previous expectations of quarterly cuts amounting to 100 basis points over the year.While this more cautious approach is currently favored, Rose highlights that “a March rate cut could quickly be back on the table if there is bad news from the labor market early next year.”The Fed’s hawkish stance fueled a rally in the U.S. dollar, with the dollar index briefly surpassing 108. This trend aligns with interest rate movements over the past two years and is expected to persist into 2025.Political factors, including Donald Trump’s upcoming inauguration, are likely to keep the dollar elevated in the near term. Yet, UBS highlights limits to further dollar strength, citing overvaluation, minimal expectations for U.S. monetary easing in 2025, and the market’s focus on the positive aspects of Trump’s policies. Any deviation from these expectations could trigger a dollar pullback.UBS views current dollar rallies as selling opportunities, forecasting EURUSD to return to 1.10 later in 2025. More

NEW YORK (Reuters) – For many people, financial resolutions might be lighthearted fodder for small talk at holiday parties.Not for Cynthia Luna. She is deadly serious about them.The financial planner from Waxahachie, Texas sends all her clients New Year’s cards with their resolutions written down in black and white. If you stray, prepare to hear about it.“The right way is to use baby steps and make them achievable and encouraging – because you don’t want to fail at your financial resolutions,” says Luna, a principal at Moonshot Financial Group. Financial resolutions start the new year on the right foot. In fact, 65% of Americans are drawing them up for 2025, according to a new study from money manager Fidelity Investments.The winning responses are classic: Save more money (43%), pay down debt (37%) and spend less (31%).But for one of the only times in the history of Fidelity’s 16-year survey, people looking to save money are favoring short-term goals over long-term ones, by 55% to 45%.That indicates people do not really have the luxury of thinking 20 or 30 years off and are instead focusing on right now – paying the rent or mortgage, buying gas, covering monthly utility bills and putting food on the table.“This will be a year of living practically,” says Rita Assaf, vice president of retirement products at Fidelity, who analyzed the findings. “Short-term savings goals are just more of a priority right now. People are very concerned about the day-to-day.”Millennials are the most determined generation in setting financial resolutions, with 74% of them making money goals for the New Year. That compares to 70% of Gen Z, 67% of Gen X and only 52% of Baby Boomers.There is an art to making financial resolutions, though. To nudge you in the direction of success, here are a few key pointers from financial professionals:GO SMALLYou may have heard the career advice, ‘Go big!’ But when it comes to financial resolutions, the smarter path is the exact opposite – go small.Think too vague and grandiose – you want to be a multimillionaire, maybe – and you will likely fall short, be depressed about your failing, and drop your goals altogether.Instead, focus on tiny, daily, concrete steps that will eventually get you where you want to go.“Have as few goals as possible, the fewer the better,” says Thomas Scanlon, a financial advisor with Raymond (NS:RYMD) James in Manchester, Connecticut. “Start small: If all you can do is put an extra $100 a month towards your credit card balance, do it.”AUTOMATION IS YOUR FRIENDOne problem with resolutions is that they tend to rely on the human will, and the human will is fallible.Your resolution is to not be tempted by those shopping discounts you love? Good luck with that because sooner or later, you will probably fail. In the Fidelity survey, 37% of people admitted they busted out on last year’s resolutions.The smart thing is to take choice out of your own hands whenever possible, so your will does not even come into play. Automate your monthly retirement plan contribution. Automate your bill payments. If you get a raise, automate saving a percentage of that, too.“I am a big fan of automation,” says W. Michael Lofley, a financial planner in Stuart, Florida. “The less you have to think about your financial resolutions, the easier it is to stick to them. It’s ‘Set it and forget it.’ ”REVISIT AS NEEDEDA New Year’s resolution is a snapshot in time, of what your goals are right now. Can those goals change in a month, or three months, or six months? Of course.There is no shame in revisiting your resolutions occasionally and changing them, if necessary. It does not necessarily mean you have ‘failed’; it means that different priorities have emerged, and that is okay.“I usually suggest people revisit those goals quarterly, or even more often if it helps you,” says Fidelity’s Assaf. “You never know what is going to arise throughout the year, and if something happens, it is perfectly fine to revise your resolutions.” More

LONDON (Reuters) – Euro zone bond yields ticked up to their highest level in around a month on Monday before dipping slightly as investors continued to try to gauge the outlook for central bank rate cuts in 2025.The Federal Reserve last week put upward pressure on U.S. government bond yields, which set the tone for other markets around the world, when policymakers said they now expect to cut rates twice in 2025, down from a previous estimate of four cuts.Germany’s 10-year bond yield, the benchmark for the euro zone, rose to 2.32% on Monday, around the highest level since Nov. 22. It was last up 1.6 basis points (bps) at 2.302%. Yields move inversely to prices.Trading volumes were lower due to traders being off over the holiday season, potentially accentuating price moves.European Central Bank (ECB) President Christine Lagarde said the euro zone was getting “very close” to reaching the central bank’s medium-term inflation goal, according to an interview published by the Financial Times on Monday.The ECB cut rates for a fourth time to 3% this month but euro zone bond yields rose after Lagarde struck a slightly tougher tone than expected, saying the fight against inflation was not over.Lagarde told the FT that although headline inflation was at 2.2%, services inflation remained at 3.9% and “is not budging much”.Irish central bank chief Gabriel Makhlouf also warned that elements of services inflation in the euro zone were concerning, the paper said.Germany’s two-year bond yield, which is sensitive to ECB rate expectations, was last flat at 2.041%.Italy’s 10-year yield was higher by 2 bps at 3.469%, and the gap between Italian and German yields stood at 117 bps.Investors face an uncertain 2025, with U.S. President-elect Donald Trump’s policies a wild card. Money market pricing on Monday showed investors expect around 115 bps of rate cuts from the ECB next year, little changed from Friday. More

NEW YORK (Reuters) – U.S. investors are preparing for a swathe of changes in 2025, from tariffs and deregulation to tax policy, that will ripple through markets as President-elect Donald Trump returns to the White House, putting the focus on whether the U.S. economy can continue to outperform.The changing of the guard in Washington has big implications for how stocks, bonds and currencies fare in the new year and may require investors to rejig portfolios. Forecasts call for another buoyant year for stocks, the dollar to maintain its recent strength over the coming months and Treasury yields to march higher.  Here is a chart-based overview of key market themes and segments that investors are closely monitoring:U.S. EXCEPTIONALISMInvestors largely expect U.S. economic exceptionalism to persist in the new year, as robust consumer spending and a resilient labor market put U.S. growth on a firmer footing than that of many of its developed market peers. The U.S. economy is expected to find further support from any potential tax reform, including a reduction in the corporate tax rate. Such tax cuts – which would need to pass Congress – could support company earnings and sentiment on stocks.In contrast, although the euro-zone economy grew faster than anticipated in the third quarter, its outlook remains weak due to potential large tariffs from the Trump administration, escalating trade tensions with China and low consumer confidence.”We do expect U.S. growth to outperform the rest of the world in 2025, on the back of potentially favorable monetary and fiscal policy,” said Sonu Varghese, global macro strategist at Carson Group.THE FEDFront and center for investors in 2025 is how rapidly or deeply the U.S. Federal Reserve can cut rates. The Fed cut rates in December, continuing reductions after a period of aggressive rate hikes, but indicated it would slow the pace of further cuts.Stocks have been buoyed by expectations of easier monetary policy. But with benchmark Treasury yields rising sharply after the Fed meeting, the rate outlook threatens to undermine the momentum for stocks. KING DOLLAR   Dollar bears have taken a battering this year and most FX market strategists forecast continued strength for the greenback. Many of the factors that powered a 7% gain for the currency against a basket of peers this year, including relatively robust U.S. economic growth and rising Treasury yields, are expected to continue supporting the dollar.Trump’s tariffs and protectionist trade policies are also likely to bolster the buck. Prospects of heightened inflation could also hinder the Fed from keeping up with interest-rate cuts, even as other central banks proceed with cuts, further lifting the dollar.Getting the dollar’s trajectory right is crucial for investors, given the currency’s central role in global finance.A strong dollar could weigh on the outlook for U.S. multinationals as well as complicate other central banks’ efforts to fight inflation as it makes their currencies cheaper.”Another year of spectacular gains in the dollar might break something in the global economy – but with major uncertainties clouding the horizon and another round of American exceptionalism largely priced in, further outperformance could be difficult to achieve,” said Karl Schamotta, chief market strategist at payments company Corpay.VOLATILITY WATCHInvestors got a taste on Wednesday of how quickly market stability can shift to turmoil. U.S. stocks fell sharply after the Federal Reserve projected fewer interest-rate cuts than expected and as concerns grew about a potential partial government shutdown.Global financial markets may extend generally tranquil trading conditions into the new year but analysts warn that a volatility shock is overdue.Analysts at BofA Global Research said they do not expect a repeat of the record-low stock-market volatility levels set in 2017, the beginning of Trump’s first term. FX markets could be in for higher volatility next year as the twin forces of tariffs and central-bank actions come to bear.”The shock absorber in financial markets is going to be foreign exchange next year,” said Fredrik Repton, senior portfolio manager with the global fixed income and currency management teams at Neuberger Berman.CRYPTO FEVERThe speculative fever that gripped bitcoin and crypto-related stocks in 2024 is unlikely to abate in the new year, strategists said.”2024 was a banner year for speculation, which had morphed into a self-fulfilling frenzy in recent weeks,” Steve Sosnick, chief strategist at Interactive Brokers (NASDAQ:IBKR).While these trades have sometimes run into trouble, most recently after the Fed’s December meeting, investors have been willing to buy the dip.”When something has been working for so many people for so long, they are loath to give it up,” Sosnick said.And work the trades have. Bitcoin hit a record high above $100,000 in December on expectations that Trump’s election will usher in a friendly regulatory environment for cryptocurrencies. Crypto-related stocks have also been on a tear, with software company and bitcoin stockpiler MicroStrategy leading the charge with a more than 400% rise for the year. More

WASHINGTON (Reuters) -Federal Reserve Vice Chair for Supervision Michael Barr has sought legal advice to explore his options against any attempts by President-elect Donald Trump to remove him, sources said, the latest sign that a conflict might be looming between the incoming administration and the central bank. Barr, who was tapped to serve as the Fed’s top regulatory official by President Joe Biden, has in recent weeks sought advice from law firm Arnold & Porter in his personal capacity, two of the sources said.The sources said he has sought counsel in a personal capacity because typically individual officials, not their agencies, have legal standing to fight in court attempts to remove them. The Fed declined to comment via a spokesperson. Representatives for Arnold & Porter and the Trump transition did not respond to requests for comment. Barr did not respond to a call or email requesting comment.Barr, whose term overseeing bank supervision expires in July 2026, has told Congress that he intends to serve it out. Reuters could not learn further details about Barr’s discussions with lawyers, including whether he would fight his removal or not. The sources requested anonymity to speak about Barr’s plans.Barr’s move comes after reports in recent months that Trump’s advisers were looking for ways to increase the incoming White House’s sway over the Fed, alarming officials and investors who argue that the central bank’s independence is necessary for it to be able to properly set monetary policy. Fed Chair Jerome Powell — who was appointed to the role by Trump only to be subsequently criticized for his decisions on interest rates — was seen as a target of the incoming president. But Powell said after the November presidential election that Trump would not have the authority to remove him. Trump subsequently said he does not intend to remove Powell.The law establishing the Fed says the president is only allowed to fire Fed governors for cause, but it is silent on whether Trump would have the power to demote Barr from his role as Vice Chair for Supervision. Powell has previously said demoting Fed officials is not permitted under the law.  Barr has earned powerful critics on Wall Street and elsewhere for his tough approach to financial regulation.   Earlier this week, the Wall Street Journal’s conservative editorial page argued Trump should fire him for cause, citing the failures by bank supervisors to address problems ahead of Silicon Valley Bank’s abrupt failure in March 2023.Trump’s advisers and other Republicans have debated pursuing that approach with Barr, according to two of the sources, who were briefed on the matter. Barr’s decision to explore outside legal counsel underscores how seriously he is taking that threat. WALL STREET’S IRE Barr earned the ire of Republicans and the banking industry for his efforts to impose strict new capital rules on the industry via so-called “Basel III Endgame” and other projects.Barr said the sector needed more guardrails against future turmoil, but those efforts were met with intense pushback from banks, who argued they were unjustified and threatened to sue over what they claimed was improper procedure. Barr eventually agreed to pare back those efforts, but a rewritten proposal never advanced due to infighting among U.S. bank regulators.If Barr were to stay, he likely would not be able to advance tough new rules that would require buy-in from other agencies taken over by Trump appointees, but he could stand in the way of regulatory easing sought by big Wall Street banks. While Trump has said little on bank regulation, his campaign has promised to slash “burdensome” regulations. Barr also has a separate 14-year term as Fed governor that runs until 2032, but officials frequently step down from that post before serving the full allotment, particularly if they had previously served in a more senior role.There is no precedent for a president to try to remove a Fed official. But messy succession fights at regulatory agencies are not unfamiliar territory for Trump. In his first term, his administration was challenged in court over his attempts to name new leadership at the Consumer Financial Protection Bureau. There, the agency’s deputy, Leandra English, resisted efforts to install an outside Republican official as leader of the agency, going so far as to challenge the move in court on a personal basis. She eventually dropped that suit and resigned. More

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