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    How American politics has infected investing

    The hedge fund’s branding is a clue. 1789 Capital was set up last year and named for the year Congress proposed America’s bill of rights. It offers investors the chance to put money into what it says are three key themes: a parallel conservative economy catering to consumers who want to avoid being bombarded with liberal ideas; the shift away from free trade; and firms that have been penalised by the environment, social and governance (ESG) investment trend. Its founder, Omeed Malik, a former banker, has hosted fundraisers for Robert Kennedy junior, an anti-vaccination, long-shot presidential candidate.1789 Capital is part of an increasingly important trend: American politics is infecting investing. A gap has opened up between how Democrats and Republicans view the world; many Americans want to express their political identities by any means possible; and others see their money as a way to sway business behaviour. All of this is influencing investment decisions. The amount of money invested in, say, novelty exchange-traded funds (ETFs), such as those tracking the portfolios of certain politicians, is small, but other developments are more significant. Some $13bn has been withdrawn from BlackRock’s accounts, for instance, as red states boycott asset managers that support ESG. A bitterly fought rematch between Donald Trump and Joe Biden will most likely supercharge the trend.Chart: The EconomistAccording to a forthcoming paper by Elena Pikulina of the University of British Columbia and co-authors, the portfolios of Democrat and Republican retail investors began to diverge half-way through Barack Obama’s presidency, before consistently widening. By combining data from investment advisers with county-level election results, the researchers show that investors in Republican-leaning counties shun stocks from firms where the chief executive has made donations to the Democrats, while those in Democrat-leaning counties are less likely to invest in a firm when there are concerns about its treatment of workers. Voters also indirectly influence decisions made by their political representatives, as can be seen with the ESG boycotts.What motivates this behaviour? One possibility is that Democrats and Republicans simply disagree about the direction of the economy and, as a result, about which investments will perform best. Under this reading, rather than being the result of investors trying to achieve political outcomes, the divide is a product of politically inflected views of the world. Indeed, a paper by Maarten Meeuwis of Washington University in St Louis and colleagues finds that the risk appetite of American investors shifts according to who is in the White House. After the presidential election in 2016 some Democrat-leaning investors sold stocks and bought bonds—a sign they were worried about the future. Republicans did the opposite. Although only a relatively small number of people made such moves, those who did typically shifted more than a quarter of their holdings.The authors argue this reflects differing interpretations of economic data. After all, it mirrors a divide between Democrats and Republicans when it comes to consumer confidence. Both are more confident about the economy when the president is from their own party, controlling for inflation and unemployment. A consumer-sentiment survey by the University of Michigan finds a significant divergence along political lines—bigger than that along lines of age or income. During Mr Biden’s time in office, Republicans have on average expected 2.4 percentage points more inflation in the year ahead than Democrats.Yet different world views do not entirely explain the trend. It seems partisans are buying shares as an expression of support, too, much as they might put up a candidate’s poster. Truth Social, Mr Trump’s social-media holding firm, surged when it listed on the Nasdaq in March, as supporters rushed to buy the stock. After Mr Trump’s win in 2016, punters in Democrat-leaning counties invested more in clean-energy firms, even though the result was likely to be bad news for such businesses. To these investors, returns matter less than identification with the cause, says Stephen Siegel of the University of Washington, one of Ms Pikulina’s co-authors.Partisan investors also hope to change business behaviour. Since red states began to pull money from BlackRock, the firm’s boss, Larry Fink, has begun to shy away from referring to esg. So have other prominent asset managers and bankers. Meanwhile, a study by Matthew Kahn of the University of Southern California and colleagues finds that when an American state’s pension fund becomes more Democrat-aligned—say, when a new governor comes in—the firms it is invested in reduce their carbon emissions more quickly.Partisan investing is both problem and opportunity for financiers. The rise of ESG investing at first allowed asset managers to distinguish themselves from rivals. Around $120bn flowed into such funds in 2021. But in the final quarter of 2023 they saw net outflows for the first time. The difficulty now is to sell to both sides without annoying either—a task that is becoming increasingly hard as new topics are dragged into the fray. In October Ron DeSantis, governor of Florida, gave Morningstar Sustainalytics, a financial-data firm, 90 days to either “clarify its business practices or cease its boycott of Israel”. He argued that its ESG metrics classified companies as a risk for having invested in Israel. An independent report commissioned by Morningstar recommended dropping a specific tag for companies that operate in “occupied territories”—advice that the firm intends to follow. Florida has since removed Morningstar from the warning list.It is not just conservatives making a fuss. Vanguard, an asset manager, has been targeted by activists for quitting the Net Zero Asset Managers Initiative, an industry body. In January the Sunrise Project, a campaign group, began running advertisements in Pennsylvania, the firm’s home state, accusing it of giving in to bullies.At the same time, smaller firms can indulge partisans. There have long been funds that apply a liberal lens to investment decisions, such as Parnassus Investments, which was established in 1984. They are being joined by right-wing ones. As well as 1789 Capital, there is Strive Asset Management, set up in 2022 by Vivek Ramaswamy, an ertswhile Republican presidential candidate, which offers investors an American energy etf that focuses on fossil fuels and has the ticker DRLL.Taking a stand can be expensive. Researchers at the Federal Reserve and the University of Pennsylvania have found that anti-ESG boycotts raised the cost of borrowing for Texan municipalities by $300m-500m as banks with ESG policies withdrew from underwriting bond sales. Democrats who shifted out of stocks when Mr Trump won in 2016 would have lost out on a post-election rally. In the year after the vote, the S&P 500 rose by 21%.Markets thrive on differences of opinion: every seller needs a buyer and every buyer needs a seller. Funds that offer investors a chance to express those opinions are not necessarily a bad thing. But American capitalism has been built on the pursuit of profit at all costs. In recent decades, investors have flocked to index funds, which track the market, offering diversification and low fees. To the extent that partisan investors are trying to reshape the economy to align with their values, rather than betting on beliefs about the economy, they are going to pay for it. ■ More

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    ‘Big change’ in global growth is bullish for commodities including copper, says VanEck CEO

    Investors should consider commodities due to a “big change” involving international expansion, according to VanEck CEO Jan van Eck.
    “The world economy started growing again,” van Eck told CNBC’s “ETF Edge” this week.

    He singles out China, the world’s second-largest economy behind the U.S., as a key driver in the expansion.
    “China which has been such a huge driver of growth and so negative for growth over the last year or two. Manufacturing PMI is now positive in China as of March,” said van Eck. “You now have growth. … So, that leads to your reflation trade.”
    His firm has exposure to commodities from gold to energy to copper. Its exchange-traded funds include the VanEck Gold Miners ETF (GDX) and VanEck Oil Refiners ETF (CRAK). They’re up 10% and 9%, respectively, year to date.
    Van Eck highlights copper’s momentum as a positive sign for demand. The industrial metal is up almost 16% this year, as of Friday’s close.
    “It’s a good measure of global economic growth and energy prices. [They] probably have gotten a little bit ahead of themselves, but they’re reflecting the world is growing,” he said.

    He also sees U.S. government spending as bullish catalyst for the commodities trade.
    “Fiscal spending is running so super high,” van Eck said. “That’s leading to this global growth trade, too. So, that’s why I like commodities because I think it’s more than just a headline.”
    As of Friday’s close, the S&P GSCI Index Spot, which tracks commodities from crude oil to cocoa, is up 10% so far this year.

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    If you’re investing in the AI theme for the long haul, here’s how to pick the winners

    Excitement around artificial intelligence lifted a slate of tech stocks to astronomical heights, contributing to the rise of the Magnificent Seven in 2023.
    But these names can see plenty of volatility. On Friday, the tech-heavy Nasdaq Composite slid more than 2% as Nvidia plummeted 10%.
    Investors examining the AI space should look into names with staying power and remain diversified. Selecting ETFs that incorporate dozens of names can be a lower-risk way to diversify, one expert said.

    Fotografielink | Istock | Getty Images

    Artificial intelligence has shaken up the investing landscape since the groundbreaking launch of ChatGPT in November 2022.
    Since then, investors have poured money into all things related to AI as they hunt for the next big winners. In 2023, a group of major technology players dubbed the Magnificent Seven — Tesla, Amazon, Meta Platforms, Apple, Microsoft, Alphabet and Nvidia — contributed to a large chunk of the market’s rally.

    Those tail winds continued into 2024, but even the winners eventually reach their limit. Indeed, some of this year’s highest fliers came down to earth on Friday, with Big Tech names dragging down the Nasdaq Composite by more than 2%.
    “You have to do your work,” said Jay Woods, chief global strategist at Freedom Capital Markets. “You want to do the research, you want to know what you’re buying, you want to know the risks involved. In AI right now, there are a lot of unknowns.”
    AI is poised to be a central theme as the technology transitions from early-stage winners to second-stage adopters. Portfolio and wealth managers say investors may want to undertake certain strategies if they’re looking for long-term plays in the space.
    What to look for
    There’s no secret formula to investing and picking artificial intelligence stocks, but investors can keep an eye on certain metrics and trends when weeding out the winners from the duds.
    When investing in any new industry, Carol Schleif, chief investment officer at BMO Family Office, recommends that investors keep an eye on companies’ cash burn and how they are spending their money. Be attentive to the fine details, including how a company works through a backlog and how much money it devotes toward infrastructure.

    When it comes to chip stocks, Schleif also recommends taking a look at government grants. The industry won big in 2022 when President Joe Biden signed the CHIPS Act into law. The measure allocated funds toward building out semiconductor production on U.S. soil.
    Samsung Electronics is in line to receive funding from CHIPS for making semiconductors in Texas, while Intel has been awarded up to $8.5 billion from the measure.
    “Focus on the underlying fundamentals, and are they moving in the right direction, [rather] than just last quarter’s earnings,” Schleif advised.
    Investors should also avoid blindly chasing the hot winners that have benefited from AI enthusiasm. For Laffer Tengler Investments CEO and CIO Nancy Tengler, that means looking at some of the old-economy stocks embracing the new digital wave. She likes Microsoft and IBM, a pair of tech industry veterans.
    When building any portfolio, financial advisors and portfolio managers stress the importance of diversification — and the same applies to AI.
    An exchange-traded fund might be a good way to get that diversified exposure to a basket of stocks that could benefit from the AI theme, rather than sticking with one or two promising names.
    Consider diversifying through ETFs
    Selecting ETFs that incorporate dozens of names can be a lower-risk way to diversify, said Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.
    She highlighted the Global X Robotics and Artificial Intelligence ETF (BOTZ), the First Trust Nasdaq AI and Robotics ETF (ROBT) and the Global X Artificial Intelligence & Technology ETF (AIQ).
    “That’s one way to get some exposure without putting the proverbial all the eggs in that one basket,” said BMO’s Schleif. “You want to be able to focus on a few different avenues such that you can withstand the volatility.”

    AI ETFs and their performance in 2024

    Ticker
    Name
    Expense ratio
    %chg ytd

    BOTZ
    Global X Robotics and Artificial Intelligence ETF
    0.68%
    0.53%

    ROBT
    First Trust Nasdaq AI and Robotics ETF
    0.65%
    -10.34%

    AIQ
    Global X Artificial Intellligence & Technology ETF
    0.68%
    0.90%

    CHAT
    Roundhill Generative AI and Technology ETF
    0.75%
    3.20%

    Source: fund websites, FactSet

    Volatility can be a bitter pill, particularly for newer investors. Stocks tend to rise at first when a new theme hits the mainstream, but often suffer at some point from volatility and pullbacks, said Helen Dietz, a CFP and managing director at Aspiriant.
    “The newer the trend, the more volatile the trend,” she said. “The corrections of those individual stocks, or those sectors, can be quite violent at times, which is not unusual, and the investing public gets scared out of that.”
    To that effect, Nvidia’s shares suffered a setback on Friday when they tumbled 10% and posted their worst day since March 2020. The decline put a sizable dent into the chip stock’s year-to-date gains, but it remains up nearly 54% in 2024. Fellow AI play Super Micro Computer also took a nosedive that day, dropping 23%.
    ETFs typically include a range of names and can vary in weighting. Though the BOTZ ETF and the Roundhill Generative AI and Technology ETF (CHAT), both currently lag some of this year’s popular AI winners. However, the underlying names are varied: BOTZ holds Nvidia and robotics play Intuitive Surgical, while CHAT’s top holdings include Microsoft, Meta and ServiceNow.
    Schleif recommends looking for ETFs with high trading volume and backed by reputable companies. Investors should also be mindful of fees, which can take a bite out of returns if they are too high.
    While the gains may fall short of the surge seen in stocks such as Nvidia and Meta, ETFs allow investors to obtain lower-risk exposure to the sector, Woods said. Longer term, investors can also use the leadership in these funds to consider picking out individual names further down the road.
    “The old cliché is timing the market and then hoping you find that individual stock that can really be the big performer,” Woods said. “If you want to be involved, you want to be diversified and I think an ETF is the best way to do that.”

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    China’s fiscal stimulus is losing its effectiveness, S&P says

    China’s fiscal stimulus is losing its effectiveness and is more of a strategy to buy time for industrial and consumption policies, S&P Global Ratings said.
    High debt levels limit how much fiscal stimulus a local government can undertake, regardless of whether a city is considered a high or low-income region, the S&P report said.
    The Chinese government earlier this year announced plans to bolster domestic demand with subsidies and other incentives for equipment upgrades and consumer product trade-ins.

    Pictured here is a commercial residential property under construction on March 20, 2024, in Nanning, capital of the Guangxi Zhuang autonomous region in south China.
    Future Publishing | Future Publishing | Getty Images

    BEIJING — China’s fiscal stimulus is losing its effectiveness and is more of a strategy to buy time for industrial and consumption policies, S&P Global Ratings senior analyst Yunbang Xu said in a report Thursday.
    The analysis used growth in government spending to measure fiscal stimulus.

    “In our view, fiscal stimulus is a buy-time strategy that could have some longer-term benefits, if projects are focused on reviving consumption or industrial upgrades that increase value-add,” Xu said.
    China has set a target of around 5% GDP growth this year, a goal many analysts have said is ambitious given the level of announced stimulus. The head of the top economic planning agency said in March that China would “strengthen macroeconomic policies” and increase coordination among fiscal, monetary, employment, industrial and regional policies.
    High debt levels limit how much fiscal stimulus a local government can undertake, regardless of whether a city is considered a high or low-income region, the S&P report said.
    Public debt as a share of GDP can range from around 20% for the high-income city of Shenzhen, to 140% for the far smaller, low-income city of Bazhong in southwestern Sichuan province, the report said.

    “Given fiscal constraints and diminishing effectiveness, we expect local governments will focus on reducing red tape and taking other measures to improve business environments and support long-term growth and living standards,” S&P’s Xu said.

    “Investment is less effective amid [the] drastic property sector slowdown,” Xu added.
    Fixed asset investment for the year so far picked up pace in March versus the first two months of the year, thanks to an acceleration of investment in manufacturing, according to official data released this week. Investment in infrastructure slowed its growth, while that into real estate dropped further.
    The Chinese government earlier this year announced plans to bolster domestic demand with subsidies and other incentives for equipment upgrades and consumer product trade-ins. The measures are officially expected to create well over 5 trillion yuan ($704.23 billion) in annual spending on equipment.
    Officials told reporters last week that on the fiscal front, the central government would provide “strong support” for such upgrades.

    S&P found that local governments’ fiscal stimulus has generally been bigger and more effective in richer cities, based on data from 2020 to 2022.
    “Higher-income cities have a lead because they are less vulnerable to declines in property markets, have stronger industrial bases, and their consumption is more resilient in downturns,” Xu said in the report. “Industry, consumption and investment will remain the key growth drivers going forward.”
    “Higher-tech sectors will continue to drive China’s industrial upgrade and anchor long-term economic growth,” Xu said. “That said, overcapacity in some sectors could spark price pain in the near term.” More

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    National Park Week is coming up — and that means free entry for visitors

    Visitors get free entry to all U.S. national park sites on April 20, when National Park Week kicks off.
    Most sites typically don’t have an admission fee but 108 of them do. They generally charge about $20 to $35 per vehicle.
    A few parks require visitors make an online reservation in advance. Without it, they’d be denied entry on certain days and during peak times.

    Grand Prismatic Spring, Yellowstone National Park on Aug. 8, 2020.
    Darwin Fan | Moment | Getty Images

    Visitors to national parks will get free admission on April 20 as the federal government waives entrance fees to commemorate the start of National Park Week.
    National Park Week runs for nine days, from April 20 to April 28.

    The National Park Service oversees 429 park sites in the U.S. Of them, 63 are national parks. The remainder are national monuments, national battlefields and national historic sites, for example.
    More from Personal Finance:4 big ways to save on your next tripDon’t let this passport quirk upend your next vacation2024 is the ‘year of globetrotting’
    Most offer free entrance all the time. However, 108 parks don’t — including some of the most popular, like Grand Canyon, Zion, Rocky Mountain, Acadia, Yosemite, Yellowstone, Joshua Tree and Glacier national parks.
    Their entrance fees — which typically range from $20 to $35 per vehicle — will be waived on April 20.
    Fee structures can vary: Some parks may charge per person instead of per vehicle, and there may also be different fees for motorcycles, for example.

    Joshua Tree National Park, California
    Casey Kiernan | Moment | Getty Images

    April 20 is one of six days in 2024 when access is free to all national parks. They include:

    Jan. 15: Martin Luther King Jr.’s birthday
    April 20: First day of National Park Week
    June 19: Juneteenth
    Aug. 4: Anniversary of the Great American Outdoors Act
    Sept. 28: National Public Lands Day
    Nov. 11: Veterans Day

    Be aware of additional entry requirements

    Yosemite National Park, California, on April 27, 2023.
    Mario Tama | Getty Images News | Getty Images

    There’s a caveat, however. While all parks may be free on these days, some still require an additional reservation for entry. Those reservations generally come with an extra fee.
    For example, Yosemite National Park in California requires reservations to drive into or through the park during peak hours — between 5 am and 4 pm local time — on many days this year. They include holidays and weekends between April 13 and June 30, and every day from July 1 through August 16, for example.
    Yosemite visitors won’t be allowed entry without making an online reservation ahead of time. They cost $2, are nonrefundable and are valid for three consecutive days.

    Additionally, it may make financial sense for visitors to buy an annual national park pass even if they plan to visit during a free entrance day, depending on the trip itinerary, Mary Cropper, travel advisor and senior U.S. specialist at Audley Travel, previously told CNBC.
    The $80 annual pass grants unlimited entrance to national parks and other federal recreation areas. Some groups can get reduced-price or even free annual passes.
    For example, a pass would likely be a better option if you plan to visit multiple parks in one trip, Cropper said.
    “You want to do the math,” she said. More

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    Why semiconductors could be the most efficient artificial intelligence play

    Investing in semiconductors may be the most efficient way to play the artificial intelligence boom, according to VanEck’s CEO.
    “Semiconductors have become the heart of the AI trade,” Jan van Eck told CNBC’s “ETF Edge” this week.

    His firm’s VanEck Semiconductor ETF (SMH), which tracks 25 of the biggest chipmakers in the country, is up 21% this year as of Wednesday’s close. However, SMH has fallen nearly 6% this month, led to the downside by Intel, AMD and On Semiconductor.
    The fund’s top holding, Nvidia, has seen its shares surge nearly 70% this year amid soaring demand for its AI processors, but it’s also down 7% since the start of the month.
    Van Eck suggests the weakness is temporary. He contends high interest in AI chips could set up the group for more durable returns.
    “They have become revalued from being a highly cyclical business with short product lives to part of the growth trade, and they have more recurring revenue, so they can just stay at high profitabilities even despite some of the short-term stuff,” said van Eck.
    ETF Action founding partner Mike Akins also sees opportunities for investors. He thinks limited competition for some of the top chipmakers’ products could sustain the group.

    “You have a high moat, and they control that pricing point,” he said in the same interview. “Until there’s a situation where competition increases meaningfully in this space, where you can have some pricing pressure, it’s hard to see that trade going away.”
    Still, Akins advises investors to pay attention to semiconductor fund flows as a barometer for future performance.
    “We often caution our clients to almost think about flows as a contrarian indicator. As flows get really depressed, that’s potentially opportunity to buy, and vice versa. As flows get really extended, it might be time to pare a little bit.”
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    Global police agencies take down massive scam website that defrauded thousands of victims

    Britain’s Metropolitan Police said in a statement Thursday that the LabHost website was used by 2,000 criminals to steal users’ personal details.
    Police identified just under 70,000 individual U.K. victims who entered their details into one of LabHost’s websites.
    LabHost’s websites were disrupted and replaced with a message stating that law enforcement has seized the services.

    Illustration of a cybercriminal using a computer.
    Seksan Mongkhonkhamsao | Moment | Getty Images

    A huge fraud website used by thousands of criminals to trick people into handing over personal information such as email addresses, passwords, and bank details, has been infiltrated by international police.
    Britain’s Metropolitan Police said in a statement Thursday that the website, called LabHost, was used by 2,000 criminals to steal users’ personal details.

    Police have so far identified just under 70,000 individual U.K. victims who entered their details into one of LabHost’s websites. A total of 37 suspects have been arrested so far, according to the Metropolitan Police.

    Police have also disrupted LabHost’s websites and replaced the information on its pages with a message stating that law enforcement has seized the services.
    LabHost obtained 480,000 credit card numbers, 64,000 PIN codes, as well as more than 1 million passwords used for websites and other online services, the Metropolitan Police said.
    The Metropolitan Police said that up to 25,000 victims in the U.K. have been contacted by police to notify them that their data has been compromised.

    Who are LabHost?

    Police say that LabHost was set up in 2021 by a criminal cyber network which sought to scam victims out of key personally identifiable information, such as bank details and passwords, by creating fake websites.

    Criminals were able to use it to exploit victims through existing sites, or create new websites mimicking those of trusted brands including banks, health care providers, and postal services.
    “Online fraudsters think they can act with impunity,” Dame Lynne Owens, deputy commissioner of the Metropolitan Police Service, said in a statement Thursday.
    “They believe they can hide behind digital identities and platforms such as LabHost and have absolute confidence these sites are impenetrable by policing.”

    Owens added that the operation showed “how law enforcement worldwide can, and will, come together with one another and private sector partners to dismantle international fraud networks at source.”
    Private companies including blockchain analysis firm Chainalysis, Intel 471, Microsoft, The Shadowserver Foundation, and Trend Micro worked with police to identify and bring down LabHost.
    The investigation started in June 2022 after police received intelligence about LabHost’s activities from the Cyber Defence Alliance, an intelligence sharing alliance between banks and law enforcement agencies.
    The Met’s Cyber Crime Unit then joined forces with the National Crime Agency, City of London Police, Europol, regional U.K. authorities, as well as other international police forces to take action. More

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    Can the IMF solve the poor world’s debt crisis?

    It is now four years since the first poor countries were plunged into default because of spiralling costs from covid-19 spending and investors pulling capital from risky markets. It is two years since higher interest rates in the rich world began to put even more pressure on cash-strapped governments. But at the spring meetings of the IMF and the World Bank, held in Washington, DC, this week, many of the world’s policymakers were acting as if the worst debt crisis since the 1980s, by portion of world population affected, had come to an end. After all, the poorest countries in the world grew at a respectable 4% last year. Some, such as Kenya, are even borrowing from international markets again.In reality, the crisis rolls on. The governments that went bust still have not managed to restructure their debts and dig out of default. As such, they are stuck in limbo. Over time more—and bigger—countries could join them. So in between the spring meetings’ embassy dinners and think-tank soirées, the IMF’s board announced a radical new step to deal with the problem.The core of the difficulty in resolving debt crises has been that there are more creditors, with less in common, than in the past. Over 70 years of debt restructurings, Western countries and banks came to do things a certain way. Now decisions require the assent of a new group of lenders, some of which see no reason to comply. Each part of the process, even if it was once a rubber stamp, can be subject to a protracted negotiation.Chief among the new lenders is China. Even though the country is now the world’s biggest bilateral creditor, it has yet to write down a single loan. India has doubled its annual overseas lending from 2012 to 2022; it sent $3.3bn to Sri Lanka soon after the country was plunged into crisis. The United Arab Emirates and Saudi Arabia are in the group, too. They have together lent more than $30bn to Egypt. The Gulf creditors’ preferred method is to deposit dollars at the recipient’s central bank—a form of lending so novel that it has never been subject to a debt restructuring before.As a result, the seven countries that have sought restructuring since the start of the pandemic have been unable to strike a deal to whittle down what they owe. Only two small countries have made progress: Chad, which rescheduled rather than reduced debts, and Suriname, which reached a deal with all its creditors but the biggest, China. Zambia has waited four years for a deal. Since no creditor wants a worse bargain than any other, there has been next to no principal debt relief during the worst debt crisis in four decades. Four years ago G20 countries signed up to the Common Framework, an agreement to take equal cuts in restructurings, but creditors have split over the degree of generosity needed.The IMF, which usually cannot lend to countries with unsustainably high debts, has been unable to do much. Yet on April 16th it made a move. It said it would lend to countries that have defaulted on debts but have not negotiated a deal to restructure all their debts. The policy is known as “lending into arrears”.In the past the fund, worried about getting its cash back, has lent into arrears sparingly and only with the permission of creditors still tussling over restructuring. Now all it is asking for is a promise from borrowing countries and co-operative creditors that its cash injections will not be used to pay off the holdouts. The imf’s economists have long feared that such a step would antagonise problem creditors, which are also countries with stakes in the fund itself. It seems the fund’s patience has run out: officials want to get debt restructuring moving.The new policy has the potential to impose discipline on the holdouts. In theory, restructurings work because easing the burden on borrowers maximises creditors’ chances of getting some—perhaps most—of their money back. The fund lending into arrears sharpens the incentive to comply because lenders who hold up negotiations face the prospect of not getting anything. They would be the ones frozen in limbo, while everyone else strikes a deal and carries on. The policy also strengthens the hand of debtors. In the past they may have feared walking away from their debts to, say, China, which is an easy source of emergency cash even after a default. Now if they wish to do so, they will have an alternative lender in the form of the imf.Getting cash flowing would certainly be good for populations of the troubled countries. Doing so might also keep the fund honest. Its debt-sustainability analyses are used as a benchmark for restructurings, and it may have an incentive to be too optimistic about sustainability, to avoid pushing a borrower into restructuring limbo. In a process that does not depend on playing down poor countries’ problems so as to avoid impossible restructurings, the fund will probably become a better broker, distinguishing between countries that need debt write-downs and those that just need a little more liquidity to make their next payment.Arrears and tearsThe question is whether the IMF can stomach the costs. Its threat will only bring creditors into line if it chooses to make use of its new powers. But in Washington officials still worry about aggravating the newer creditors, particularly China, with which the fund prizes its relationship. They might turn their back on co-operative restructurings altogether. Some borrowers could walk away from the IMF and take bail-outs from elsewhere.In the end, though, the fund may have little choice. Too many countries are in crisis. A clutch of big developing countries that have avoided default are teetering closer than ever to the edge. To avoid a catastrophe for hundreds of millions of people, international financiers need a way to get governments out of default before a country like Egypt or Pakistan goes under. Lending into arrears is the best available tool. ■Read more from Free exchange, our column on economics:What will humans do if technology solves everything? (Apr 9th)Daniel Kahneman was a master of teasing questions (Apr 4th)How India could become an Asian tiger (Mar 27th)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More