Banks

BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Economy

Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

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Currencies

Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Banks

Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Archive | November, 2016

Italy expects big interest in bad loans

Posted on 31 January 2016 by

Tourists take in the view from the top of St Angelo's castle as an Italian national flag flies from a flagpole nearby in Rome, Italy, on Sunday, May 5, 2013. Italian banks' corporate loan book will worsen this year as the euro region's third-biggest economy remains mired in its longest recession in two decades, according to the nation's central bank. Photographer: Alessia Pierdomenico/Bloomberg©Bloomberg

A senior Italian finance official has claimed the finance ministry expects strong interest from would-be buyers of distressed debt held by the country’s banks, rejecting concerns that last week’s deal to let Rome guarantee the loans will fall flat.

In an interview with the Financial Times, Alessandro Rivera, director-general for the banking and financial system at Italy’s finance ministry, said that while the government guarantee plan was not a “silver bullet” for Italy’s struggling banks, neither was it inherently flawed.

    “The tool will be effective to bridge the gap that exists between demand and supply for non-performing loans,” Mr Rivera said. “It will narrow the distance and simplify discussions between buyers and sellers, lowering the cost of funding, and we expect to see a growing number of transactions.”

    Italian banks are saddled with about €350bn in non-performing loans as a legacy of a lengthy recession, which ended late in 2014. After months of tortuous negotiation with the EU, an agreement was reached last week with Rome to ensure the loan guarantee scheme does not breach EU competition law.

    The plan is designed to clear one of the most persistent clouds hanging over the eurozone’s third-largest economy, with the $350bn worth about 17 per cent of total loans and the same share of gross domestic product.

    That pile of bad loans made the country’s financial institutions especially vulnerable in the recent market sell-off, causing alarm among investors and policymakers. Stocks in Italian banks tumbled last week even after the deal was announced.

    The bad loans will not be sold individually under the new plan but will be packaged through securitisation — a market that has been lacklustre in Europe over recent years — and sold to private investors.

    “These transactions are not frequent in Italy, but there is increasing activity,” Mr Rivera said. “[Securitisation] allows us to streamline the process and industrialise it and allows the involvement of the rating agencies, which are a key pillar of the scheme,” he said.

    Doubts remain about how effective the plan will be, as the government has said its guarantees will apply only to the least risky, or senior, tranches of debt that are given an investment-grade rating.

    “It’s unclear how many senior notes they can create from a given pool of non-performing loans, and how many junior notes they can sell,” said David Covey, head of European ABS strategy at Nomura.

    The scheme is also voluntary for Italian banks, which Fitch, the rating agency, suggested last week “may limit take-up”.

    However, Mr Rivera suggested there was plenty of appetite from potential buyers — mainly hedge funds and private equity firms — and predicted a “snowball effect” of transactions.

    “We know they have collected large amounts of money from their investors: the pressure is on them to do something and the money is there,” Mr Rivera said. “They are extremely interested and we are receiving a number of calls for clarifications and will proceed to explain [the scheme] better,” he said.

    Italy has refused to say what share of the €350bn in bad loans it hopes to see removed from banks’ balance sheets under the plan, and Mr Rivera said he was “not in a position to predict” an ideal target. However, the aim is to facilitate the sale of as many of the €200bn or so worst off loans — called sofferenze — as possible.

    The first loans sales with the new guarantees are expected to take place around April, Mr Rivera said.

    Herman Gref, Sberbank’s survivor chief

    Posted on 31 January 2016 by

    Herman Gref and Vladimir Putin: the Sberbank CEO is one of the remaining liberals in the president’s ruling circle©Reuters

    Herman Gref (right) is one of the remaining liberals in Russian President Vladimir Putin’s ruling circle

    In December 2014, as Russia’s rouble plunged amid sliding oil prices and western sanctions over Ukraine, Sberbank, the country’s biggest lender, suffered what its chief executive Herman Gref described as a “co-ordinated attack”.

    A million customers received anonymous text messages claiming that the bank, already restricted from raising western financing by sanctions, was about to be cut off from international fin­ancial networks and that deposits would be blocked.

      Queues formed at Sberbank ATMs as depositors withdrew Rbs1.3tn (more than $20bn) in a week and IT systems went into overload. Management kept silent, having concluded that reassuring messages might only inflame the panic. “It was a very dangerous mom­ent,” says Mr Gref. “Our systems, our liquidity management, our customer service, were all put to the test.”

      The scare abated and Mr Gref says he is proud Sberbank got through without external help. Russian authorities are still investigating the attack.

      But the crisis was a rude shock. Since 2007, Mr Gref had transformed Sberbank from a holdover of the Soviet bureaucracy into a modern financial in­stitution. Barely a year earlier, it had an­nounced bold plans to double profits and assets by 2018.

      Then, Mr Gref says, three “black swans” hit Russia. The most damaging, in his view — though he concedes it stretches the “black swan” definition of unexpected events that wreck previous assumptions — was not oil prices or sanctions, but Russia’s long failure to modernise its economy reaching a crunch point.

      “Basically the key problem now is the dire need of structural re­forms,” he says. “Because even if the oil price increases and sanctions are lifted, if reforms are not implemented there will never be high growth.”

      An irony of the sanctions is that Sberbank, as one of their biggest corporate targets, is run by a pro-western reform­er who for 15 years has been one of the leading liberals in president Vladimir Putin’s ruling circle. As economy minister, he led efforts to bring Russia into the World Trade Organisation.

      That he still feels able to criticise the government’s record reflects, perhaps, his reputation as one of the few senior Russians able to stand up to Mr Putin.

      A long-time friend, who asks not to be named, says the Sberbank chief executive re­mains someone the president listens to on economic matters. Steering the lender through the crisis without needing a state bailout has enhanced his standing. Sberbank’s net profit fell 24 per cent last year, but it accounted for the bulk of the entire Russian banking sector’s profits.

      CV

      Herman Gref

      Born

      February 8, 1964, Pavlodar region, Kazakhstan, USSR

      Education
      Omsk State University, St Petersburg State University law school

      Career

      1991: Joins St Petersburg City administration

      1998 -2000: First deputy minister of state property of the Russian Federation

      2000 -2007: Minister of economic development and trade

      2007 – present: Chief executive, Sberbank

      Interests
      Self-improvement and education, running and reading

      With a softly-spoken manner that be­lies his sometimes outspoken public comments, the 51-year-old has known Mr Putin, like many in today’s Russian elite, since the 1990s when they worked in the St Petersburg city administration.

      In 1999, Mr Putin chose Mr Gref to head a think-tank preparing his presidential economic policy. Then, as economy minister, Mr Gref implemented parts of his bold “Gref plan” before the Kremlin’s reform enthusiasm waned as energy prices soared.

      In 2007, he moved to the corporate world, although Sberbank was still 57 per cent state-owned, and pledged to “teach an elephant to dance” by re­vamping the company, its 20,000 branches and 250,000 employees.

      The task was byzantine. Sberbank, Mr Gref notes, was “basically 17 different banks” — regional divisions with different systems. He set about hiring young managers who centralised operations, cut bureaucracy and improved service.

      In 2011, Sberbank acquired Russian investment bank Troika Dialog, then the eastern European operation of Austria’s Volksbank, and in 2012 Turkey’s DenizBank. Sberbank’s countries of operation went from two, when Mr Gref joined, to 22. It raised $5.2bn in London’s biggest stock market listing of 2012, as Russia’s central bank reduced its stake in the lender to 50 per cent plus one share.

      Then the black swans arrived. Protests in Kiev led to revolution, Russia’s annexation of Crimea, war in east Ukraine and sanctions. Oil prices fell and Russia slid into recession. On sanctions, Mr Gref notes only that they constitute a “strange situation” when “over 30 per cent of our free float is held by American investors, and over 20 per cent is British investors”.

      After the bank was largely barred from raising western financing, it went through “quite a difficult period” of compliance, stopping all sanctioned operations, when it was unable to pay out for several days. “But we survived through that, and the situation has stabilised now,” he says.

      The former director

      Three things are proof of Herman Gref’s transformation of Sberbank, says Sergei Guriev, a leading Russian economist now at France’s Sciences Po, who sat on the bank’s board from 2008 to 2014. Service “dramatically” improved; financial results, until last year, were “spectacular”; and he equipped it to withstand crisis — thereby helping stabilise Russia’s financial system and economy.

      “He’s happy to bring in independent talent and recognise his own mistakes. He’s always learning, he reads a lot and he listens to Russian and (even more uncommon) non-Russian innovators, researchers and entrepreneurs.”

      Sberbank was also forced to find new sources of financing. “If before, we hard­­­ly ever used to attract loans from China, now we have to do it,” he says. “But it’s not the same scale” as its previous western financing. Yet Sberbank still had obligations to investors, to whom it had pledged in 2013 to double profits in five years. Mr Gref smiles as he recalls that even the “negative” scenario in its strategy as­sumed oil prices over that period of $95, about three times today’s price.

      Mr Gref warns that big global banks are being challenged by “fast, flexible” Silicon Valley financial technology companies. So the bank presented a radically revised strategy late last year. Surprisingly, it still envisages increasing profits and assets in 2013–2018 by 1.8 times. Though oil prices have fallen again recently, the bank told investors in January that it was not altering the strategy.

      If the previous plan was ambitious, says Mr Gref, “we’d call the new one hyper-ambitious”. But the path this time is different. Corporate lending targets have been revised down, with Sberbank aiming instead to lift its already large share of Russian retail lending by more cross-selling of financial services. International expansion is out.

      The strategy demands even more cost-cuts and organisational change. Af­ter shifting from a top-down divisional structure to a “matrix” model, borrowing methods from Boeing, the next goal is a “3D matrix”, where teams co-operate across boundaries throughout the organisation. To illustrate the need to break down barriers, Mr Gref picks up three glass water bottles and, momentarily alarming those around the table in his London hotel, clinks them heavily together — they do not smash.

      In IT, after shrinking 30 data centres to one, the next goal is a single, open-source platform built around “in-memory processing”, which speeds up customer data analysis, to help Sberbank confront the fintech upstarts.

      Despite Mr Gref’s enthusiasm for tackling challenges, the long-time friend says sanctions have come as a personal blow. Given Russia’s lengthening downturn and the Sberbank boss’s record as moderniser and crisis manager, this person speculates the Kremlin could recall him to a top economic role. Mr Gref has said he has little desire to be a minister again.

      But after Russia’s long inertia fostered by economic good times, could adversity finally prove the spur for reforms? “It’s true that human nature is quite resistant to change, and changes start when the money runs out,” he says. But reforms also require money to be spent.

      “The times when we were rolling in fat, literally, we had more possibilities for reform. But we had less need.”

      Athens and Rome expose EU faultlines

      Posted on 31 January 2016 by

      Italian Prime Minister Matteo Renzi (R) talks with European Commission President Luxembourg Jean-Claude Juncker before the arrival of Pope Francis at the European Parliament, on November 25, 2014. AFP PHOTO / POOL / PATRICK HERTZOG (Photo credit should read PATRICK HERTZOG/AFP/Getty Images)©AFP

      European Commission president Jean-Claude Juncker, left, and Italian prime minister Matteo Renzi

      How should we think about systemic risk in Europe today? The EU has been moderately successful at crisis management. But the ability to muddle through is reaching its limits when, as now, several crises intersect at once.

      You can see the problem most clearly in Greece — a country battling both an economic meltdown and a refugee crisis — with not much help from the rest of the EU. Last week when the European Commission issued a report criticising Athens over its failure to control its borders, Macedonia took the unilateral decision to close its southern crossing with Greece — leaving thousands of refugees in transit on the Greek side of the border. In Athens, meanwhile,
      parliament discussed pension reform, forced upon the country by their creditors as a quid pro quo for continued financial life support.

        Greece may be the starkest example, but it is not the only country facing overlapping crises. It is not even the most important one facing this dilemma. That would be Italy. While Rome’s problems are different from those of Greece, the country’s long-term sustainability in the eurozone is just as uncertain, unless you believe that its economic performance will miraculously improve when there is no reason why it should.

        Italy was overwhelmed by the increase of refugees from north Africa last year. On top of that it faces unresolved economic problems — no productivity growth for 15 years; a large stock of public sector debt that leaves the government with virtually no fiscal room for manoeuvre; and a banking system with €200bn in non-performing loans, plus another €150bn of debt classified as troubled. Then consider that
        its three main opposition parties have, at one time or another, all questioned the country’s membership of the eurozone. Even if none of them look like coming to power in the near future, it is clear that Italy only has a limited amount of time to fix its multiple problems.

        The struggle to repair the banking system is a good example of just how big the task is. Last week, the Italian government and the European Commission agreed a convoluted scheme to relieve the Italian banking system of some of these toxic assets. It uses all the dirty tricks of modern finance, including the infamous credit default swap, a financial product that mimics insurance against default on a bond, which was particularly popular during the pre-2007 credit bubble. These instruments allow investors to hedge against default risk. But more often than not, their true purpose is to conceal information, to fool investors, or to circumvent regulatory restrictions.

        In depth

        Europe’s migration crisis

        A migrant family walk toward the border after arriving at the railway station of Botovo, near the Croatian-Hungarian border, on September 21, 2015. Hungary has emerged this year as a "frontline" state in Europe's migrant crisis, with 225,000 travelling up from Greece through the western Balkans and entering the country from Serbia and most recently Croatia. Last week Hungary sealed its southern border with Serbia, forcing tens of thousands of migrants to enter Croatia, from where many then again crossed into Hungary and headed for Austria and beyond. AFP PHOTO / STRINGER

        The EU is struggling to respond to a surge of desperate migrants that has resulted in thousands of deaths

        There are no such evil motivations behind this structure in the case of Italy, but the idea that the country’s solvency crisis could be fixed through financial trickery is, of course, absurd. For me the scheme is less a symbol of devious financial engineering, than a sign of desperation. There was little else the Italians could have done under the EU’s tight rules on state aid.

        The European Commission previously blocked a proposal to create a classic “bad bank”, a state-owned company that would have bought the toxic debt directly from the commercial banks — thus giving them immediate relief. Doing so would have constituted illegal state aid under European law. The goal of the CDS scheme is more modest. It will bring no direct relief, but will help create an efficient market to sell some of this toxic debt over time. We should therefore expect the Italian banking system, and the wider economy, to continue to struggle.

        I shudder to think how Italy would cope with an additional shock of the kind Greece is experiencing after the Macedonian decision — a sudden inflow of immigrants from Syria. This might occur, for example, through further border closures on the Balkan route, which has been the preferred gateway for Syrian refugees on their way to Germany. Such a shift could see refugees divert via the Adriatic Sea to Italy.

        There are signs that Italy’s patience with the EU and Germany, in particular, is wearing thin
        . Matteo Renzi, prime minister, has been openly attacking the policies of the EU on energy, on Russia, on the fiscal deficits, as well as German dominance of the entire apparatus.

        It is not the euro crisis alone that has brought Italy to the brink of questioning its position in the eurozone. It is a combination of many crises and is likely to gain more momentum from the Brexit debate.

        There is an element of bad luck in this. Europe’s policy of muddling through, of doing the minimum required, and hoping to mop up the rubble later, might even have worked if the refugees had stayed at home. The EU’s mistake was not to have chosen a path that would lead to invariable ruin, but to render itself defenceless against the next unforeseen shock.

        munchau@eurointelligence.com

        Barclays, CS to pay $154m over dark pools

        Posted on 31 January 2016 by

        A logo of the British bank Barclays is seen on a sign outside a branch of the bank in London on October 22, 2015.©AFP

        Credit Suisse and Barclays have agreed to pay a record $154m to settle investigations by regulators into their share trading venues known as “dark pools”.

        Barclays will pay $70m, the largest ever penalty for a dark pool operator, with the fine split evenly between the Securities Exchange Commission and New York attorney-general’s office. The fine also settles a legal battle brought against the bank by the NY attorney-general in June 2014.

          Credit Suisse Securities will pay $60m, with half going to each regulator, as well as an additional $24.3m in disgorgement — a fine designed to make the bank pay back any wrongfully earned income.

          It comes after heightened scrutiny of dark pools — private trading venues designed to allow investors to trade large numbers of shares without moving the price against them — by US regulators. More than a third of daily US trading is executed away from public exchanges.

          “These cases mark the first major victory in the fight to combat fraud in dark pool trading and bring meaningful reforms to protect investors from predatory, high-frequency traders,” said attorney-general Eric Schneiderman.

          “This effort, which began when we first sued Barclays, includes co-ordinated and aggressive government action which forced admissions of wrongdoing from the parties. We will continue to take the fight to those who aim to rig the system and those who look the other way.”

          In early 2014, the attorney-general’s office launched its “Insider Trading 2.0” initiative, aiming to ensure fairness in electronic trading markets, prompted by the rise of high-frequency trading — the topic of Michael Lewis’s bestselling book Flash Boys.

          The settlements are the largest since Investment Technology Group, an agency broker, was hit with a $20.3m fine by the SEC in August. In January, UBS paid more than $14m to settle allegations about inadequate disclosures over its dark pool.

          We will continue to take the fight to those who aim to rig the system and those who look the other way

          – NY attorney-general Eric Schneiderman

          Barclays admitted to making material misrepresentations to investors about its platform, called Barclays “LX”, including how it monitored its venue for high speed, predatory trading, according to the statement. An independent monitor will conduct a review of the bank’s electronic trading business, with a view to further reform.

          Credit Suisse did not admit wrongdoing as part of the settlement. The NY attorney-general said the bank misled investors using its Crossfinder and Light Pool platforms. According to the settlement, Credit Suisse told clients that it did not preference any trading venue over another. However, the bank has been found to have prioritised Crossfinder, its own dark pool, over others, regardless of the quality of execution, the attorney-general’s statement said.

          Crossfinder is the second-largest dark pool, according to data from the Financial Industry Regulatory Authority. Barclays’ LX is the eighth largest.

          Credit Suisse and Barclays declined to comment.

          “Dark pools have a significant role in today’s equity marketplace, and the firms that run these venues must ensure that they do not make misstatements to subscribers about their material operations,” said Andrew Ceresney, director of the SEC’s enforcement division.

          FT City Network: Is the outlook all doom?

          Posted on 31 January 2016 by

          View of London at night fromTim Peake on board International Space Station©ESA/NASA

          View of London and the City at night fromTim Peake on board the International Space Station

          Several City leaders have warned about the global economic outlook, citing a “doomed” post-crisis environment in “a world of zeros” where central banks grapple over whether to further unwind ultra-loose monetary policies.

          Nigel Wilson, chief executive of Legal & General, said: “We are heading for a world of zeros: including zero inflation, zero growth in per-capita GDP and zero growth in productivity.”

            His comments were echoed by the UK fund manager Helena Morrissey, of Newton Investment Management, who told the Financial Times: “If ‘doomed’ is that the post-crisis experiment in attempting to use asset inflation to generate sustained growth is unwinding, and that confidence in the ability of central bankers to always be able to do ‘whatever it takes’ to preserve the wealth of those that seek to front-run official liquidity injections, then the answer is probably ‘yes’.”

            Other City chiefs also voiced bearish views in the latest online debate of the FT City Network, a forum of more than 50 financiers, business leaders and policymakers. They were responding to questions about recent low-key economic forecasts from George Osborne, the chancellor, and Mark Carney, governor of the Bank of England.

            A fortnight ago, Mr Carney said: “The year has turned and, in my view, the decision proved straightforward: now is not yet the time to raise interest rates . . . The world is weaker and UK growth has slowed.”

            The change of tone echoed a more downbeat prognosis from the chancellor, who warned last month that unless the UK kept to tough economic reforms, 2016 could mark “the beginning of the decline for the country”.

            Yet despite the even gloomier comments from Ms Morrissey and Mr Wilson, the majority view from the FT City Network was more balanced. John McFarlane, chairman of Barclays, said: “I doubt disaster is looming,” adding that he trusted the US economy to “rise and lift all others”.

            Win Bischoff, FRC

            The heroic outperformance of the UK economy is unlikely to continue in 2016 and beyond to the same extent as in the last two years. It will, however, remain sound.

            Expectations for that continuation needed to be cut back. Politicians and central bankers can do this as well as company CEOs when reducing guidance! I do not see this as anything but sound realism and a sensible update.

            2016 is going to be tough for all the reasons mentioned in the last few weeks, not only by the chancellor and the [BoE] governor. At the same time there is no suggestion at this time that we will have another recession.

            John McFarlane, Barclays

            John McFarlane©Getty

            Well, how things turn. The past years evidenced a two-tier world, with emerging markets and oil rich countries the darlings, and the developed world still in recovery from the global financial crisis.

            This said, we have seen relatively normal strength in the US and UK, with Europe as a whole weak, but certain countries strong. No longer. China’s correction and with it emerging markets in general, and unpredicted low oil and resource prices have brought uncertainty, and strangely enough, some normality to things.

            It’s always unreliable to predict outcomes in the eye of any storm

            It’s always unreliable to predict outcomes in the eye of any storm. My sense is we need to digest the new normal and wait for clarity. I doubt disaster is looming and things slowly will get better if not exciting. In my mind the US economy is key here. I’ve always trusted it in the past to rise and lift all others, and feel that will deliver again.

            Regarding monetary and regulatory policy, it’s really hard to see divergence so where’s the surprise in similar statements? Rates are unusually low, and the currency weak. While in the medium term we all expect higher rates, sudden moves are uncompelling. Inflation is hardly a worry either. Once greater clarity emerges on long term direction, I think the Bank will ease into rate rises gradually. In the meantime, at most it will be a little and then not much to follow immediately thereafter. I worry less about how it happens and more about getting it right. Remember, we’re all in this together, like it or not.

            James Bardrick, Citigroup

            James Bardrick Citigroup

            We have to be careful not to generalise, as even within regions, country situations and outlooks are so different. As I hear from many of my colleagues and our clients around our global network of over 100 countries, they view 2016 from their local and regional vantage points with an uneven range of perspectives.

            In Latin America, for example, Mexico, Brazil, and Argentina are not in the same place and whether it’s Asia, North or Latin America, Africa, Middle East or Europe, you need that local perspective because all those economies are in various states of development, recovery, and, increasingly, challenge.

            Others have already referred to the outlook in the US, the UK and Europe, so I will focus on the substantial drop in commodities, which creates real problems where you have emerging economies built and structured to have 4 per cent to 6 per cent growth rates.

            I’m also keeping a close eye on the economic situation in Russia

            The issues are compounded when there is a high dependence on the export of commodities, especially oil or minerals, to fund government programmes and the local economy and normally combine with high debt levels in the economy by historical standards. So, I am concerned about the slowdown in China and the market volatility we are seeing there today.

            I am also keeping a close eye on the economic situation in Russia, as well as the impact of sustained low energy prices on those countries with oil export economies. I would also expect Brazil to remain in recession in 2016, potentially exacerbated by unpopular fiscal policies.

            However, there are others that are well positioned to benefit from these macro trends, like India and Mexico.

            Slowdowns and recessions can and will occur in some countries although I would hope that the huge amount of work done since the last crisis should mean that a much stronger and more resilient banking and finance industry weathers the storms.

            Where does the politics come in? I would hope that similar announcements by finance ministers and central bankers mean that their views are aligned rather than politicised.

            Much more important is the increasing interaction between geopolitics and economics. There are obvious links between the turmoil in the Middle East, terrorist attacks around the world and the migration crisis, and between migration and European politics, and between tensions in Europe and politics in the UK. The refugee crisis is one of the biggest political risks for the EU in 2016. The most impactful political signposts for 2016 include the US presidential elections in November and the UK referendum on EU membership (probably sometime this summer).

            The refugee crisis is one of the biggest political risks for the EU in 2016

            Unscheduled political developments such as government collapses followed by snap elections may also emerge.

            Citi has highlighted the risk of “Merkel-exit” as a key risk to watch for Europe, given the importance of her leadership to not only Germany but the wider EU project.

            One danger is that governments with limited political capacity will increasingly lack the power — or the will — to address these risks with anything other than the piecemeal, “just in time” policies. Until now, financial markets have taken a relatively sanguine view of political events, treating them as regional and idiosyncratic. One of the main factors insulating markets from geopolitical risk has been abundant liquidity provision by central banks. As the Fed begins to raise rates, that support may begin to wane.

            Citi has highlighted the risk of “Merkel-exit” as a key risk to watch for Europe

            We may be entering a new phase, where policymakers, including central banks, have less power to mitigate risks. That said, a range of positive outcomes and “silver linings” may also emerge. Increased co-operation between Russia and the West over the Syria crisis is possible in 2016, potentially leading to an improvement in ties that dropped to their worst level in decades. 2016 could also see co-operation between Turkey and the EU to address the refugee crisis, potentially reviving broader relations.

            David Morgan, JC Flowers

            I don’t believe the two pronouncements [by Mr Osborne and Mr Carney] are further proof of politicisation of the UK’s monetary policy and financial regulation.

            Normal parts of the job of central bank governors are to provide credible views on the economic situation and outlook — both domestic and global — and help promote a well informed public policy debate on monetary policy and financial regulation.

            Central bank independence on monetary policy has generally worked well for all relevant constituencies. I believe it will — and should continue to be — jealously guarded not just by central bankers but also others, including the politicians.

            Financial regulation has been less insulated from politicisation than has monetary policy. Appointment of a truly first class chief executive to the FCA would be a welcome next step forward in this regard.

            Helena Morrissey, Newton

            Helena Morrissey, founder of the 30 Percent Club and chief executive officer of Newton Capital Management, poses for a photograph following a Bloomberg Television interview during the Milken Institute London summit in London, U.K., on Tuesday, Oct. 28, 2014. The summit brings together opinion makers, executives, investors and philanthropists during the Institutes two day event. Photographer: Simon Dawson/Bloomberg *** Local Caption *** Helena Morrissey

            If “doomed” is that the post-crisis experiment in attempting to use asset inflation to generate sustained growth is unwinding and that confidence in the ability of central bankers to always be able to do “whatever it takes” to preserve the wealth of those that seek to front run official liquidity injections, then the answer is probably “yes”.

            At Newton we have been mindful that rather than the pricing power and consumer price inflation that ultra-loose policy was supposed to create, we have instead witnessed the creation of an abundance of capacity across a wide range of sectors and industries.

            With the report published [recently] co-authored by former BoE governor Mervyn King for the Swedish Riksbank echoing our view that “models that not only didn’t, but couldn’t by their nature, predict the [2008] crisis were unlikely to tell the whole story of the difficulties facing economies during the recovery phase”, we would not be surprised to see current events unfolding into a more challenging period for markets and the UK economy.

            The Bank of England’s Funding for Lending Scheme started a slippery slope towards a 1970s style industrial policy supported by the central bank

            Re the second part of the question, I’d suggest that arguably the politicisation of UK (and wider) monetary policy and financial regulation has already occurred. The Bank of England’s Funding for Lending Scheme started a slippery slope towards a 1970s style industrial policy supported by the central bank. Everything is connected.

            Given that the interest rate set by a central bank cannot be an exact science and is invariably influenced to some degree at least by political aspects (and sometimes very obviously so, for example the Bank of Japan’s change in monetary policy at the behest of the new Prime Minister Abe and his appointment of the like-minded Mr Kuroda in 2013) it seems more probable that history will look back on the era of ‘independent’ central banking as the anomaly.

            Jean-Pierre Mustier, Tikehau

            Jean-Pierre Mustier, the former investment-banking chief of Societe Generale SA, arrives at the court house in Paris, France, on Wednesday, June 9, 2010. Societe Generale SA had no choice other than to unwind Jerome Kerviel's unauthorized trading positions immediately after they were discovered, the former head of the French market regulator told a court. Photographer: Antoine Antoniol/Bloomberg *** Local Caption*** Jean-Pierre Mustier

            We need to learn again to live in a more volatile financial world, brought by a major change of central bank policy. Capital markets are global and any decision of the Fed impacts them in a disproportionate way, even if the catalysts today can be the oil price or worries about the Chinese economy.

            But more volatility does not mean the return of the 2008 crisis, the environment is very different: banks balance sheet are much stronger, their short or long term refinancing is not an issue. In the UK and Western Europe, the environment is relatively supportive: lower oil price should be a positive for our economies, as should lower currencies, still accommodative central bank policies and the relaxation of some of the fiscal policies. Such correction might not signal a recession but will bring in a more reasonable valuation for various assets classes which were too stretched, like equity of credit.

            Politicians or central bankers are right to warn about the environment, and we should not look for more than that. But it is as well fair to say that the uncertainty of the political environment linked to Brexit needs to be taken into account by the central bank and might force the governor, far from being a politicisation of his function, to comment about such event as he already rightly did for the Scottish referendum.

            Nigel Wilson, Legal & General

            Thursday 14th February 2013 Nigel Wilson, CEO of Legal and General. Photographed at OSB.

            As a consequence of significant mis allocation of global capital there is an unnecessarily high probability that we are heading for a world of zero’s; including zero inflation, zero growth in per capita GDP and zero growth in productivity.

            Substantial structural reform is required to encourage step changes in new investment across infrastructure, technology and people which will drive growth in productivity and remedy the over capacity in old industries and the under capacity in new industries.

            Without reforms economic, social and political risks will continue to rise.

            From 2009 to 2015 central bankers, governments, business and investors were aligned as the combination of $60tn of QE led credit growth coupled with the windfall gains to business from lower interest rates and lower taxes alongside the hollowing out of middle management and deferral of capex drove excessive asset price inflation and increasing inequality.

            As a consequence of significant mis allocation of global capital there is an unnecessarily high probability that we are heading for a world of zero’s

            In 2016 the certainty of the Bernanke and Draghi puts has ended, however the risks and uncertainty associated with the $200tn of global debt remains. Market prices are now responding to market data — excess supply causes prices to fall eg oil, increasing default risk reduces banks values (Chinese banks have PEs of around 4 and several major western banks trade at a discount to book value) and reduced growth decreases business values everywhere.

            The good news is that the US, China and Germany all have sufficient financial firepower to stimulate their economies through supply reforms whilst Japanese corporates sit on cash balances equivalent to 70 per cent of their GDP The outcomes are that we are all likely to have to work longer, pay more taxes and make greater contributions to long term care and improving our digital skills. This will require significant international constructive collaboration between government, business and regulators.

            Rhydian Lewis, RateSetter

            We are not witnessing the start of a financial crisis of the ilk of 2008. Rather, global markets are simply moving in sync with the economic cycle. Crises occur when people don’t expect them and when supposedly robust mechanisms fail. That is unlikely to occur in any imminent downturn — there will be economic and financial losses but not an existential crisis. This economic slowdown is probably already under way.

            Monetary policy is working hand in hand with fiscal policy — easy money and low rates offsetting fiscal austerity. It makes sense for these two policies to work in a co-ordinated manner — they have been for the last 5 years. Financial regulation appears politicised at the moment because the government has removed the last head of the FCA and is setting the tone of a more conciliatory approach to the financial sector.

            Both monetary policy and financial regulation always have a political element — the former intertwined with the fiscal situation and the latter always subject to political appointment — but so long as there is institutional separation there are sufficient checks and balances not to be overly concerned. What’s more, the nuts and bolts of Western financial regulation is set as much globally as it is locally which mitigates overt politicisation.

            Brenda Trenowden, 30 per cent Club

            ©FT

            We are coming off an extended QE high which staved off Armageddon, alleviating some of the symptoms, but hasn’t put the world back on a prudent path of sustained economic growth.

            There is an ongoing and concerning dislocation between economic fundamentals and asset price inflation. The majority of large corporates in the UK have been able to amass cash with a bias towards share buybacks and M&A over capital investment. This, combined with a clear shift from low-yielding fixed income into equities and real assets driven by the search for yield has overheated the equity markets. This reinforces the dislocation between markets and economic fundamentals.

            Outside of the top tier corporates, balance sheets are not in such a strong position and there are clear credit quality concerns. On top of that, the Brexit debate doesn’t help as markets and businesses don’t like uncertainty.

            At ANZ we are particularly focussed on China, where the consumer confidence index fell to a record low, coinciding with the lower-than-expected Q4 GDP growth in 2015 and confidence on the five-year economic outlook also worsened in January. China will likely settle in the next 18-24 months and then continue to grow, but not at the pace that we have seen in recent years.

            UK economic data

            Economic growth

            GDP economic dashboardThe pace of overall economic growth halved in the first quarter of the year, in spite of a joint boost from sliding oil prices and the incipient eurozone recovery. While the data was worse than expected, most economists remain optimistic about the prospects for growth this year.

            Clearly, sustained low oil prices and falling commodity prices are positive in terms of key inputs to industry and my economist reminds me that falling oil prices are not normally the backdrop for a recession. In the UK unemployment has normalised, and this is in the face of record high labour market participation.

            So where does this leave us? I think to John’s original point, the current environment represents a “new normal” and we will have to wait to see how it plays out. Yes, UK growth is slowing, but it is because the recovery has matured. We don’t see a recession on the cards.

            On the second question, monetary policy and financial regulation are of course subject to some political influence and to James’s point, it’s good to see some ‘alignment of views’ in such a challenging economic environment.

            I would add that as a Canadian working for an Australian bank, I see immigrant flows as a net positive, so I liked Christine Lagarde’s recent comment — “The current surge in refugees is a challenge with an upside potential. With appropriate policies, this rich source of human capital can be harnessed with benefits for everyone.”

            Fiona Woolf, CMS Cameron McKenna

            I share Helena’s view that everything is connected. We must factor in to the “new normal” the investment implications of the agreement in Paris on climate change which includes a commitment to increase ambition.

            Simon Walker, IoD

            At Home with Simon Walker, Hammersmith, London

            [Are we doomed?] On the contrary. Notwithstanding the febrile behaviour of currency and stock markets, I — and most of our members — feel optimistic about prospects for 2016, particularly in Britain.

            Anxieties about the Chinese economy are understandable but overdone. The readmission of Iran to the international fold brings opportunities as well as risks, and the fundamentals of the main western economies remain sound.

            In Britain the number of people in work is at a record high, wage growth is 2 per cent against a backdrop of near zero inflation, and, notwithstanding the real misery of families hit by structural shifts, unemployment is as low as it is likely to get. The government is gently reining in spending. Fiscal and monetary policies remain sensibly synchronised and both the Chancellor and Governor of the Bank of England are appropriately cautious.

            The moaning minnies and doomsayers may dominate the headlines now, but in due course the prophecies of gloom will fade and normal service will resume. The fundamentals are satisfactory: the message has to be “keep calm and carry on”.

            And in years to come historians will marvel at the way it was once thought acceptable for politicians to set interest rates on the basis of the electoral cycle.

            David Roberts, Nationwide

            David Roberts, Nationwide©Bloomberg

            I am struck that when I talk to business leaders and consumers operating in the real economy they remain resolute and reasonably confident, whereas leaders in financial markets are uniformly bearish and despondent. It is interesting to question why this disparity exists.

            In my view, a sustained global liquidity surplus has led to a surge in commodity and emerging markets to name but two. This has inspired asset inflation, leveraged by QE, as opposed to increases in consumer demand, and the hoped for rise in business investment has not transpired. As a consequence financial markets have become dislocated from the real economy. What we are now seeing is an inevitable and necessary rebalancing as unrealistic growth expectations are reduced and financial markets “get real” with consequent asset price falls.

            The challenge therefore is whether the “real economy” in the powerhouse countries remain strong. This will be driven in large part by confidence; for businesses to invest and consumers to spend. The reduction in energy costs and the consequent decrease in inflation should put more money in people’s pockets and should result in greater spending, assuming expectations of employment and wages remain strong. Bank balance sheets remain strong, corporate balance sheets are very strong and hence the transmission mechanisms remain robust.

            In the UK it is also important to consider if the reduction in asset prices moves across into the housing market, as this would directly and quickly impact confidence

            In the UK it is also important to consider if the reduction in asset prices moves across into the housing market, as this would directly and quickly impact confidence. My sense is this is quite possible in high-end city centre properties, but probably not in the remainder of the market as the fundamental mismatch between supply and demand and low financing costs support prices. As such, whilst turbulence in the economy remains likely for some considerable months as imbalances unwind, the real economy is likely to remain relatively resilient and hence recession will be unlikely.

            My plea would be for government to use this dislocation as a reason to drive fundamental supply side investment; for sustained investment in infrastructure, skills, research and in particular support for technology deployment to shape and reinvent markets. The business case is sound and the UK needs this to compete successfully.

            Paul Drechsler, CBI

            I think there is little to add to feedback you have received, which is consistent. There is some necessary correction.

            There is still lots of uncertainty on many fronts. Different countries and sectors are experiencing different dynamics — it depends where you operate.

            Leadership is also about providing signals and confidence not contagion. Uncertainly and volatility are sure to prevail for some time to come. And of course, there is a referendum to contend with.

            Helen Alexander, UBM

            Just because we see the Bank and the Chancellor going in the same direction doesn’t mean we are seeing politicisation

            In the real economy, there is some nervousness, not least caused by the bearishness in the financial markets. But resolute and reasonably confident most firms remain, and they look with some surprise at the volatility of the markets. The world is in a very different place from the times of the crises we remember recently, and balance sheets are generally much more sound. If — if — we can keep that position, recession is not the most likely scenario.

            And meanwhile, just because we see the Bank and the Chancellor going in the same direction doesn’t mean we are seeing politicisation.

            Nigeria asks for $3.5bn emergency loans

            Posted on 31 January 2016 by

            (FILES) a file picture taken on September 16, 2015 in Paris shows Nigerian President Muhammadu Buhari speaking to the press. Buhari will be in charge of the petrol ministry in his new government his spokesman said on September 30, 2015. AFP PHOTO / BERTRAND GUAYBERTRAND GUAY/AFP/Getty Images©AFP

            Nigerian President Muhammadu Buhari

            Nigeria has asked the World Bank and African Development Bank for $3.5bn in emergency loans to fill a growing gap in its budget in the latest sign of the economic damage being wrought on oil-rich nations by tumbling crude prices. 

            The request from the eight-month-old government of President Muhammadu Buhari is intended to help fund a $15bn state deficit, which has been deepened by a hefty increase in public spending as the west African country attempts to stimulate a slowing economy. 

              It comes as concerns grow over the impact of low oil prices on petroleum exporting economies in the developing world. Azerbaijan, which last month imposed capital controls to try and halt a slide in its currency, is in discussions with the World Bank and the International Monetary Fund about emergency assistance.

              Nigeria’s economy is Africa’s largest and has been hit hard by the fall in crude prices — oil revenues are expected to fall from 70 per cent of income to just a third this year.  

              Finance minister Kemi Adeosun told the Financial Times recently that she was planning Nigeria’s first return to bond markets since 2013. But Nigeria’s likely borrowing costs have been rising alongside its budget deficit. A projected deficit of $11bn, or 2.2 per cent of gross domestic product, had already risen to $15bn, or 3 per cent, as a result of the recent turmoil in oil markets. 

              The $2.5bn loan from the World Bank and a parallel $1bn loan from the ADB, which would enjoy below-market rates, must still be approved by both banks’ boards. 

              Under World Bank rules its loan would be subject to an IMF endorsement of the government’s economic policies and bank officials say they would have to be confident the Nigerian government was undertaking significant structural reforms. But both loans would carry far fewer conditions than one from the IMF, which does not believe Nigeria needs a fully fledged international bailout at this point. 

              IMF and World Bank move to forestall oil-led defaults

              A oil worker works on a oil pump "nodding donkey "at an oil field near Baku, Azerbaijan, on Friday, Jan. 30, 2009. Since gaining its independence with the 1991 collapse of the Soviet Union, Azerbaijan has become an important energy exporter and transport hub for Caspian Sea oil and gas. Photographer: Jeyhun Abdulla/Bloomberg News

              Officials from the International Monetary Fund and the World Bank are heading to Azerbaijan to discuss a possible $4bn emergency loan package

              “I think we all agree that Nigeria is facing significant external and fiscal accounts challenges from the sharp fall in . . . oil prices, as of course are all oil exporters,” Gene Leon, the IMF’s representative in Nigeria, told the FT. But he added that Nigeria was not in immediate need of an IMF programme. “We are not in that space at all.” 

              An IMF mission that visited the country in January as part of a regular review estimated that Nigeria’s economy grew 2.8-2.9 per cent in 2015 and predicted it would register 3.25 per cent growth this year, down from an average 6.8 per cent growth in the decade to 2014, Mr Leon said.

              The country’s financial buffers are also eroding. The central bank’s foreign exchange reserves have nearly halved to $28.2bn from a peak of almost $50bn just a few years ago. A rainy-day fund that had $22bn in it at the time of the 2008-09 global financial crisis now has a balance of $2.3bn. 

              I think we all agree that Nigeria is facing significant external and fiscal accounts challenges from the sharp fall in . . . oil prices, as of course are all oil exporters

              – Gene Leon, IMF representative in Nigeria

              Mr Buhari won elections last year by promising to root out corruption and he has launched an aggressive crackdown since taking office, promising to recover “mind-boggling sums” he says were stolen under the watch of his predecessor, Goodluck Jonathan. 

              But the new government is also facing questions about its handling of the economy. Capital controls introduced last year have weighed on growth and the IMF has called for Mr Buhari to pursue alternatives. 

              The central bank introduced the first controls before Mr Buhari took office last May, but many new measures have been imposed since and the president has repeatedly voiced his support for them. 

              During a January visit Christine Lagarde, the IMF’s managing director, urged the government to allow the naira to trade more freely so that it could help absorb economic shocks. “It can also help avoid the need for costly foreign exchange restrictions, which we don’t really support,” she said in an address to parliament.

              Some see a growing case for outside help. Nigeria’s current economic troubles are “exactly the situation an IMF loan was created to deal with”, said John Ashbourne, economist at Capital Economics. Although Mr Buhari has promised reforms, they would take time to work and “getting money from abroad would help him do that”, he said.

              But Mr Buhari and his government are likely to resist a full IMF rescue programme. The former military ruler butted heads with the IMF while leading the government in the 1980s and many observers believe he would be reluctant to invite the fund in again.

              The World Bank loan would come as part of its “development policy” lending, which the bank uses to lend help to countries facing short-term financing difficulties. Such loans, known as “development policy operations”, often come alongside formal IMF bailouts, but they can also be independent of the IMF.

              During the 2008-09 crisis the World Bank used such loans to help developing countries, including Nigeria. And because of the growing problems facing many commodity-producing emerging economies, bank officials say they are seeing demand rising again.

              Axa chief warns on Brexit ‘Russian roulette’

              Posted on 31 January 2016 by

              Henri de Castries, Chief Executive Officer at AXA photographed during the interveiw, for one use in the Financial Times, copyright Magali Delporte, 2012©Magali Delporte

              Henri de Castries

              The head of one of Europe’s largest insurers has warned that the British referendum on leaving the European Union this year was akin to the country playing Russian roulette “with maybe not six bullets in the barrel but at least four.”

              Henri de Castries, Axa chief executive, said that the UK was right that the EU was “dysfunctional” and needed change, but added that there would be a severe negative impact on the country if it were to leave, particularly on the City of London.

              “There is a school of thought in the UK that says that the Monday would not be very different from the Friday [after a vote to leave]. I disagree — I think it would be very different,” he said, in an interview with the Financial Times, speaking from the group’s offices in central Paris.

              Interview

              De Castries excited by scale of technological change

              Paris, the 31th of July 2012. Mister Henri de Castries. AXA copyright : Magali Corouge/ Documentography

              The insurance industry is moving into a more accurate and dynamic age, says Axa chief

              Comments by Mr de Castries, who has been chief executive of Axa since 2000 and is one of France’s leading business figures, make him one of the few continental voices to have spoken out on the debate, with most reluctant to get involved or simply assuming a decision to stay.

              He said that there would be “very serious consequences” for the City of London in particular following a vote to leave, because the European Central Bank would not allow London to be the hub for Euro clearing any more. “You break a financial centre faster than you create it,” he warned.

              Referendums, he said, were also dangerous tools, because they were unpredictable. “People never answer the question asked. The response depends on their mood. It is like playing Russian roulette with not six bullets in the barrel but at least four.”

                David Cameron, the UK prime minister, is in the midst of tense negotiating to reform Britain’s relationship with the European Union ahead of the vote, which is likely to take place over the summer, although a date has not yet been set.

                Mr de Castries said that reform of the EU was necessary, however. “The UK is very right to say that there are things that should be changed in the union because you’d have to be a fool not to agree that the current state of things is pretty dysfunctional,” he said. He added that a UK decision to leave, combined with a lack of reform, would be a “disaster for everyone”.

                The 61-year-old chief executive, who has said he will step down from Axa by 2018, also hit out at financial regulation, saying it has weakened rather than strengthened the global system by forcing institutions to act in the same way.

                “If you look at systems in nature, stability does not come from the fact that everyone is doing the same thing. It comes from the fact that there is diversity. You have to ask yourself if the regulation is leading to an excessive uniformity.”

                He points to Solvency II, the EU insurance regulation introduced at the start of 2016, as a classic example.

                “It has led us to shorten our investment horizons because you measure the solvency of players with a one year investment horizon. Insurers are going less into long term investments, and have less countercyclicality.”

                Axa chief excited by technological change

                Posted on 31 January 2016 by

                Paris, the 31th of July 2012. Mister Henri de Castries. AXA copyright : Magali Corouge/ Documentography©Magali Corouge

                Henri de Castries

                Old meets new at Axa’s Paris headquarters. The old is an ornate 18th century mansion. Bolted on to it is the new — a modern glass-fronted office block. Henri de Castries has his office firmly in the old part. But, like a growing number of insurance executives, his conversation focuses on the new.

                The chief executive of Europe’s second-biggest insurer by market capitalisation says that the industry is dealing with technological change unevenly. “That is great news,” he adds, explaining that it allows more nimble operators to win business from those slower to embrace change. “Everyone is threatened . . . and it creates more fluidity in market shares.”

                He wants to put Axa at the forefront of the change. A bewildering array of initiatives is already under way — research labs in Silicon Valley and Shanghai, a €200m venture capital fund to invest in external start-ups, a new internal incubator fund called Kamet with €100m to invest, partnerships with LinkedIn and internal data analysis competitions to name just a few.

                Brexit vote is Russain roulette, says Axa chief

                Henri de Castries, Chief Executive Officer at AXA photographed during the interveiw, for one use in the Financial Times, copyright Magali Delporte, 2012

                There would be ‘very serious consequences’ of the UK leaving the European Union, says Henri de Castries

                And the pace is about to pick up. This year Axa comes to the end of its latest five year plan, and a new one will be presented in June. “There are three areas for growth” he says. “The traditional ones are the least powerful going forward.”

                The less powerful tools are, for example, the time-honoured strategy of being more selective in mature countries while pushing into growth markets. The excitement, says Mr de Castries, is in the digital transformation of the business.

                He says the industry is moving to a world where, instead of having a few data points on which to price risk, there are now a near unlimited amount, which can me measured in real time, with black boxes fitted in cars to measure driving safety just one example.

                His speech rich with metaphor, Mr de Castries says the industry is “moving from the representation of buffaloes in a grotto in Alaska by prehistorical painters to a 3D image. It’s much more accurate and dynamic, enabling you to have much more accurate and dynamic pricing.”

                And it is not just about using data to underwrite more accurately, he says. “It enables you to significantly increase the chances of prevention. Customers coming to an insurer would rather avoid risk than be paid the claim. If you have a much more accurate view of the risk, you will be able to do more prevention.”

                  This does not mean that traditional avenues of growth will be absent from the new strategy. Axa reported a solvency ratio of 212 per cent in December under the new Solvency II rules. Although many European rivals have not yet reported their ratios, Axa is expected to be among the stronger ones. That will put it in a good position to use its balance sheet to make further acquisitions — in the first half of 2015 the company completed deals in Africa, Poland, and Brazil.

                  But bigger deals are not the priority. “We know how complex it is to integrate other companies. Do you really want to merge two 19th-century factories when the challenge is to build a 21st-century factory? One way of consolidating is to take others’ market share without buying their balance sheet.”

                  He hopes that modernisation will also move into the European economy, helping to kick-start growth in the region. Unfortunately, he says, many countries have been proving reluctant to do the necessary “surgery” on their economies.

                  He is particularly critical of France’s Socialist government, despite its policy reversal about two years ago when it began pledging to cut taxes instead of raising them, on top of reducing red tape and creating more flexibility in the labour market.

                  “There is more talk than action,” he says. “When you look at what the state is spending today in euros compared with last year it is more. When compared with 2012 it is much more . . . the burden on companies is phenomenal and very little flexibility has been introduced in the system.”

                  He praises Emmanuel Macron, France’s reformist economy minister, for sending the right message but says that, ultimately, not enough has been done. Picking up on a phrase that he says he heard at the World Economic Forum in Davos, he says: “Talking does not cook rice.”

                  Closer to home though, Mr de Castries sees new risks threatening both his clients and his own company. Cyber attacks are a big concern. HSBC, where Mr de Castries is about to become a non-executive director, suffered an attack late last week.

                  “Cyber is much higher on my list, both as a worry and as an opportunity . . . It is the biggest source of disruption potentially for any industry. It’s true for government, utilities and individuals,” he says,

                  “Most at the moment do not understand it, and are not covered.”

                  UK commercial property investment pans out

                  Posted on 31 January 2016 by

                  31/05/13. LONDON STREET SCENES (FOR ANDY MEARS). PICTURE SHOWS THE HERON TOWER, THE TALLEST BUILDING IN THE SQUARE MILE. CREDIT: DANIEL LYNCH. 07941 594 556. www.lynchpix.co.uk

                  Investment in UK commercial property declined 19 per cent in the second half of 2015 from a year earlier, according to new data that confirm suspicions of a slowdown in the market.

                  Some £32.7bn was invested into the sector in the six months to the end of December, down from £40.5bn in the same period of the previous year, figures from the information provider CoStar Group show.

                    “The commercial property gold rush might be over,” said Richard Yorke, director of market analytics at CoStar, adding that investment was especially slow in the fourth quarter.

                    The year as a whole was the second strongest on record, with £67.5bn of investment, 5 per cent down from the previous year’s high.

                    But a changed atmosphere among investors became evident when the sale of Heron Tower, in the City of London, to the Chinese insurer Anbang fell through in September, while another major asset, Devonshire Square, was put up for sale but then removed from the market. A series of other properties on the market for about £100m were subsequently withdrawn.

                    “There were a few deals that did not happen late last year because investors were unrealistic about pricing, which in general was quite racy,” said Mr Yorke. “We may have reached the top in terms of pricing.”

                    £32.7bn

                    Invested in commercial property in the six months to end December 2015

                    But he said volatility in China, falling oil prices affecting levels of Middle Eastern investment, and jitters about a potential UK exit from the EU had also cut into investment levels.

                    Investors may pause ahead of the referendum on the UK’s membership of the EU, which is expected this year, as they did ahead of the 2014 referendum on Scottish independence from the UK, he added.

                    Sir George Iacobescu, chairman of Canary Wharf group, said investors were also wary of the currency risk posed by the EU vote.

                    £40.5bn

                    Invested in commercial property in the six months to end December 2014

                    “The hiatus that you see today is in part because of Brexit,” he said. “People are thinking twice because if the currency goes down you will suddenly see your investment fall in value.”

                    The impact of falling oil prices was seen last year in the levels of Middle Eastern money flowing into the market. The Qatar Investment Authority bought Canary Wharf with Canadian investors Brookfield in a £2.6bn deal in January 2015, but with that deal excluded, Middle Eastern investment dropped to £1.6bn, its lowest level since 2012.

                    Investors shifted their focus to the English regions: some £3.2bn flowed into the regional office market, the highest level since the 2008 financial crisis.

                    “We may have reached the top in terms of pricing

                    – Richard Yorke, director of market analytics at CoStar

                    They are now turning to the question of what will happen in the market if pricing has indeed passed its peak. Mr Yorke said the UK property market’s size and liquidity would continue to attract investors.

                    “Most observers expect yields have bottomed out and probably will start to drift up at the beginning of 2017, but don’t expect a big correction,” Mr Yorke said.

                    Capital controls will not cure China’s ills

                    Posted on 31 January 2016 by

                    epa02007063 Renminbi banknotes backdropped by the headquarters of the People's Bank of China (PBOC) in central Beijing, China 27 January 2010. PBOC is the issuing bank for Renminbi, the currency of China which has been under pressure from trading partners around the world to revalue in order to relieve pressure caused by trade imbalances. The trading range for Chinese currency which is not freely convertible on international markets is fixed within narrow limits by the government. EPA/ADRIAN BRADSHAW©EPA

                    In yet another sign of the strange times we live in, Japan is calling for China to impose controls to stem capital outflows that are eroding the value of the renminbi. Authoritative voices have endorsed this view. This fast-developing orthodoxy that capital controls could give China some breathing room is wrong. Controls would make things worse, not better.

                    China certainly has a problem on its hands. In August 2015, the People’s Bank of China ostensibly freed the renminbi’s value to be more freely determined by market forces. Unfortunately, it got off on the wrong foot, combining a well-intentioned move towards greater exchange rate flexibility with a 2 per cent devaluation relative to the dollar. Financial markets focused on the devaluation, interpreting it as a desperate measure to shore up a stalling economy. The problem was compounded by botched communications.

                      Since August, China has lost about $320bn of foreign exchange reserves in trying to prevent its currency from falling too fast. This has intensified a trend of reserve losses since mid-2015 as restrictions on outflows have been eased, allowing households, corporations and institutional investors to seek portfolio diversification through investments abroad.

                      Japan has good reason to worry about a falling renminbi. The success of the Bank of Japan’s monetary stimulus in raising inflation and boosting growth depends on a weaker yen stimulating exports. A falling renminbi vitiates that goal and the ensuing investor concerns are driving safe haven inflows to Japan, pushing up the yen. But the suggested remedy for the renminbi could end up worsening these problems.

                      Japan’s experience with capital account liberalisation (easing restrictions on capital flows) holds some positive lessons and a few cautionary ones for China. Opening up the capital account facilitated Japan’s integration into global trade and finance, and also helped in developing and deepening domestic financial markets. But it also made exchange rate management harder. An open capital account without a flexible, market-determined exchange rate complicates monetary policy.

                      In an ideal world, the correct sequence is clear — fix financial markets, free up the exchange rate, then open up the capital account. In a less than ideal world, an opportunistic approach to reforms may be the best available option.

                      The PBoC wisely used the goal of elevating the renminbi into the IMF’s basket of reserve currencies by the end of 2015 as a tool for opening up the capital account, freeing up the exchange rate and undertaking a number of financial sector reforms. But the timing was less than propitious as capital outflows for the right reasons (portfolio diversification) got mixed in with outflows fuelled by concerns about the economy and Beijing’s anti-corruption drive.

                      The endgame is clear. The PBoC will eventually have to free up the exchange rate rather than maintaining substantial and costly intervention to keep its value stable. In its own inimitable and oblique way, the PBoC signalled in December that markets ought to focus on the renminbi’s value relative to a trade-weighted basket of currencies of China’s major trading partners.

                      Despite its best intentions, however, the PBoC has painted itself into a corner. It faces a challenge in allowing for more currency flexibility in practice without triggering substantial capital outflows and a sharp currency depreciation. Reversing the progress on capital account opening through measures designed to hinder outflows risks
                      signalling that the government is back to its inconsistent approach to reforms.

                      There is a better exit strategy from the PBoC’s current dilemma, however. It will take a number of self-reinforcing elements to stabilise market expectations and rebuild investor confidence.

                      First, a balanced mix of macroeconomic policies to support growth. With monetary policy constrained, fiscal policy could be used to boost growth in the short run and help in longer-term economic rebalancing. This requires judicious tax cuts and increases in social spending. Second, a redoubled commitment to reforms. This would be an excellent time for the government to make a real commitment to some of the supply-side reforms it has long talked about. Third, a transparent communications strategy that makes clear what the government’s short-term and long-term plans are for currency market and other financial sector reforms.

                      Capital controls are a seductive but dangerous substitute for what China really needs — strong and concerted action to build confidence rather than measures that sow more panic.

                      The writer is a professor at Cornell University and a senior fellow at the Brookings Institution