Donald Trump is strong-arming Congress into accepting the new NAFTA
Thu, 06 December 2018 15:42:10 GMT

FOR YEARS President Donald Trump has been itching to withdraw from the North American Free Trade Agreement (NAFTA), a trade deal between America, Canada and Mexico. But as long as negotiations about a revamp continued, he held off. The day after signing a new deal on November 30th, rebranded the USMCA, he announced that he would “shortly” indulge himself and terminate the original deal after all. That would force Congress to choose between the USMCA and a NAFTA-less world.

“If Trump’s new NAFTA is so great, why does he need to resort to brinkmanship to ram it through Congress?” asked Ron Wyden, a Democratic senator. The answer is that many do not think the new deal is so great. The AFL-CIO, a union of unions, calls it incomplete. Nancy Pelosi, the minority leader in Congress and probably the next speaker, says it is a “work in progress”. Some Republicans express misgivings. Mr Trump wants to silence such voices.

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Why investors in emerging-market bonds are so attuned to political risk
Thu, 06 December 2018 15:42:10 GMT

PAULO GUEDES might not be your first-choice brother-in-law. He is a close adviser to Jair Bolsonaro, Brazil’s populist president-elect, who is wistful for military rule. But if you invest in emerging-market government bonds, Mr Guedes is the sort of person you might want as economy minister, the post he will take up on January 1st. He was co-founder of BTG Pactual, Brazil’s Goldman Sachs. He has a PhD in economics from the University of Chicago. He favours tax reform and privatisation.

Brazil is not the only focus of attention for such investors. This week Andrés Manuel López Obrador, a left-leaning populist, was sworn in as president of Mexico. He has cancelled a $13bn bond-financed airport that is already one-third-built. In November a committee of South Africa’s parliament resolved that the constitution should permit land reform without compensation. Some have begun to worry about what Narendra Modi might do to secure re-...

A trade truce between America and China is over as soon as it began
Thu, 06 December 2018 15:42:05 GMT

AFTER A WORKING dinner between Presidents Donald Trump and Xi Jinping on December 1st, it seemed as if a truce had been called in their two countries’ rumbling trade war. “This was an amazing and productive meeting,” said Mr Trump. But the truce is already at risk of unravelling.

On December 5th Canada’s justice department said that, on the same day that the two presidents dined, it had arrested Meng Wanzhou, the chief financial officer of Huawei, a Chinese maker of telecoms equipment, at America’s behest. For China, that looks like a political salvo. Huawei is a pillar of the Chinese economy—and Ms Meng is the founder’s daughter. The fate of the trade talks could hinge on her encounter with the law.

She was due to appear in a Canadian court on December 7th, after The Economist went to press. Her arrest is thought to be related to an American probe into Huawei’s alleged violation of...

Buying nuclear fuel is back in fashion
Thu, 06 December 2018 15:42:05 GMT

ON DECEMBER 3RD McIntyre Partnerships, a hedge fund in New York that normally buys equity and debt securities, told investors it was buying a commodity: uranium. This “slight anomaly” was justified by the metal’s impressive recovery, said its founder, Chris McIntyre. Uranium’s spot price has jumped by 41% since April, to near a two-year high (see chart), following an overdue reduction in supply.

Uranium fell out of favour after the Fukushima nuclear disaster in 2011, which led to plant closures in Japan and Germany and a slowdown in plant-building elsewhere. (Uranium, or plutonium, which is made from it, is an essential nuclear fuel.) Despite the recent surge its price, at $29 a pound ($64 per kilo), is still 60% below the 2011 peak, according to UxC, a consultancy. Production costs will be above that for perhaps three-quarters of this year’s output.

Uranium miners were slow to cut supply in response....

Quantitative easing draws to a close, despite a faltering economy
Thu, 06 December 2018 15:42:05 GMT

CENTRAL BANKING can be agonising. The effect of monetary policy on the economy is not immediate, so decisions must be based on expectations for two years’ time. That means putting faith in forecasts that could well turn out to be wrong.

Some soul-searching might be expected at the monetary-policy meeting of the European Central Bank (ECB) on December 13th. Since 2015 it has stimulated the euro-zone economy by buying bonds worth €2.6trn ($3trn) under its quantitative-easing programme. In June it said it planned to stop asset purchases by the end of the year (though it will continue to reinvest proceeds from maturing bonds), and to keep interest rates at their current rock-bottom levels “through the summer” of 2019. Since then, though, economic growth has slowed and inflation, stripped of oil-price rises, has stayed resolutely low. The question is how persistent these developments will be.

After an impressive showing...

Hard-up firms in China use cashmere and pork to repay loans
Thu, 06 December 2018 15:42:05 GMT

LI XINTONG DID not want one overpriced cashmere sweater, let alone a hundred. But when his loan to Jicai came due, the investment firm offered to repay him not in cash, but in sweaters. The value of 100 cashmere pullovers, it said, equalled his 150,000 yuan ($22,000) loan, and was thus fair compensation. Mr Li (not his real name) disagrees.

Perhaps he should count himself lucky. At least he did not receive dozens of packages of premium ham, as a troubled Chinese pig farm’s bondholders recently did, in lieu of interest. In another case, a financial subsidiary of HNA, a conglomerate that includes an airline, offered flight vouchers instead of cash when its clients’ investments matured.

The spate of unorthodox repayments highlights a squeeze in China’s financial system, which has hurt smaller companies and non-bank lenders most. So far this year companies have defaulted on 135bn yuan ($20bn) of bonds, more...

The first charges for money-laundering are laid against Danske Bank
Thu, 06 December 2018 15:42:05 GMT

AS EUPHEMISMS FOR suspected money-laundering go, “insufficiently legitimised” takes some beating. That is how Denmark’s Financial Supervisory Authority (FSA) described some of Danske Bank’s customers in a report in 2012. The country’s largest bank now faces criminal charges at home and investigations elsewhere.

The dirty-money scandal swirling around Danske is the largest ever uncovered. Over €200bn ($227bn) of suspicious transfers originating in ex-Soviet countries may have been rinsed through the bank’s Estonian branch. As the scale of the suspected laundering, dating back a decade, has emerged this year, the bank has lost its boss and seen its share price halved.

In preliminary criminal charges filed on November 28th, Danish prosecutors accuse Danske of failing to report suspicious transactions, not training staff in anti-money-laundering procedures, and having no senior manager responsible for...

The moral assumptions embedded in economic models of climate change
Thu, 06 December 2018 15:42:05 GMT

CLIMATE CHANGE is many problems in one. Developing and deploying zero-carbon technologies is a formidable challenge. So is the politics of co-ordinating disparate groups to achieve the necessary collective action. In America, where the Republican Party persists in climate denialism, it is an epistemological pickle. Policymakers met in Katowice, Poland, this week to discuss implementing the climate deal signed three years ago in Paris, from which America withdrew under President Donald Trump.

Behind all this, however, lies an economic problem. Humanity must work out how many resources should be diverted from other, valuable uses—from life-enriching consumer goods to funding for pensions—to the task of limiting global warming. These calculations may look bloodless, but they are built on weighty moral assumptions, namely, how to value other people’s lives. Though it is hard to know what might finally impel humanity to take the...

Why do so many people fall for financial scams?
Thu, 06 December 2018 15:42:05 GMT

Unmissable, you say?

IN HINDSIGHT, DAVID CARTER sees the deal differently. The 63-year-old has a Master’s degree in technology. A successful career meant he found a six-figure salary offer perfectly plausible. He knew from reading newspapers that tech stocks were up and the job market was hot. So when an email offered him a job with a Swiss firm at a $100,000 salary, he took it.

Mr Carter never saw a penny. Instead he owes $80,000, which he is paying off from his retirement savings. The job was too good to be true. All he had to do was use his credit card to buy iPhones and iPads. He started in June, buying them at Best Buy and Walmart and sending them from his home in Maryland to an address in California. The company paid his credit-card bill—for a few weeks. In July those payments were voided. His bank said the debts were his. The company’s website vanished. The people he had spoken to...

Europe makes contingency plans for clearing-houses after Brexit
Thu, 29 November 2018 15:47:02 GMT

AS THEY PREPARE for Brexit, many of London’s financial firms have begun to move some staff, or operations, to the continent. But financial contracts, notably derivatives, are difficult to uproot. London’s clearing-houses, which ensure that a contract is honoured even if one side goes bust, are globally important. As fears of an acrimonious Brexit have risen, so too have those of havoc. Now European Union regulators have unveiled contingency plans.

Clearing-houses have grown vastly in significance since the financial crisis, after which the G20 group of economies made it mandatory to settle most simple derivatives trades through them. London’s three big clearing-houses handle vast amounts of derivatives, and much of the trading cannot be done elsewhere. LCH, London’s largest clearing-house, clears interest-rate swaps with a notional value of over $340trn, making up 95% of the world’s total. LME Clear (part of the London Metal...

Non-bank firms are now big players in America’s mortgage market
Thu, 29 November 2018 15:47:02 GMT

Not so bankable

TWICE IN THE past 30 years, housing finance has taken down America’s economy. As interest rates rise and the housing market stutters (see article), regulators are again pondering the risks from the mortgage market—this time from a shift towards non-bank originators.

These firms, which create mortgages and often sell them on to other institutions, exist outside the bank-regulatory framework. They now account for 44% of lending by the top 25 originators, up from 9% in 2009, according to Inside Mortgage Finance, a trade publication. Five of the largest ten are non-banks, as is the largest retail mortgage originator, Quicken Loans. Their market share for servicing mortgages, or collecting monthly payments, has risen from 5% in 2009 to 41% in 2018.

Some of this shift reflects non-...

Paul Volcker’s memoir invites a rethink of the fight against inflation
Thu, 29 November 2018 15:47:02 GMT

PAUL VOLCKER’S legend is almost as grand and imposing as his physical personage, all six feet and seven inches of it. In 1979 President Jimmy Carter chose him to run the Federal Reserve and tackle America’s high inflation. Mr Volcker acted with grim determination, tightening monetary policy even as the economy sank into deep recession and beleaguered Americans pleaded for relief. Eventually he not only routed inflation, but also won a hard-earned credibility for the Fed that would help successors keep inflation stable. Mr Volcker himself recounts the story in a new memoir, “Keeping At It”, which calls on central banks to resist the siren song of loose money. But the book also invites readers to reconsider his legacy, and to ask whether central bankers have drawn the right lessons from the legend of Chairman Volcker.

The recessions and disinflation of the early 1980s proved a watershed both for macroeconomics and the practice of...

Financial firms have quietly prepared for Brexit
Thu, 29 November 2018 15:47:02 GMT

SINCE BRITONS chose to leave the European Union in June 2016, the clichés have piled up almost as thickly as the votes: “no deal is better than a bad deal”; “Brexit means Brexit”. And you might count yourself rich—even by the City of London’s standards—if you had a fiver for every time you had heard a banker say his firm was “hoping for the best, but preparing for the worst”. Four months before Britain is due to quit the EU, financial firms have long ago given up hoping for the best (for most, that Britain would remain after all) and are still not sure they will avoid the worst—a sudden, no-deal Brexit on March 29th 2019. But they have been quietly bracing themselves for it.

Firms based in any EU member state may serve clients in any other: lending and raising money, trading and clearing derivatives, and insuring lives and property across the union without setting up shop locally, in a system known as “passporting”. London is by...

Corporate bonds in an ageing business cycle
Thu, 29 November 2018 15:47:02 GMT

IN THE 1970s the junk-bond market was a dark underworld. It was the home of “fallen angels”, the bonds of investment-grade firms that had gone to seed. Most investors were too genteel to hold them. So they traded at hefty discounts to face value. Then Michael Milken, a junk-bond guru, came along with a new gospel. A portfolio of high-yield junk was a better bet than one of supposedly safer bonds. After all, an A-rated bond can only go in one direction—down.

The corporate-bond class system is still in place. Many types of mutual fund are barred from holding non-investment grade (ie, junk) bonds. But junk is no longer a stunted and shameful offspring. The high-yield market in America is now worth $1.2trn. And investment-grade bonds have also come down in the world. Around half are rated BBB, a notch above junk. Issuers are slumming it for a reason. A low rating is the price they pay for loading up on cheap debt.

A world with less snobbery of any kind is a...

Why opening pubs on the Emerald Isle is so difficult
Thu, 29 November 2018 15:47:02 GMT

Whither ’Spoons?

FOR A COUNTRY whose chief cultural export is its pubs—there are some 7,000 Irish pubs worldwide, and 8,403 on the island itself—Ireland makes it surprisingly difficult to open a drinking establishment. In both Northern Ireland (part of the United Kingdom, but with many of its own laws) and the Republic, the process is slow, pricey and fraught with uncertainty.

Both use a system familiar to anybody who has ever queued to get into a nightclub: one in, one out. Aspiring landlords must buy licences from those willing to “surrender” theirs. Moreover, buyers must prove local “need” by pointing to a growing population or the closure of nearby pubs. Objections, from existing publicans, say, can cause months of delays. Transfers of licences are approved by courts and dates for disputed cases are hard to come by, says Maura McKay, a lawyer in Belfast.

Getting a licence in Ireland...

Green asset classes are proliferating
Thu, 29 November 2018 15:47:02 GMT

IF THE WORLD is to tackle global warming, vast amounts of money—$3.5trn annually from now until 2050, according to the International Energy Agency, a forecaster—will have to flow into clean-energy research and generation. Capital will have to shift from carbon-intensive industries into clean ones. That means asset managers will have to offer more green investment products, and regulators will have to set standards that enable investors to make green choices.

Much has already been done. In a decade green-tinged assets under management have grown from almost nothing to a small but significant share of the total. In America, where scepticism about climate change is common, climate is the most frequently used “ESG” (environmental, social and governance) criterion among asset managers, reckons US SIF, an industry group. As of this year, $3trn of the $46.6trn in professionally managed American assets take climate issues into account—more than double the amount in 2016.

The first “green” bonds,...

Bitcoin has lost most of its value this year
Thu, 29 November 2018 15:47:02 GMT

ON DECEMBER 17TH 2017 the price of bitcoin on CoinMarketCap, a cryptocurrency exchange, neared $20,000. True believers hoped that was just the beginning. One analyst at a Danish investment bank predicted bitcoin could be worth $100,000 by the end of 2018. The year is not yet over. But as The Economist went to press, bitcoin’s price was $4,223, and trending downwards (see chart). Where bitcoin goes, other cryptocurrencies follow. Ether, the second-most popular cryptocurrency, is down from $1,432 in January to $120 today.

All this marks the deflating of the third cryptocurrency bubble (the others were in 2011 and 2013). The trigger is unclear. Explaining the movements of deep, liquid markets is tricky at the best of times. Cryptocurrency markets are neither. One popular theory is that the the supply of brave buyers willing to take a punt has now been exhausted.

Regulatory interest may be another reason. Cryptocurrencies have long been a...

The person who is doing most to undermine the Reserve Bank of India
Thu, 22 November 2018 15:53:30 GMT

SOMETIME IN THE 1990s Jagdish Bhagwati, one of India’s most distinguished economists, encountered Swaminathan Gurumurthy, a financial commentator associated with the Rashtriya Swayamsevak Sangh (RSS), a Hindu-nationalist organisation. Mr Gurumurthy was making the case that globalisation, brought in by well-connected financiers, was destroying India. Mr Bhagwati came to a caustic conclusion. If RSS ideologues like Mr Gurumurthy were economists, then Mr Bhagwati was a “Bharatnatyam dancer”, he said (referring to a traditional dance from Tamil Nadu performed by women).

Over 20 years later, Mr Gurumurthy’s beliefs have changed little. But today he is one of the most influential members of the board of the Reserve Bank of India (RBI), the country’s central bank, to which he was appointed by the government in August. He has led demands that the RBI loosen restrictions on India’s rickety state-run banks and hand more of its reserves to the government. Other than Narendra Modi, the...

Treaty-shopping is about to get more expensive
Thu, 22 November 2018 15:53:30 GMT

Treasure island

MBIZA, A BUSINESS that grows berries in Zambia and South Africa, and Niel Finance and Services, which owns the Central African Republic’s largest mobile firm, would seem to have little in common. But both have headquarters in Mauritius, an island of 1.2m people 2,000km off the mainland. The country, which tops the World Bank’s “ease of doing business” ranking for sub-Saharan Africa, has a robust legal system and amenities that make it an attractive place to set up shop. Perhaps a bigger draw, though, is a 15% corporate-tax rate, falling to as little as 3% on foreign income.

Mauritius also boasts an extensive tax-treaty network with many sub-Saharan African countries. It has ratified 15 since 1992; only South Africa arranged more over the period. Twelve more are in the works. Double-taxation treaties (DTTs) specify the rate applied by source countries on cross-border income, such as...

For Europe’s stockmarkets to recover, bank shares need to rally
Thu, 22 November 2018 15:53:30 GMT

NOT SO LONG ago, a stockbroker trying to interest an American fund manager in European shares would be met with an eye-roll. But sentiment is fickle and attitudes change. These days the likely response is a hard stare. Over the years in which stockmarket returns in America pulled ahead of everywhere else, any residual feelings for old-world shares had slowly turned to indifference and then curdled into something like hatred.

For what is there to like? The Euro Stoxx 50 index of euro-zone shares is lower than it was 20 years ago. Earnings forecasts have been steadily cut this year. Political risk—from Brexit to Italy’s budget stand-off with the European Union—is never far away and, seemingly, never resolved. “Call me when it’s over,” is the refrain of many American investors. Do not get them started on Europe’s structural defects: its ageing populations, scarcity of world-class digital firms and fragmented markets.

The category of stocks that captures the...


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