Tag: Approved

DURING the financial crisis, Western governments poured hundreds of billions of dollars into their banks to avert collapse. The search for ways to avoid future bail-outs started before the turmoil ended. One of the niftiest proposals was the “contingent convertible” (coco) bond, which turns into equity when the ratio of a bank’s equity to risk-weighted assets falls below a predetermined danger point (since set at a minimum of 5.125% for cocos, although it can be up to around 7%). The ambition was grand. As the Squam Lake Group, composed of mostly American academics, put it in 2009, the automatic conversion of cocos would “transform an undercapitalised or insolvent bank into a well-capitalised bank at no cost to taxpayers”.

At first, regulators were keen. In 2010 Mervyn King, then the governor of the Bank of England, said he wanted contingent capital to be a “major part of the liability structure of the banking system”. Swiss regulators, too, pushed for coco issuance. The hybrid nature of cocos seemed a way to satisfy both regulators, who wanted banks to have bigger safety buffers, and bankers, who were reluctant to issue new shares because of the high cost of capital. The hope was that investors, too, might see the appeal of an asset that offered a higher yield than bank bonds but lower risk than bank shares.

Nine years after the first cocos…Continue reading

THE Hong Kong dollar is one of the most and least manipulated monies in the world. For over 34 years the territory’s monetary authority, the HKMA, has kept it pegged to America’s currency at around HK$7.80 to the dollar, resisting all temptations to let it fall or rise. In 2005 it refined the peg with two promises: to buy dollars at the price of HK$7.75 and to sell them for HK$7.85.

The strength of the Hong Kong dollar has obliged the HKMA to keep the first promise many times since. Its purchases of American dollars have even drawn the accusation that it manipulates its currency for competitive advantage.

In fact, the HKMA has always been ready to manipulate its currency upwards, too. But since 2005 it has had no occasion to, until last week. On April 12th the Hong Kong dollar weakened to HK$7.85, forcing the authority to buy HK$51bn over the next few days in exchange for American dollars.

The Hong Kong dollar’s weakness reflects the gap between rising American interest rates and…Continue reading

WATCHING financial markets can be like watching a horror film. A character walks into the darkness alone. A floorboard creaks. The latest spooky sign is the spread between the three-month dollar London interbank offered rate (LIBOR) and the overnight index swap (OIS) rate. It usually hovers at around 0.1%, but has recently climbed to 0.6% (see chart). As it widens, bankers are bracing for a jump scare.

To see why, consider what each rate represents. LIBOR is the rate that banks charge other banks for unsecured loans. The OIS rate measures expectations for the federal funds rate, which is set by the central bank. As LIBOR rises above the OIS rate, that suggests banks fear it is getting riskier to lend to each other. (The gap was 3.65 percentage points in the depths of the crisis, after Lehman Brothers filed for bankruptcy.)

Market-watchers were already twitchy. Last November they shuddered as the yield curve, which plots the yields of Treasury bonds of different maturities, abruptly flattened….Continue reading

THE aftermath of the 2007-08 financial crisis ought to have been a moment of triumph for economics. Lessons learned from the 1930s prevented the collapse of global finance and trade, and resulted in a downturn far shorter and less severe than the Depression. But even as the policy remedies were helpful, the crisis exposed the economic profession’s continued ignorance of the business cycle. That is bad news not just for the discipline, but for everyone.

The aim of those studying the macroeconomy has always been to understand the economy’s wobbles, and to work out when governments should intervene. That is not easy. Downturns come often enough to be a serious irritant, but not often enough to give economists sufficient data for rigorous statistical analysis. It is hard to distinguish between short-run swings and structural economic changes resulting from demography or technology. Most classical economists were sceptical of the idea that the macroeconomy needed much oversight at all.

By…Continue reading

WHEN the Foreign & Colonial Government Trust was launched in 1868, The Economist had its doubts. “The shape is very peculiar,” we worried, adding that “the exact idea upon which it starts has never been used before.” Some of the trust’s promises were “far too sanguine to ever be performed”. Nevertheless, we concluded that: “In our judgment, the idea is very good.”

That turned out to be one of this newspaper’s more successful forecasts. One hundred and fifty years later, the trust is still going strong, having delivered a compound annual return of 8.1%. It now looks after a portfolio of £3.5bn ($5bn), rather than the £588,000 it raised at launch.

In its own way, the trust is an example of how much the financial sector has changed—and how much it has stayed the same. The idea of a pooled portfolio seems commonplace now, but at the time it was revolutionary.

This was the 19th century, when Britain was confident of its worldwide role. The…Continue reading

WHEN the Foreign & Colonial Government Trust was launched in 1868, The Economist had its doubts. “The shape is very peculiar,” we worried, adding that “the exact idea upon which it starts has never been used before.” Some of the trust’s promises were “far too sanguine to ever be performed”. Nevertheless, we concluded that: “In our judgment, the idea is very good.”

That turned out to be one of this newspaper’s more successful forecasts. One hundred and fifty years later, the trust is still going strong, having delivered a compound annual return of 8.1%. It now looks after a portfolio of £4bn ($5.7bn), rather than the £588,300 it raised at launch.

In its own way, the trust is an example of how much the financial sector has changed—and how much it has stayed the same. The idea of a pooled portfolio seems commonplace now, but at the time it was revolutionary.

This was the 19th century, when Britain was confident…Continue reading

JUST a few years ago Wuhan, a sprawling metropolis in the middle reaches of the Yangtze River, exemplified China’s economic woes. Municipal debt had soared. The most senior local official was known as “Mr Dig Up The City”, a reference to his zeal for grandiose construction projects. A movie theme park, intended as a landmark, closed after failing to draw crowds. It would take nearly a decade, it was estimated, to sell all of Wuhan’s vacant homes.

These days, the city of 11m stands as a monument to China’s resilience. Its economy has accelerated even as the government has controlled debt more strictly. Five subway lines were opened or extended in the past two years alone; they are jammed in rush hour. Investment is pouring into semiconductor production, biotech research and internet-security companies. The glut of unsold homes is almost cleared.

But today China’s economy, like Wuhan’s, looks in much better shape. Then, the country was reeling from a stockmarket crash,…Continue reading

RAKUTEN is a jack-of-all-trades. Since pioneering e-commerce in Japan in 1997, it has been a rare example of a highly entrepreneurial Japanese firm. Today it spans more than 70 businesses providing credit cards, a travel agency, a golf-reservation system, matchmaking, wedding planning and insurance. It owns Viber, a calling and messaging app and has invested heavily in Lyft, a car-hailing service. Now it is adding another: on April 9th the government gave Rakuten a concession to operate Japan’s fourth mobile network (Rakuten currently runs mobile services using another operator’s infrastructure).

Rakuten sees this as the next step in building its “ecosystem”. It reckons it retains its approximately 95m registered users in Japan by being a trusted brand that can provide customers with everything they need at every stage of their life, and by rewarding their loyalty. Customers get points if they use their popular Rakuten credit cards, for example. These they can then spend on other…Continue reading

ALMOST all Canada’s oil and gas is landlocked, so getting it to market requires pipelines—lots of them. But building them requires skills more suited to circus artists than engineers. They must walk the financial high wire, jump through ever-changing regulatory hoops and juggle conflicting demands from environmental groups and numerous governments. The list of failures is long. It includes Northern Gateway, meant to bring Alberta crude to a port in northwestern British Columbia; Energy East, which would have linked Alberta to the Atlantic coast; Pacific Northwest, to bring gas to the west coast; and the legendary Mackenzie Valley gas pipeline, first proposed in 1974 and dropped in 2017 by its last, exhausted promoter.