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Global monetary policy: from divergence to convergence again?

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Global monetary policy: from divergence to convergence again?

By Artur Baluszynski, Head of Research at Henderson Rowe

Henderson Rowe’s Artur Baluszynski, Director and Head of Research, discusses whether negative rates are the “new normal” as central banks head towards rate-cutting or more QE.

Every tool that central bankers have tried to revive the global economy since 2009, including QE, is merely an attempt to modify the behaviour of investors, businesses and consumers. The ECB and the Fed have been trying to kickstart lending by “lubricating” the financial system with cheap money and to boost inflation. If central bankers are successful and manage to alter the behaviour patterns of market participants, the yield curve should steepen. This means the gap between short-term and long-term yields increases as investors expect stronger growth and higher inflation*.

So far, the G7 central banks have been reasonably successful and sometimes just lucky in their attempts to reflate the global economy. When the Fed started cutting rates in 2007, the curve began to steepen, helping to kickstart the growth of credit in the US economy. Once the US economy reached a sustainable momentum, the Fed was the first central bank to return policy rates to pre-recession levels in 2017. In Europe, however, the sluggish economy and a weak banking system meant the ECB had to stay put. At one point, the two-year rate difference between the US and the eurozone was close to 3%, and the coordinated convergence to zero was officially over.

When the global economy started slowing down due to tariff wars in late 2018, the Fed began cutting rates, but this time the curve flattened. ECB’s recently extended QE and new rate cut had almost no impact on the yield curve. This time, the market is trying to tell central bankers it is the end of the road for traditional monetary policy.

 Debt and other drags on growth 

The eurozone’s most significant obstacle to reflating its economy is debt. By taking on a substantial amount of debt pre-2008, some European consumers and corporates brought most of the future growth forward. As a result, future cash flow will be directed towards interest and debt repayments, instead of consumption.

While the US banking system is in much better shape, demographics will be a drag on growth. The baby boomer mortgage bonanza officially ended with the global financial crisis. Most of that generation is now in deleveraging mode, which is understandable. You have to pay off your debt to retire. For the younger generation, zero-hour contracts and overhanging student debt means less disposable income, hence a minimal boost to the US economy.

Structural issues highlighted above coupled with the recent austerity policies in the eurozone, decades of offshoring of manufacturing to countries with cheap labour, declining birth rates and anti-immigration policies, slowly choked off demand in the developed world.

Sixteen trillion dollars of negatively yielding sovereign credit shows that central banks are committed to keeping the cost of money as low as possible. However, if they cannot stimulate their domestic economies at zero interest rates, what are the chances they will do so at negative rates, which are a tax on the banking system? Japanese and European bank share prices are at or around decade lows, reflecting their deteriorating fundamentals and confirming that central banks are reaching limits in terms of their credibility and effectiveness. To be blunter, we have now reached the impotence of monetary policy.

 Politics before monetary policy 

Mario Draghi, the outgoing president of the ECB, as well as his successor Christine Lagarde both mentioned the need for fiscal stimulus while telling politicians not to rely on the ECB anymore. In the US, Trump’s administration has already launched a mini fiscal stimulus in the form of corporate and individual tax cuts. But any new tax cuts would require approval by the Congress, where Democrats control the House of Representatives and are not likely to risk boosting Trump’s support during an election season.

The fragmented eurozone will find it even more challenging to agree on a coordinated fiscal expansion. Let us not forget that as per the Stability and Growth Pact, the EU countries have to maintain a maximum fiscal deficit of 3% of GDP and a public debt below 60% of GDP. So there is a structural obstacle the EU would have to deal with first. Another issue will be domestic politics. In the case of Germany, any government who wants to be re-elected will not want to be seen officially financing the deficits of other countries, especially the likes of Italy or Greece.

Zero or negative interest rates are here to stay until there is a coordinated political solution and not only a monetary one. The G7 central banks have failed to stir inflation, much less fuel GDP growth. Developed economies will continue to deflate until a proper plan for coordinated fiscal stimulus is agreed. While the Fed has not yet reached or even considered negative rates, a more severe recession combined with a lack of political solutions could be a trigger for crossing that threshold.

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IMF lifts global growth forecast for 2021, still sees ‘exceptional uncertainty’

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IMF lifts global growth forecast for 2021, still sees 'exceptional uncertainty' 1

By Andrea Shalal

WASHINGTON (Reuters) – The International Monetary Fund on Tuesday raised its forecast for global economic growth in 2021 and said the coronavirus-triggered downturn in 2020 would be nearly a full percentage point less severe than expected.

It said multiple vaccine approvals and the launch of vaccinations in some countries in December had boosted hopes of an eventual end to the pandemic that has now infected nearly 100 million people and claimed the lives of over 2.1 million globally.

But it warned that the world economy continued to face “exceptional uncertainty” and new waves of COVID-19 infections and variants posed risks, and global activity would remain well below pre-COVID projections made one year ago.

Close to 90 million people are likely to fall below the extreme poverty threshold during 2020-2021, with the pandemic wiping out progress made in reducing poverty over the past two decades. Large numbers of people remained unemployed and underemployed in many countries, including the United States.

In its latest World Economic Outlook, the IMF forecast a 2020 global contraction of 3.5%, an improvement of 0.9 percentage points from the 4.4% slump predicted in October, reflecting stronger-than-expected momentum in the second half of 2020.

It predicted global growth of 5.5% in 2021, an increase of 0.3 percentage points from the October forecast, citing expectations of a vaccine-powered uptick later in the year and added policy support in the United States, Japan and a few other large economies.

It said the U.S. economy – the largest in the world – was expected to grow by 5.1% in 2021, an upward revision of 2 percentage points attributed to carryover from strong momentum in the second half of 2020 and the benefit accruing from $900 billion in additional fiscal support approved in December.

The forecast would likely rise further if the U.S. Congress passes a $1.9 trillion relief package proposed by newly inaugurated President Joe Biden, economists say.

China’s economy is expected to expand by 8.1% in 2021 and 5.6% in 2022, compared with its October forecasts of 8.2% and 5.8%, respectively, while India’s economy is seen growing 11.5% in 2021, up 2.7 percentage points from the October forecast after a stronger-than-expected recovering in 2020.

The Fund said countries should continue to support their economies until activity normalized to limit persistent damage from the deep recession of the past year.

Low-income countries would need continued support through grants, low-interest loans and debt relief, and some countries may require debt restructuring, the IMF said.

(Reporting by Andrea Shalal; Editing by Shri Navaratnam)

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Leon Black step downs as Apollo CEO after review of Epstein ties

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Leon Black step downs as Apollo CEO after review of Epstein ties 2

By Mike Spector and Chibuike Oguh

NEW YORK (Reuters) – Leon Black said on Monday he would step down as chief executive at Apollo Global Management Inc, following an independent review of his ties to the late financier and convicted sex offender Jeffrey Epstein.

While Black, whose net worth is pegged by Forbes at $8.2 billion, will remain Apollo’s chairman, his decision to step down illustrates how doing business with Epstein weighed on the reputation of one of Wall Street’s most prominent investment firms. Black co-founded Apollo 31 years ago.

Apollo said it plans to change its corporate governance structure, doing away with shares with special voting rights that currently give Black and other co-founders effective control of the firm.

The independent review, conducted by law firm Dechert LLP, found Black was not involved in any way with Epstein’s criminal activities. Black paid Epstein $158 million for advice on tax and estate planning and related services between 2012 and 2017, according to the review.

Black, 69, said that although the review confirmed he did not engage in any wrongdoing, he “deeply” regretted his involvement with Epstein.

“I hope that the results of the review, and related enhancements … will reaffirm to you that Apollo is dedicated to the highest levels of transparency and governance,” Black wrote in a note to Apollo fund investors. He will step down as CEO no later than July 31.

Apollo co-founder Marc Rowan, 58, will take over as CEO.

Rowan has often kept a low-key profile compared with Apollo’s other co-founder, Joshua Harris, 56, and spearheaded many initiatives that turned Apollo into a credit investment giant, including the permanent capital base the firm enjoys through its ties to reinsurer Athene Holding Ltd.

The revelations of Black’s ties to Epstein took a toll on Apollo, which Black turned into one of the world’s largest private equity groups. Apollo executives had warned in October that some investors had paused their commitments to the buyout firm’s funds as they awaited the review’s findings.

Apollo shares are down 1% since the New York Times reported on Oct. 12 that Black paid at least $50 million to Epstein for advice and services, when most of his clients had deserted him.

Over the same period, shares of peers Blackstone Group Inc, KKR & Co Inc and Carlyle Group Inc are up 19%, 10% and 23%, respectively.

“We think a large number of (Apollo fund investors) took a ‘pause’, and we believe the outcome (of the review) and changes today will cause most of them to return to allocating to future Apollo funds,” Credit Suisse analysts wrote in a research note.

Apollo shares jumped 4% to $47.65 in after-hours trading on Monday.

“We continue to follow these events closely and will evaluate how Apollo addresses its issues,” the California State Teachers’ Retirement System, one of the largest U.S. public pension funds and an Apollo investor, said in a statement.

Epstein was found dead at age 66 in August 2019 in a Manhattan jail, while awaiting trial on sex trafficking charges for allegedly abusing dozens of underage girls in Manhattan and Florida from 2002 to 2005. New York City’s chief medical examiner ruled that the cause of death was suicide by hanging.

FALLING OUT

Black previously said he had paid millions of dollars to Epstein, but the exact size of his payments was revealed for the first time on Monday. Beyond the $158 million in payments, Black made two loans to Epstein totaling $30.5 million in early 2017.

Dechert said in its report that Black’s social ties with Epstein, who built his fortune by endearing himself to powerful figures in high society, went back to the mid-1990s.

Epstein won Black’s trust by resolving an estate tax issue for him in 2012 potentially worth at least $500 million, the report said. He ended up advising Black on various aspects of his personal financial affairs, from his family office and airplane to his yacht and artwork.

Black believed that Epstein provided advice over the years that conferred between $1 billion and $2 billion in value to him, according to the Dechert report. Black said in his note to investors that he had paid Epstein a fee equivalent to 5% of the value he generated on an after-tax basis, and not tied to hourly rates.

Black and Epstein’s relationship deteriorated after Epstein failed to repay $20 million of the loans and Black refused to pay tens of millions of dollars in fees that Epstein demanded, according to the Dechert report.

They severed ties in October 2018, according to the report. Black knew Epstein had been convicted in Florida a decade earlier for soliciting prostitution from a minor, the Dechert report said, but there was no evidence suggesting Black had knowledge of the other alleged crimes before they were publicly reported in late 2018, culminating in Epstein’s July 2019 arrest.

On Monday, Black pledged $200 million toward “initiatives that seek to achieve gender equality and protect and empower women,” as well as helping survivors of domestic violence, sexual assault and human trafficking.

Apollo said it would pursue a “one share, one vote” corporate governance structure that would do away with shares with special voting rights. It said the move could qualify it for listing on the S&P Global indices.

Apollo also said it would seek to give its board more authority to oversee its business, eroding the power of its executive committee led by Black.

The board will be expanded to include four new independent directors, including Avid Partners founder Pamela Joyner and physician and scientist Siddhartha Mukherjee, Apollo said. Apollo co-Presidents Scott Kleinman and James Zelter will join the board and take on increased responsibility running day-to-day operations.

Apollo had about $433 billion in assets under management as of the end of September.

(Reporting by Mike Spector and Chibuike Oguh; Additional reporting by Lawrence Delevigne and Jessica DiNapoli in New York; Editing by Sonya Hepinstall, Leslie Adler and Kim Coghill)

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EU sees no cliff-edge ending for COVID fiscal stimulus

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EU sees no cliff-edge ending for COVID fiscal stimulus 3

BRUSSELS (Reuters) – European governments will not need to abruptly end fiscal support for their economies after the pandemic, top officials said on Monday, noting that any withdrawal of stimulus would be carried out gradually and only once the economy has recovered.

Euro zone public debt rose sharply during 2020 and is likely to exceed 100% of GDP this year as governments borrow to help individuals and businesses survive lockdowns.

The higher debt raises concern about how to deal with it down the road and when to start cutting it again, since the EU last year suspended its rules limiting budget deficits and debt, known as the Stability and Growth Pact (SGP).

EU finance ministers are to discuss when to reintroduce any borrowing limits in the second quarter of this year.

“I believe it important that finance ministers debate and reach a common understanding on the appropriate fiscal stance by the summer. This can then serve as guidance for the preparation of their draft budgetary plans for 2022,” the chairman of the euro zone’s group of finance ministers, Paschal Donohoe, said on Monday.

“To avoid any misunderstanding, let me stress that this is not about an imminent withdrawal of fiscal stimulus,” he told the economic committee of the European Parliament.

“We all agree that our immediate priority is to shield our citizens, in particular younger cohorts and those most exposed to the crisis. There must be no cliff-edges,” he said.

Joao Leao, the finance minister of Portugal which holds the rotating presidency of the EU and therefore sets the agenda for EU finance ministers’ work until June, was equally cautious.

“We should not withdraw stimulus too early. We need to make sure the suspension clause for the SGP remains in force at least until we return to pre-crisis economic figures,” he told the committee. “We need to make sure jobs are maintained as well as the production capacity of companies.”

He said first cash from the EU’s 750 billion euro post-COVID economic recovery programme should reach the economy in the first half of the year.

“Real funding should be getting to the economy before the summer or in early part of the summer,” he said.

(Reporting by Jan Strupczewski; Editing by Giles Elgood)

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