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The Eurozone crisis: between suspense and rebound

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yoni

Jonathan Assia
eToro

The Eurozone is in the midst of a crisis of debt and trust and a number of member states are on the verge of bankruptcy as a result of fiscal mismanagement. This article explores how events are unfolding in Europe and likely implications should the Eurozone disintegrate.yoni

The economic situation in the Eurozone is dire, of that there is little doubt. The Greek government is in the midst of negotiations with private bondholders who are unwilling to take further losses. The European Central Bank is considering how to deal with its own potentially huge losses from their holdings of Greek sovereign debt. There is seemingly no consensus among the E.U.’s leaders as to how to proceed. The head of the International Monetary Fund, Christine Lagarde, has said that now was the time for action, else the Eurozone is headed for a 1930’s style depression.

The European Central Bank (ECB) has been thrust into a lender of last resort role. Although it has recently stepped into secondary markets, buying sovereign debt to keep interest rates from rocketing skyward, it has failed to instil confidence in markets because it is an unwilling participant in the market. This was made clear by Mario Draghi during the question and answer session of his first press conference as the newly installed head of the ECB when he said, “I do not think that this is really within the remit of the ECB. The remit of the ECB is maintaining price stability over the medium term.” A simple promise by the ECB to do what needs to be done, when it needs to be done, in whatever amount needs be, is what is being called for by investors, analysts and economists. The French government has made it fairly clear that they would like to see the ECB step into that role. Last week, a senior ECB policymaker said that designing a lender-of-last resort mechanism was feasible though would need careful orchestration to avoid eroding already fragile market-confidence.

Indeed, too many unfounded, unsubstantiated and potentially damaging rumours are steering markets. “Is the Eurozone in the process of being dismantled?” “Is it true only the richest countries will be invited to stay in the Eurozone?” The Eurogroup’s president, Jean-Claude Juncker, has denied these rumours saying, “We don’t want to have the euro area exploding without reason. » But once a rumour is released, the damage is done; the hope is that the rumours are quickly quashed, to minimise repercussions.

Despite rhetoric and assertions to the contrary, there remains a general lack of political will for promised infrastructural and fiscal reforms. Take a look at Italy and its new prime minister, Mario Monti, who was well received and widely respected. Since he revealed a plan for some €34 billion in spending cuts and tax increases, his popularity has plummeted among his constituents and the little political goodwill he came into office with is already eroding; a mid-December poll conducted by Italy’s IPR Marketing found that his popularity among Italians had slipped from a high of 62 to 58. If he is forced to face a confidence vote, this will further unsettle potential investors, who are already well aware of a growing anarchical mentality.

Spain’s recently elected government was originally seen in a favourable light, but the proposal of desperately needed labour reforms has caused a great deal of dissension and breaking of the ranks. The Spanish government has already acknowledged that this key Eurozone economy missed its fiscal deficit target of 6.0% for 2011 and that growth will further deteriorate. Olli Rehn, the Economic Affairs Commission for the E.U. has said, nonetheless, that Spain must meet this year’s target of 4.4%. It could be difficult for the Spanish government to push through more austerity measures in the face of these obstacles.

The proposed fiscal reforms in Greece are well behind schedule. The new prime minister, Lucas Papademos, is also striving to muster political goodwill but as with Monti, his popularity is warning. A mid-December poll showed that 40% of respondents viewed him negatively as compared to 39% who saw him in a favourable light. It is uncertain whether the public clearly will support his proposal to push through more austerity measures. It is also uncertain whether private bondholders would be willing to “voluntarily” take even larger haircuts on existing debt. Without that support, the Greek government could find itself once again on the brink of default.

Greece’s debt is massive, with debt-to-GDP edging toward 170% and likely continuing higher. The most recent negotiations between the Greek government and private bondholders appear to be going nowhere fast, and time is not on Greece’s side. Without an agreement between the parties, there is a possibility Greece won’t be able to dodge a default this time around. A “technical credit event,” which is the negotiation of new terms other than those originally and contractually agreed, could also be triggered even if there is a voluntary agreement, should the participation rate fall significantly below 100%. In the event of a technical credit event or a disorderly default, sovereign debt markets could be further strained and spreads could rise, not just in the periphery, but among the now-downgraded core members.

So what would happen if the Eurozone breaks up? This would trigger a severe recession in the Eurozone as there would be a major collapse in global demand. Corporate profitability will also be hard hit. Eurozone liquidity would be almost non-existent, and investors would flee the Euro and the Eurozone for the safe haven US dollar and the US economy. There, at least, the Federal Reserve can provide the liquidity needed, given that they are a lender of last resort.

Then, the US bond market would re-establish itself as the safest debt market in the world. The most immediate response, which is already being seen, is a decline in borrowing costs for the US government. This could compel the US government to hold off on its deficit reduction strategy and increase government spending. As a result of huge and overwhelming demand for US debt instruments, the US dollar would rise sharply. Government spending would continue to increase as commodity prices dropped (when there is no liquidity, inflation quickly turns into deflation). Borrowing costs would continue to drop and the US position as the safest long term bet would be reinforced.

Overall, the collapse of the Eurozone would greatly benefit the US economy, but the rest of the world could be plagued by years of stagnation.

How Australia will be affected?

The Australian economy will be only moderately affected by the Eurozone crisis and that primarily during the first half of the year. The slowdown in China, which is Australia’s biggest trading partner, will be the most significant headwind for the Australian economy. The Chinese slowdown, an indirect effect of the European debt crisis given that Europe is China’s largest trading partner, in conjunction with the slowdown in Chinese real estate will reduce demand for Aussie goods and that will eventually transmit into lower growth. The impact in the first half of 2012 would be slightly muted by overall global liquidity injections and monetary easing, specifically in China, and a pro-growth policy of the RBA which is keen to hold the economy afloat with looser monetary conditions.

Nevertheless, we expect the European crisis to escalate towards the end of the year, with Sovereign Credit Defaults of Greece and Portugal seen as highly likely. We, therefore, expect a negative shockwave in the global credit system to follow, which will hammer global demand for commodities. Since the Asian credit markets depend on around $1.5Trln of credit from European finance institutions the effect on Asian growth will radiate throughout the entire region. And with Commodities prices and demand both slashed we expect the Aussie rate to deteriorate and Australian growth to decelerate.

We expect China’s GDP to grow in the range of 8% to 8.2% in 2012 in “official terms” and closer to 7% in real terms.  In our view, this will likely bring Australia’s annual GDP growth to an average 2% for 2012. The negative effect of the Chinese slowdown will be somewhat amplified by the strength of the Aussie Dollar, which we expect to continue to rise and gather steam from rate differentials at least until the end of the first half of 2012. However, as we would like to emphasis once again, as the Australian growth path will decelerate this will eventually cause the Aussie interest rate differential with other nations to narrow and could cap the Aussie around the 0.90 per US Dollar.

Finally, I would like add that, in the event global liquidity injections reaches overwhelming proportions (and €2Trillion from the ECB would be considered overwhelming), it would simply postpone the inevitable. Deleveraging will eventually materialize, despite the liquidity injections, and our envisioned scenario, too, will merely be postponed.
 

Finance

Global dividend payouts forecast to revive in 2021

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Global dividend payouts forecast to revive in 2021 1

By Joice Alves

LONDON (Reuters) – Global dividend payments could rebound by as much as 5% this year, a new report estimated on Monday, after the coronavirus caused the biggest slump in payouts since the financial crisis more than a decade ago.

Companies’ payouts to shareholders plunged more than 10% on an underlying basis in 2020 as one in five cut their dividends and one in eight cancelled them altogether.

A total of $220 billion worth of cuts were made between April and December, based on investment manager Janus Henderson’s Global Dividend Index. But there are signs companies are beginning to reinstate at least some of them.

Janus Henderson’s report warned that dividends could still fall 2% this year, in a worst-case scenario. But its best-case scenario sees 2021 dividends up 5% on a headline basis.

“It is quite likely we will see companies pay special dividends in 2021, utilising strong cash positions to make up some of the decline in distributions in 2020”.

Banking dividends will be likely to drive the rebound in payouts in 2021, the report said, after the European Central Bank and Bank of England eased blanket bans for lenders on dividends and buybacks. These were imposed during the first wave of the crisis to prepare for a potential increase in bad loans.

UK lenders Barclays and NatWest resumed payouts this month.

Last year, dividend bans meant banks cut or cancelled $70 billion of payments globally, according to the report.

But the overall global dividend cuts proved less dramatic than expected. In August, Janus Henderson had expected the virus to drive corporates to cut $400 billion worth of dividends, nearly double the eventual outcome.

A resilient fourth quarter of 2020 helped, said Janus Henderson. The likes of German car maker Volkswagen and Russia’s largest lender Sberbank restored payments.

Mining and oil companies cut dividends after a slump in commodity prices, while consumer discretionary companies also took a hit following lockdowns.

European dividends, not including Britain, fell by 28.4% on an underlying basis in 2020 to $171.6 billion. “This was the lowest total from Europe since at least 2009,” Janus Henderson said.

(GRAPHIC: Dividend cuts by region –

Global dividend payouts forecast to revive in 2021 2

In contrast, North American payouts rose 2.6% for the full year, setting a new record of $549 billion, the report said. Canada had the fewest dividend cuts anywhere in the world, the index showed.

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Former Bank of England Governor Carney joins board of digital payments company Stripe

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Former Bank of England Governor Carney joins board of digital payments company Stripe 3

By Kanishka Singh

(Reuters) – Mark Carney, former head of the UK and Canadian central banks, has joined the board of U.S. digital payments company Stripe Inc, days after the company was reported to be planning a primary funding round valuing it at over $100 billion.

“Regulated in multiple jurisdictions and partnering with several dozen financial institutions around the world, Stripe will benefit from Mark Carney’s extensive experience of global financial systems and governance”, the company said on Sunday, confirming a report by the Sunday Times newspaper.

Forbes magazine had reported on Wednesday that investors were valuing Stripe at a $115 billion valuation in secondary-market transactions.

A senior Stripe executive told Reuters in December that the company plans to expand across Asia, including in Southeast Asia, Japan, China and India.

The company offers products that allow merchants to accept digital payments from customers and a range of business banking services.

Stripe raised $600 million in April in an extension of a Series G round and was valued back then at $36 billion.

Consumer-facing fintechs have seen a boost to their businesses during the COVID-19 pandemic, as people have been staying at home to avoid catching the virus and have increasingly been managing their finances online.

Carney, who headed the Bank of England and the Bank of Canada, had a 13-year career at Wall Street bank Goldman Sachs Group Inc in its London, Tokyo, New York and Toronto offices.

He is the United Nations special envoy on climate action and finance.

(Reporting by Kanishka Singh in Bengaluru; Editing by William Mallard)

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The potential of Open Finance and the digitisation of tax records

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The potential of Open Finance and the digitisation of tax records 4

By Sudesh Sud, Founder of APARI 

The world is undergoing huge changes at the moment. Between coronavirus pushing the economy to the limit and a group of Redditors challenging the financial market hegemony, people are questioning the role of established institutions. If finance doesn’t work to enable the economy, businesses or individuals, then who is it for?

Before the digital revolution, financial experts were seen as a necessity. They knew how things worked, what everything meant, could provide good advice and were employed to sit at the heart of the action. Now, trading can be done by anyone online through established platforms, with a wealth of information available to hand.

Yet, as the 2008 financial crisis proved, established financial institutions have made themselves too big to fail. Simply tearing down the existing financial system would leave many ordinary people, along with businesses and government treasuries, in ruin.

However, as legendary futurologist, Buckminster Fuller, once said: “You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.”

Traditional banking models are already being upended by technology. Through Open Banking, challenger banks are able to connect services digitally, cutting inefficiencies and costs while speeding up transactions. Now, Open Finance is seeking to build on this model to connect financial services via technology, potentially making the existing financial model obsolete.

Just as Open Banking led to greater democratisation of money, Open Finance has the potential to transfer power back to individuals. Not only would this benefit society as a whole, but it would help minimise the boom-bust cycles that cripple entire economies. No individual would be too big to fail, and bailing people out would cost far less, having minimal impact on the economy overall.

With more information available to them, Open Finance businesses will be able to use technology to make better decisions instantly. Many people struggle to get onto the housing ladder due to a poor credit score, for example, yet they have been paying rent every month of their adult lives. Why, then, can they not access mortgages? A company called Credit Ladder is addressing this through Open Banking, reporting rent payments via challenger banks like Starling to credit agencies, helping good renters to access mortgages.

While it is still very early days for Open Finance, there seems to be an endless raft of possibilities to benefit individuals, businesses and national economies. Faster, more secure, and less risky access to credit can help grow the economy, transforming finance from something that benefits a few wealthy capitalists to something that enables growth in the real economy.

So how else could Open Finance benefit society?

Using Tax Information

Every working adult pays income tax. Some of us via self-assessment while others are enrolled in PAYE. Regardless, we all have tax records with a wealth of financial information that has been verified, at least in part, by HMRC.

This centralised repository of financial information could be put to better use, such as allowing credit reference agencies to better understand an individual’s risk profile or helping to prove income as part of a mortgage application. Unfortunately, HMRC is a black hole of information ‒ its sheer size and power sucks information in, but nothing comes back out again.

However, by Making Tax Digital (MTD), HMRC are effectively allowing individuals to keep validated tax records on the software of their choice. Software providers may then be able to use this information to enable certain aspects of Open Finance. The information doesn’t need to be protected by HMRC, it is the individual’s choice and responsibility over how to use their own information.

As MTD software develops, we will see it connected to Open Banking, allowing self-assessed taxpayers to connect their business account directly to the software, effectively getting their tax return completed for them by an AI program. They would simply check the details, add any adjustments, and click submit. HMRC would then validate the records, providing assurance for any financial institutions using that financial information.

More Growth, Lower Risk

With access to complete and validated financial information, lenders would be able to more quickly and accurately assess individual risk when considering a loan or mortgage application. This would greatly speed up the process of applying for a loan, whether for a business venture or property purchase, for example.

Take residential landlords, for example. They may own a few properties already, with equity coming out of their ears. If that landlord wants to obtain another property, they would need to get their accountant to assemble their financial information, complete a SA302, and send everything off to their mortgage advisors who would then validate the information before submitting the mortgage application.

The application can then take months to approve, slowing down the process and potentially leading to missed opportunities. Since property sales usually occur in a chain (the owner of the property you are purchasing is usually purchasing another property, and so on), these inefficiencies slow the process down for everyone and can have major impacts.

If, however, mortgage applicants could simply share validated financial/tax records, mortgage providers could use that information to make quick decisions with reduced risk. What’s more, applicants could share only relevant, high-level information, rather than expose their entire financial history.

Individual Risk Management

Currently, individuals can manage their credit score/risk profile via third party providers like Experian, Equifax and TransUnion. These credit reporting agencies use limited information, such as credit cards, store cards and loans to assess risk. Individuals need to understand what factors each agency uses in order to ‘game’ the system.

For example, someone who has always been careful with their money, kept to a strict budget and never taken out a loan or credit card will have a far worse credit rating than someone who regularly uses debt to finance their lifestyle. So, even though they may have amassed a good deal of savings, they cannot get a good deal on a loan or mortgage.

With Open Finance, these individuals would be able to quickly prove their earnings, spending, and savings, decreasing their risk profile in line with reality. Rather than crude measures of creditworthiness, financial institutions would be able to use accurate and validated information to make quick decisions based on realistic risk. This both transfers more power to individuals and contributes to faster growth while reducing overall risk.

As a centralised repository for validated financial information, MTD providers will be in a unique position to develop a two-sided marketplace for finance, allowing credit providers to match products to individuals’ risk profiles. When a customer needs a loan, credit card or mortgage, they can simply browse products for which they have already been approved, applying and receiving finance instantly.

Empowering PAYE Taxpayers

Currently, PAYE taxpayers have little, if any, visibility or control over their tax contributions. They will see the amount paid in tax and national insurance, but to claim any allowances requires them to submit a self-assessment tax return. For most PAYE taxpayers, this simply doesn’t seem worthwhile.

Yet, self-employed taxpayers can claim for things like travel to their place of work, a proportion of living expenses when working from home, even their lunch. These things are necessary for productive work yet, for PAYE taxpayers, come out of their already taxed income. Meanwhile, businesses tend to make use of every tax allowance available to them.

This imbalance could be rectified with Open Finance connected to tax software. As MTD becomes a validated system for self-assessed taxpayers, a new version could be developed for PAYE taxpayers, putting them in control of their tax and finances. Not only would they be able to benefit from Open Finance in the same way as self-assessed taxpayers, but they will also be able to claim for reasonable allowances. What’s more, HMRC/the Treasury/the government would be able to hold employers accountable for pay disparities and unreasonable tax avoidance.

Open Finance, then, has the power to speed up and reduce the cost of obtaining and providing finance. It would make the finance system fairer and most transparent while distributing financial power, and help to avoid the creation of too big to fail financial institutions and the boom-bust cycle that has become unfortunate features of modern capitalism.

Ultimately, Open Finance has the potential to help the UK and other nations recover from the seemingly unending series of crises that have plagued the early 21st century by allowing people to access finance quicker in order to grow their business and personal finances while reducing risk, inefficiencies, and costs.

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