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What is deficit financing?

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What is deficit financing?

Adopting one of several deficit financing techniques is what many countries do when the government does not have enough of money earned through taxes to cover expenditure. Here is what you need to know about deficit financing in a country, and whether or not you will ever have to encounter it while working in a company.

Definition of Deficit Financing

Governments borrowing money to meet expenditure when revenue from taxes fall short is what constitutes deficit financing. Most often governments resort to deficit financing and deficit spending when there is a need to bring an economy out of recession or when it is in a downturn, and it helps kick start recovery and bring growth rates up. Currently the fiscal deficit, which is arrived at after subtracting the expenditure from the cash inflow without including any sums that are borrowed, is the factor that is considered to be important in an economy.

The Myth of a Balanced Budget

In companies and even in the case of countries the world over a balanced budget does not happen every year. Especially in countries that are highly developed a balanced budget every year is no longer a major factor. While there are several drawbacks of deficit financing such as a country being indebted to foreign lenders there are also many positive aspects, which often result in companies and governments planning ahead to deal with a budget deficit for a year.

Planned Budget Deficits

Much like a country, a company might plan for a budget deficit in a year. There are also instances when businesses prepare for a budget deficit in a particular quarter in the year and as a result deficit financing comes into play. In some companies the need for deficit financing comes up ever year when a particular quarter sees a downturn in sales. Downturns during winter mostly happen in companies that supply materials for construction and as a result sales people have less work. In such a situation borrowing allows the business to keep running and for employees to be retained on the rolls, even if there is a loss incurred in one quarter. As sales improve in the following quarter the company can run smoothly bringing in a profit.

Often companies that are operating in a economy that is slowing down or having to take on increasingly aggressive competitors also plan to invest more than what they are earning into expansion or creating new products in an effort to bring in more customers and hence increase sales.

Advantages and the Pitfalls

Deficit financing has some well known advantages leading to its increased prevalence, but it also comes with a number of traps which can hamstring a country or company both in the short and long term. One of the main advantages of deficit financing is that it allows a company to grow by acquiring other companies. While an important pitfall is that it makes governments borrow from funds in the capital market or look for creditors outside the country.

The factors leading to deficit financing might be improperly planned acquisitions or in the case of a country a shortfall in taxes gathered for the year. Irrespective of why deficit financing is required it is obvious that it will be around for a long time and is no longer viewed as undesirable when compared to a balanced budget.

Finance

Bitcoin slumps 6%, heads for worst week since March

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Bitcoin slumps 6%, heads for worst week since March 1

By Ritvik Carvalho

LONDON (Reuters) – Bitcoin fell over 6% on Friday to its lowest in two weeks as a rout in global bond markets sent yields flying and sparked a sell-off in riskier assets.

The world’s biggest cryptocurrency slumped as low as $44,451 before recovering most of its losses. It was last trading down 1.2% at $46,525, on course for a drop of almost 20% this week, which would be its heaviest weekly loss since March last year.

The sell-off echoed that in equity markets, where European stocks tumbled as much as 1.5%, with concerns over lofty valuations also hammering demand. Asian stocks fell by the most in nine months.

“When flight to safety mode is on, it is the riskier investments that get pulled first,” Denis Vinokourov of London-based cryptocurrency exchange BeQuant wrote in a note.

Bitcoin has risen about 60% from the start of the year, hitting an all-time high of $58,354 this month as mainstream companies such as Tesla Inc and Mastercard Inc embraced cryptocurrencies.

Its stunning gains in recent months have led to concerns from investment banks over sky-high valuations and calls from governments and financial regulators for tighter regulation.

(Reporting by Ritvik Carvalho; additional reporting by Tom Wilson; editing by Dhara Ranasinghe, Karin Strohecker, William Maclean)

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Britain sets out blueprint to keep fintech ‘crown’ after Brexit

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Britain sets out blueprint to keep fintech 'crown' after Brexit 2

By Huw Jones

LONDON (Reuters) – Brexit, COVID-19 and overseas competition are challenging fintech’s future, and Britain should act to stay competitive for the sector, a government-backed review said on Friday.

Britain’s departure from the European Union has cut the sector’s access to the world’s biggest single market, making the UK less attractive for fintechs wanting to expand cross-border.

The review headed by Ron Kalifa, former CEO of payments fintech Worldpay, sets out a “strategy and delivery model” that includes a new billion pound start-up fund and fast-tracking work visas for hiring the best talent globally.

“It’s about underpinning financial services and our place in the world, and bringing innovation into mainstream banking,” Kalifa told Reuters.

Britain has a 10% share of the global fintech market, generating 11 billion pounds ($15.6 billion) in revenue.

“This review will make an important contribution to our plan to retain the UK’s fintech crown,” finance minister Rishi Sunak said, adding the government will respond in due course.

The review said Brexit, heavy investment in fintech by Australia, Canada and Singapore, and the need to be nimbler as COVID-19 accelerates digitalisation of finance all mean the sector’s future in Britain is not assured.

Britain increasingly needs to represent itself as a strong fintech scale-up destination as well as one for start-ups, it added.

The review recommends more flexible listing rules for fintechs to catch up with New York.

“Leaving the EU and access to the single market going away is a big deal, so the UK has to do something significant to make fintechs stay here,” said Kay Swinburne, vice chair of financial services at consultants KPMG and a contributor to the review.

The review seeks to join the dots on fintech policy across government departments and regulators, and marshal private sector efforts under a new Centre for Finance, Innovation and Technology (CFIT).

“There is no framework but bits of individual policies, and nowhere does it come together,” said Rachel Kent, a lawyer at Hogan Lovells and contributor to the review.

Britain pioneered “sandboxes” to allow fintechs to test products on real consumers under supervision, and the review says regulators should move to the next stage and set up “scale-boxes” to help fintechs navigate red tape to grow.

“It’s a question of knowing who to call when there’s a problem,” Swinburne said.

($1 = 0.7064 pounds)

(Reporting by Huw Jones; editing by Hugh Lawson and Jason Neely)

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Finance

Enhancing efficiency in international trade – the time is now

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Enhancing efficiency in international trade – the time is now 3

By Carl Wegner, CEO of Contour

Despite significant advances in digital enterprise technology in recent years, international trade remains overwhelmingly manual and fraught with inefficiency.

Financial market participants spend millions of dollars to save fractions of seconds. Central banks are rushing to offer “fast” domestic payments in under three seconds. But cross-border trade relies on payments involving more than one country and bank, with no common central bank to provide cover and currency conversion. It takes at least a day or, in most cases, two – and that’s not even the most inefficient part of cross-border trade.

These processes are lightning quick compared to trade-related finance and risk mitigation products such as Letters of Credit (LCs), which can take over a week to settle. These involve more parties, more complexity, more paper and less trust.

In global trade finance, a bank will agree to pay an overseas seller after receiving proof that the seller has met their obligations. There is no common network for the seller to provide this proof, and no global database of shipments. Sellers rely on the gold standard of banking communication: wet ink-signed paper documents. Collecting, presenting and checking these documents can take days, if not weeks, stalling payments and leaving goods sitting on the dock rather than working through the economy.

The perceived credibility of “wet ink” signatures on documents is holding the industry back even as other areas are embracing new technologies. Unfortunately, it is all the industry has and the highest common denominator of communication. Bringing trade finance into the twenty-first century will need the development of a new gold standard – a common and trusted digital infrastructure. Luckily, the technology to ease this change and inject massive efficiency gains into the industry is now available.

More than a few small tweaks

Banks, buyers, sellers, shipping companies, ports, customs, and so on; the number of parties involved in international trade and the relative lack of trust among them makes any change a significant challenge.

Even before paper documents are involved for proof of shipment, there are trust challenges in communication for trade finance. While banks have a trusted form of communication among themselves, this does not extend to corporates or other parties. These groups are left with paper communication, email and fax – hardly efficient methods of communication. The industry needs a network,  a common identity, and a way to share data securely and privately with all participants. This is the first step and can lead to significant increases in efficiency, especially if communication between participants can be synced in real-time.

Building the network

The future of global trade communication is decentralised. With today’s technologies, it is no longer feasible to have the world’s sensitive trade data sitting in one place susceptible to attack or commercial manipulation.

Every bank and corporate must own their own data and share it only with their trading partners where necessary. Decentralised technologies go further than this, allowing data to be synchronised with trading partners, enabling a new level of trust between parties through the deceptively complicated concept of ”what I see, you see”.

The practicalities of title transfer

The problem of paper and wet-ink signatures seems simple to solve once the network is in place. Remove the couriers, upload PDFs of all that paper onto the decentralised and synchronised network built to authenticate the sender, and trade is digitised. However, while this process is easy in theory, the variety of documents involved in a single transaction complicates matters – especially when it comes to the transfer of title.

The bill of lading is a key example of this – issued in triplicate on original letterhead and signed by an authorised party on behalf of the ship’s captain. They represent title to the documents and can be used as a negotiable document much like a bank cheque.

Digitising these documents has come a long way in the last few years, with specialised platforms and digital registries created and new legal standards drafted to allow electronic bills of lading (eBLs) to be used instead. But adoption still lags behind, and for their efficiency to be realised across the majority of global trade, the concept of digital documents such as eBLs needs to be married to decentralised networks for trade finance.

The security issue

For documents not related to title transfer, the long-held argument that an original signed document is more secure than a digital version is extremely outdated. With the right protocols in place, a digital document can present a more private and secure option than its physical counterpart.

Even an uploaded PDF can be a “digital document” with the right controls in place. Using a decentralised network every member will have an immutable audit log for every transaction, with the uploading party taking responsibility for the documents they introduce to the network in the same way a sender can take responsibility through their signature. These security protocols will also enhance the time it takes to manage trade documents, allowing parties to track and match items to real-time data.

Scaling

There has already been phenomenal success in combining a decentralised network with electronic bill of lading solutions. Rather than seven days, the time from presentation to payment instruction can be reduced to 24 hours. However, for any of this to be achieved at scale, we need coordinated collaboration to ensure a new global digital standard can emerge, rather than a series of disconnected digital islands.

Fortunately, the industry is well on its way. The Asian Development Bank recently reported that 85% of banks are gearing up to serve the trade finance needs of more businesses through technology, addressing concerns such as inefficiencies and KYC, showing a clear demand for more efficient processes to be established in the sector.

While removing a few hours from overseas payments is a worthwhile goal, reducing a week from trade finance processes can have an even greater impact on businesses’ working capital efficiency and accelerating growth in the wider global economy.

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