Brexit: Fishing in Troubled Waters

It’s perhaps a case of having your fish and eating it too. The number of analogies that may be rallied to describe the current standoff between the European Union and the United Kingdom over the post-Brexit assignment fish stocks is almost endless. The EU may have bigger fish to fry as it grapples with a virus and a number of restless potentates along its eastern fringes but must first deal with the odd-fish British who threaten to resolutely sail their indomitable island nation into the North Atlantic lest they get more … fish.

The talks between the EU and the UK can be said to constitute a fine kettle of fish with the French, particularly, seeking to fish in troubled waters, British cabinet members spinning fish tales, Prime Minister Boris Johnson fishing around for a fig leaf to mask any concessions, and President Emmanuel give all those looking his way the fish eye. Meanwhile, Chancellor Angela Merkel of Germany keeps to the script that calls for her to take on the role of a cold fish. She’s a natural.

Though the subject matter of the discussion supposedly holds or displays no emotions, fish tug at the heartstrings of at least eight coastal EU member states that send out fleets of trawlers, trollers, and seiners to pluck, scrape, and net the riches of the seas surrounding the British Isles. Those waters will shortly become off limits to EU-flagged vessels as the transition period expires and the UK cuts the last ties that have bound it to the European Union for well over forty years.

In the grand order of economic things and interests, fishing barely registers and does not even merit a footnote. The sector, including aquaculture, represents far less than one percent of EU GDP, employs an estimated 180,000 people, and annually fishes some 1.4 million tonnes of ‘aquatic organisms’ out of the seas. The entire fisheries value chain is calculated to be worth around €3.9 billion per year.

Small Fry

Though it may be ‘small fry’, fisheries encapsulate a traditional way of life, cherished and romanticised by many outside the industry and totemic to politicians of all stripes. Its policies impact far-flung communities. In their negotiations with the EU, the British have angled for continued tariff-free access for the Falkland Island squid that is landed at Vigo in Spain. It is estimated that more than half the calamari served in Southern Europe originates from the frigid waters surrounding the South Atlantic archipelago. Squid and other fisheries exports to the EU account for almost 50 percent of the Falkland Islands’ GDP.

EU chief negotiator Michel Barnier insists that access to waters and markets is linked. He holds strong cards: 10 out of the UK’s 15 most important export fish species depend on the EU market for 90 percent or more of their sales volume. Nature and the caprices of geography and underwater topography are also at play. Whilst nobody disputes that British waters are exceptionally bountiful, their riches spawn from the much shallower nursing grounds that line the continent’s western seaboard.

According to Clara Ulrich of the French Institute for Ocean Science (Institut Français de Recherche pour l’Exploitation de la Mer) when fish reach adulthood, they migrate to deeper, colder, and more oxygenated British waters: “This allows them to lay their eggs upstream of the current which are then whisked to the friendlier southern part of the North Sea in a natural cycle that has only been reinforced by climate change.

In Boulogne-sur-Mer, France’s largest fishing port and since Roman times a gateway to Britain, fishermen seem resigned to a no-deal outcome that will deprive the community of up to 80 percent of its catch. The locals have now turned to a new menace and scan the horizon for the expected arrival of Dutch supertrawlers which deploy nets up to a mile long to hoover up hundreds of tonnes of fish every day.

The Dutch fleet of 23 factory ships usually plies the fishing grounds around Scotland and along the English coast from Norfolk to Northumberland but may soon be looking for its catch elsewhere. Dubbed the ‘undertakers of the sea’, the Dutch are loathed in France for their obsession with industrial-scale fishing and fixation on numbers. There is nothing quaint or romantic about the Dutch fishing industry.

Stumbling Block

Fisheries have been an EU stumbling block almost since its institutional beginnings in 1957. Two countries – Norway and Iceland – withdrew their application for accession over the Common Fisheries Policy (CFP) which pools all EU waters into a single shared zone which is then divvied up between member states using mostly opaque but invariably complex formulae. Upon gaining home rule from Denmark in 1979, Greenland moved to extricate itself from the EU, becoming an OCT (overseas countries and territories) in 1985 to regain control over its maritime resources.

British cabinet members have repeatedly flaunted their ignorance on the well-established and deeply ingrained diplomatic practices of the EU by suggesting their country should receive a fishery deal similar to the ones offered to Norway, Iceland, and the Faroes. This is an impossible ask: As should have become clear after four years of negotiating Brexit, the EU is remarkably unified when it comes to dealing with third countries.

Norway, Iceland, and Liechtenstein are all part of the EU single market via their EFTA (European Free Trade Association) membership. Switzerland, also an EFTA member state, found a sui generis solution via a set of some 200 interlinked bilateral deals that effectively secures access to the single market. These countries agree with the EU on policy but not on politics and institutions. They have also chosen a pragmatic approach in their dealings with the EU, quietly delegating important parts of their actual sovereignty to Brussels whilst maintaining formal sovereignty. This also implies that quasi-EU member states accept the adjudication of any conflicts by the EFTA Court and the Surveillance Authority.

The lesson for the UK is far from complex: Single market access is awarded to those countries that manage to drift ever closer to the EU whilst sustaining a reasonable argument against direct membership such as domestic political sensitivities or, indeed, fish. EFTA/EEA countries are also – and crucially – bound to implement the EU’s four basic freedoms, pointedly including the freedom of movement. As the Swiss recently noted, there are no exceptions allowed – ever.

Life outside the EU, but in close proximity to the bloc, need not be impossible – or even hard. Norway and Switzerland show that prosperity beckons. Iceland shows that having a good friend in Brussels helps when a major crisis strikes. What EFTA/EEA members understand is that, however unreasonable a state of affairs, the big fish eats the smaller ones. Its gluttony needs to be placated in order to ensure a profitable coexistence. Once the UK has realised that it no longer is a big fish, a new and meaningful relationship between London and Brussels may eventually emerge.


Canada - This Is Our Time to Be Kind

‘Peace, order, and good government’, the leitmotif of the British Empire, seems to trump the American ‘life, liberty, and the pursuit of happiness’ when it comes to public safety. Canada, which kept the motto and lives by it, has thus far managed the Corona Pandemic quite well when compared to its more boisterous southern neighbour. The relative incidence of covid-19 cases in the United States is about five times higher than the number reported by Canada.

In September, Prime Minister Justin Trudeau signalled that his government was not in a rush to reopen the land border with the US, closed since March 22 for all but commercial traffic. Public Safety Minister Bill Blair extended the travel restrictions to October 21, ignoring an appeal by 29 US lawmakers to ‘craft a comprehensive framework for the phased reopening of the border’.

Whilst in the last week of September Quebec topped the list of infections with a rate of 55 per 1 million inhabitants, no less than 42 US states reported a higher incidence. Even the best-performing US state, Vermont with just 4.6 cases per million, is outdone by 7 Canadian provinces and territories.

As leaves start to brown in anticipation of winter, announced like clockwork in the days immediately following the cherished Labour Day long weekend, the Great White North is engaged in a new national pastime: Coming up with explanations for the rather pronounced differences with the Great Unruly South.

Though displays of national pride usually remain confined to cross border ice hockey matches for the Stanley Cup – last brought home in 1993 by the Montreal Canadiens – when it comes to highlighting their society’s accomplishments, Canadians revel in spotting, marking, and underlining the differences with a barely concealed sense of moral superiority.

Rule Followers

“We usually prefer to follow the rules and wait for our turn,” surmises Sarah Chown of the Ontario Restaurant, Hotel, and Motel Association. Free public healthcare and a media establishment largely devoid of hysterics are other sources of national pride. In anticipation of an early federal election, widely considered a distinct possibility, Elections Canada is calmly preparing for a surge in demand for mail-in ballots – without fuss or causing any controversy.

From the very beginning of the pandemic, federal and provincial leaders have prioritised science over politics, following all policy recommendations to the letter and refraining from spin, alt-truths, and all other forms of massaging public opinion. Without much ado, a contact-tracing app was launched which has recently seen a significant uptick in the number of downloads as people start worrying about a second wave.

Prime Minister Trudeau took ownership of the pandemic, delivering daily briefings laced with messages of comfort delivered in a soothing Rogers tone. The contrast with President Donald Trump’s White House ramblings couldn’t be any greater. Where Trump assigns blame and dodges responsibility, Trudeau offers assurances and provides solace.

Most provincial and federal health authorities have now gained near-superstar status. British Columbia Provincial Health Officer Dr Bonnie Henry captured both the spirit and imagination of the country with her trademark phrase ‘this is our time to be kind, to be calm, and to be safe’ which has since been stamped on t-shirts, bracelets, shoes, posters, and pretty much anything that will carry or convey a message. However, the preternaturally calm Dr Henry did more than just appeal for kindness: She also managed to contain the viral outbreak in a province that, by the force of logic, should have become a covid-19 hotspot due to its proximity to Washington State and close ties with China.

Embracing Vulnerabilities

Celebrated as one of the world’s most effective public health officials, Dr Henry has not yet gotten used to her fame which arrived after she teared up whilst expressing concern for the wellbeing of health workers and caregivers during a press conference in March. The Globe and Mail, Canada’s largest newspaper, promptly noted that the nation ‘embraces vulnerability in its leaders’.

Before long, this former fleet medical officer of the Canadian navy became a national hero – and an authority on epidemiology with skills honed whilst tracing Ebola outbreaks in Africa for the World Health Organisation. There she discovered that an effective quarantine does not use punitive measures, but communication and support: “If you tell people what they need to do and why, and give them the means to do it, most will do what you need.”

Though Dr Henry has been granted the power to directly issue orders to BC police to enforce quarantine rules, she has flatly refused to make use of that authority: “The only way we can get through this as a community is without traumatising people.” Dr Henry also realises better than most that the coronavirus is going nowhere any time soon and societies need to adapt and find a balance between minimising the impact of the disease on the population and minimising the negative consequences of the outbreak and lockdowns such as spikes in the rates of domestic violence and suicide.

A New Canada

Meanwhile, the federal government in Ottawa is striking a balance of its own. In his annual throne speech to parliament, delivered by Governor General Julie Payette in lieu of Queen Elizabeth II, Prime Minister Trudeau promised to usher in a new era of greener, fairer, healthier, and more compassionate policies to help the nation recover from the pandemic. “This is not the time for austerity,” he said before sketching the outlines of strengthened social programmes to support workers and families affected by the economic downturn, and help businesses weather the storm, in addition to an ambitious push to combat climate change.

Though his conservative opponents were slightly less excited and worry about the widening budget deficit, the prime minister is safe in the knowledge that no Canadian government has ever been defeated on its throne speech. However, Trudeau’s Liberals do not command a majority in parliament and must rely on dissidents from Conservative ranks, and possibly from the more progressive New Democratic Party, to push through their reforms. The federal government may also expect some pushback from the provinces who may resent any changes to the healthcare system which they administer – and mostly pay for.

Federal emergency spending on a wide array of support programmes has pushed to budget deficit to levels not seen since World War II. A July ‘fiscal snapshot’ showed the 2020 fiscal deficit approaching a staggering 21 percent of GDP with Canada’s debt-to-GDP ratio pushing 120 percent. Fitch Rating promptly downgraded the country’s credit rating to AA+ (stable), reducing to just ten the number of sovereign credit issuers still meriting the coveted Triple A status – eight of them members of the European Economic Area.

Canada does possess a history, if not tradition, of quick post-crisis recovery. In its country outlook report, Fitch Ratings analysts expect the long-term consequences of the Corona Pandemic to reduce economic growth to just one percent for two years or longer. Substantial growth, they guesstimate, will only return by 2025.

Though Statistics Canada has recorder strong growth since May, the rebound is not expected to undo the damage done in Q2 when GDP plummeted by 38.7 percent (at an annualised rate). TD Bank Senior Economist Brian DePratto added yet another letter to the post-corona alphabet soup: ‘K’ for a recovery that sees some sectors claw back their losses quickly whilst others stay stuck in a recession.

So far, most Canadians have not yet felt the full financial impact of the Corona Recession. Whilst household spending dropped by 13.1 percent in Q2, and employee compensation fell 8.9 percent, disposable household income rose by 10.8 percent as a particularly generous federal income support programme kicked in. Over Q2 2020, the federal government saw its spending on benefits increase by 193.5 percent compared to the same period of 2019.

Most economists agree that the largesse was called for and saved the country from a 1930s-style depression. However, continued extravagant deficit spending as proposed by the Liberals may not be the wisest course of action. Then again: Nobody really knows how long the coronavirus will roam the globe largely unchecked and when sustained recovery can reasonably be expected to begin. With everybody guessing, perhaps it’s best to keep economies – and societies – on life support for a little while longer and keep the piper at bay. He can wait.


Asian Development Bank: What Emerging Markets Can Teach Us About CSR

[caption id="attachment_17268" align="alignright" width="300"] ADB approved $5 million in grants to provide food support to Manila’s most vulnerable households during the COVID-19 lockdown.[/caption]

Fifty years after Milton Friedman’s famous essay arguing that companies should focus solely on shareholder profits, emerging markets businesses are helping lead the fight against Covid-19.

Their example adds nuance to Friedman’s argument, reminding us that companies can effectively pursue their objectives only if they enjoy the trust of society, and that building trust sometimes entails sacrifice. When the pandemic first struck in Manila, where the Asian Development Bank is based, the government confronted a difficult choice. Lockdowns appeared essential, but millions would go hungry if workers were forced to stay home. The threat of starvation was as real as that from the virus.

The government moved quickly to expand social protections, reaching out to ADB and others for help. As we moved forward, we found that many of the nation’s leading corporations were already hard at work to ensure their employees felt secure, and implementing ambitious new initiatives to deliver food to the poor.

These efforts were not the result of some cold-hearted utilitarian calculus. Early on I spoke with the CEO of a construction firm that was determined to do whatever was necessary. “We have 70,000 employees right now and zero revenue,” he told me, “We will continue to pay them until the government steps in or we have no money left.”

Companies acted quickly because they understood, as Oxford scholar Colin Mayer has noted, that “[t]he corporation is not a ‘nexus of contracts’ … it is a nexus of relations. Those relations are based on trust.” Companies accomplish much more when they honor their civic responsibilities than when they engage in a narrowly transactional manner.

What resulted was an enormously productive three-way collaboration between the government, private sector and ADB. Some 63 million meals were distributed to needy families in the early days of lockdown, and Covid-19 testing capacity increased from 5,000 to 35,000 tests per day.

These initiatives were not unique. Indian companies have spent more than $1bn in Covid-related corporate responsibility efforts, and Singapore-based Olam International responded to the crisis by delivering support to 11.5m people in 33 countries, mainly in emerging markets.

An important strand of development theory argues, in the words of Daron Acemoglu and James Robinson, that “institutions … forge the success or failure of nations.” Scholars have historically focused on the development and legitimacy of political institutions, but it is economic institutions — companies, mostly — that have led the world to a level of unprecedented affluence.

[caption id="attachment_17269" align="aligncenter" width="900"] Delivering food to some of the poorest neighbourhoods in Manila under an ADB-supported scheme during the COVID-19 lockdown.[/caption]

Like political institutions, economic institutions also need legitimacy to be effective. Robust corporate legitimacy requires the apparatus of a functioning market economy and legal system, but takes more than a commitment to shareholder rights or even to a broader set of stakeholder rights. It must rest on corporate commitment to a purpose that resonates credibly with the rest of society.

The point is not that profit is ignoble, or that business managers should run internal philanthropies. It is that true commitment to purpose, the kind that bestows legitimacy and respect, sometimes entails voluntary sacrifice. That might mean foregoing a project that harms society, such as a profitable investment in a coal fired power plant, or deploying resources for the greater good during an emergency.

I saw at first-hand how a commitment to purpose confers legitimacy when delivering food to some of the poorest neighborhoods in Manila, and in opening the first new Covid testing facility north of the city. The impact was obvious, on everyone from the neediest slum resident to the most senior government official.

Institutions like the ADB have long leveraged their own substantial reservoir of legitimacy to help build consensus on standards for private sector behavior. For example, ADB supports the World Bank Group’s Equator Principles, which establish voluntary environment and social guidelines for financial institutions. New standards may be needed in emerging markets for corporate social responsibility, and ADB will therefore be conducting a study on the link between this subject, corporate legitimacy and economic development.

I had the privilege of obtaining two degrees from Milton Friedman’s academic home. In business school we learned about the primacy of shareholder profit. But an older set of ideas prevailed in legal ethics. A lawyer is both a zealous advocate for client interests, and an officer of the court who must honour her or his responsibilities to the system of justice.

Across the world, companies have responded to pandemic by recognising their own broader role. We must learn from their example. Without capable and legitimate economic institutions, companies that are profitable and widely respected as contributing members of society, it will become progressively harder to make the world a better place.

About the Author

[caption id="attachment_17267" align="aligncenter" width="500"] Asian Development Bank Vice President for East Asia, Southeast Asia, and the Pacific: Ahmed M Saeed[/caption]

Ahmed M Saeed is based in the Philippines and serves as Vice President for East Asia, Southeast Asia, and the Pacific at the Asian Development Bank. He is a former Deputy Assistant Secretary of the US Treasury and Managing Director at JPMorgan Chase. Ahmed holds JD and MBA degrees from the University of Chicago.

About the Asian Development Bank

The Asian Development Bank was founded in 1966 as a financial institution that would be Asian in character and foster economic growth and cooperation in what was then one of the poorest regions of the world. ADB assists its members and partners by providing loans, technical assistance, grants, and equity investments to promote social and economic development. Under its long-term Strategy 2030, ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. ADB is composed of 68 members, 49 of which are from Asia and the Pacific.


Brexit Nears, Hedge Funds Flip Sides, and IMF Urges Spending

The yield on the benchmark 10-year German bund this week dipped to minus 0,63 percent as investors scrambled for safety and stocks took a beating. Tech stocks stumbled as well after the Financial Times revealed that the European Commission is looking into ways to force a breakup of dominant internet giants such as Google, Facebook, Amazon, and Apple.

Equity futures retreated across the board as well after British, German, French, and Dutch authorities announced quasi lockdowns in an attempt to stop the second wave of the Corona pandemic from getting out of control. Meanwhile, the contours of a third wave become visible in the US as the novel virus seesaws from coast to coast.

On Thursday, the FTSE 100 dropped 2.4 percent in early morning trading on reports that London may face stricter lockdown rules. The index timidly recovered some of the lost ground on Friday. The absence of progress in the talks on a post-Brexit trade deal between the UK and the EU also dampened spirits. EU leaders gathered in Brussels on Thursday for two days of talks at a summit that were supposed to deal with the tortuous negotiations. However, that topic was relegated to the footnotes as concerns over the pandemic’s economic and financial fallout took centre stage.

EU chief negotiator Michel Barnier was told to stay within his narrow mandate, and cautioned not to cede ground, as irritation grew over last-ditch British attempts to sow discord in the union. In a series of videocalls with government leaders deemed sympathetic to his plight, Prime Minister Boris Johnson pleaded for ‘small concessions’ to safeguard to the ‘greater good’.

Early in the week, German Chancellor Angela Merkel released a statement saying that any deal should even-handed and reflect the interests of both the UK the EU. In an ominous sign that the British establishment has lost the fine art of correctly interpreting the subtleties of diplomatic exchange, Merkel’s words were instantly celebrated as a decisive victory over the vengeful French and their odious insistence on extracting a punishing deal ‘pour encourager les autres’.

Fatigue

However, the exuberant mood was short-lived as Merkel promptly joined French President Emmanuel Macron in calling Barnier to order after he had suggested a bit more wriggle room to accommodate British demands and secure a last-minute deal. In Brussels, EU leaders dispatched the entire subject as a line item, agreeing that the EU’s position on state aid, fishing rights, conflict resolution, and other thorny issues is crystal clear and needs no further clarification or modification. What also became abundantly clear in Brussels was that Brexit fatigue has set in. EU Council President Charles Michel bluntly stated that London will have to ‘move’ if it desires a deal.

On Friday morning, Prime Minister Johnson addressed the nation in a televised statement to break the news and ask Britons to prepare for a no-deal outcome in case the EU refuses to budge on the outstanding issues. He repeated his desire to obtain a Canadian-style free trade agreement from the EU, a request that has been dismissed by Brussels as a ‘deal too far’ given the volume of trade, the close proximity of the UK, and the country’s apparent refusal to abide by the terms of the Withdrawal Agreement.

Tentative Optimism

If the prescient powers of hedge fund analysts offer any guidance, there is reason for tentative optimism. Fund managers have been gradually shoring up their shorts of pandemic winners such as online retailers, computer manufacturers, and healthcare providers. After three consecutive quarters of strong growth, these over-earners are poised for a return to their ‘old normal’ and are considered unlikely to experience sustained buoyancy. In a recent note to investors, Goldman Sachs warns that a market ‘correction’ is imminent.

Hedge fund managers have turned sour on obvious shorts such as brick-and-mortar retailers, airlines, and entertainment after governments rolled out emergency support packages that limited downsides and took a chunk out of the anticipated profits. They are now scouring markets for more esoteric options, focussing on seriously overpriced stocks with a price-to-earnings ratio running into the hundreds – or even the thousands.

One of the nuggets unearthed by hedge funds has been Germany’s meal kit provider HelloFresh which reported ‘exceptional’ growth and posted a €172 million profit in the first half of the year, after racking up pre-tax losses in 2018 and 2019. A number of bellwether funds such as Lone Pine Capital and Palestra Capital, amongst others, have boosted the volume of bets against the company north of €200 million.

Vaccine manufacturers are another irresistible target. Novavax, up a staggering 2,900 percent so far this year, is racing to develop a combined flu/covid-19 vaccine and has been a darling of hedge fund managers since the start of the pandemic. However, the ranks of dissenters are beginning to swell and flipping NVAX positions from call to put offers a new and exciting thrill.

Big Spenders

In the weeks and months ahead, with multiple crises unfolding, finding stocks to short should not pose much of a challenge. UniCredit, Italy’s largest retail bank, warned that with lockdown restrictions tightening, a post-Brexit deal unlikely, and a post-Corona recovery distant and iffy, Europe is facing a particularly nasty set of circumstances. Meanwhile, the International Monetary Fund (IMF) – formerly a guardian of fiscal frugality – may have suffered an epiphany of sorts and now calls on governments to perish any and all thoughts of austerity. The IMF wants to see deficits and debt ratios balloon and suggests big spending is the only answer to the pandemic.

Advanced economies, the IMF concludes, can and must borrow freely without regard to the overall health of their public finances. The philosophy, whilst risky, is not entirely without merit given the present record low interest rates. Some countries such as Germany, Austria, and The Netherlands – curiously precisely those that managed their finances with an elevated level of prudence in the past – are actually earning good money from negative interest rates: The more debt is taken on, the more profit is raked in.

The novel IMF thinking holds that fiscal largesse will result in economic growth rates – and fiscal revenues – that outpace debt servicing costs by the proverbial country mile, rebalancing national accounts in five years or less. The trouble is that not all advanced economies are created equal. Going into the Corona Recession, both the US and the UK already sustained debt levels roughly equal to their GDP, in addition to crippling current account deficits. The US in particular subsists on the fumes of the no-longer-so-mighty dollar as the world’s reserve currency. The UK, not blessed with a reserve currency, prepares for a double whammy as the pandemic’s resurgence coincides with Brexit doomsday in an almost apocalyptic scenario that calls for a strong chin and stiff upper lip.

In summary, nobody is doing too well these days with, perhaps, the sole exception of President Xi Jinping’s China which seems to have shrugged off the pandemic, and its recession, by boosting domestic demand. Then again, as a fount of regional and global tensions, stresses, and conflicts China does not quite represent  a model for others to follow.


The Summer Before Dark 2.0

Paris is under a curfew and Madrid under a state of emergency. In the Benelux, bars and cafés have been closed whilst elsewhere in Europe governments are almost uniformly moving towards a quasi-lockdown. The second wave was perhaps slow to gather speed but is now steamrollering the continent with a ferocity that surpasses even the darkest predictions. In some countries, both the infection rate and the number of people diagnosed with covid-19 are significantly higher than those recorded in April and May at the peak of the pandemic’s first wave. The muted 2020 holiday season increasingly looks like the summer before dark.

The economy has seesawed in tandem with the novel virus. Analysts expect Q3 numbers to show record GDP growth across the EU after a sharp Q2 contraction. However, the last quarter of the year – the one that was supposed to consolidate post-pandemic gains and pull up the results for the full year to near zero – is likely to deliver a coup de grace and set the stage for a steep recession. All chatter about its form – V-, L-, U-, or W-shaped – has vanished as the I-shape comes into view – a precipitous drop off the figurative cliff with no branches to hang on to and little in the way of a cushion at the bottom.

The double-dip recession is already in the bag and a triple-dip has become a distinct possibility. A perusal of today’s headlines confirms the dire straits. The Guardian reports on street protests against toughened rules turning violent in Prague and Dublin. The paper also cites a snapshot study of the retail sector that tabulated over 6,000 (net) store closures in the UK between January and June – a record number.

The Frankfurter Allgemeine concludes that the pandemic rages out of control in Berlin-Neukölln where increasing numbers of infected people refuse to self-quarantine. Germany’s paper of record also reports that European Central Bank (ECB) President Christine Lagarde has suggested the creation of a permanent EU recovery and development fund underwritten by eurozone member states. The ECB forecast of fourth-quarter growth in excess of 3 percent has wisely been binned. The bank’s belief that the eurozone would return to its pre-pandemic size by 2022 was ditched as well.

The Italian Corriere della Sera carries news about a project to fast-track the assembly of a number of ICU-trains that can be mobilised to alleviate the pressure on overwhelmed local and regional hospitals. The first such train compositions, each equipped with 130 ICU beds, will roll out of the Angel Group’s workshops in about two months’ time.

Second Coming

In the UK, the pandemic’s second coming roughly coincides with the impending end of the Brexit transition period which kept the country inside the EU single market in all but name. The transition was to pave the way for a comprehensive free trade agreement, but negotiations have stalled over fishing rights and the need for a level playing field and a strengthened conflict adjudication mechanism. On Saturday, Prime Minister Boris Johnson seemed to suggest an end to the talks and informally notified EU chief negotiator Michel Barnier not to bother coming to London. Brussels ignored the advice and Johnson refrained from instructing his negotiating team to break off conversations. However, with both sides entrenched in their positions, it seems highly unlikely that an agreement – or fig leaf – will emerge.

Meanwhile, the ECB’s increasingly frantic attempts to stoke inflation came to naught with the eurozone consumer price index dipping to minus 0.3 percent in September – a four-year low coming on the heels of August’s minus 0.2 percent. Core inflation, a measure which strips out the most volatile prices of food and energy, amongst others, descended to just (plus) 0.2%.

After injecting trillions into moribund eurozone economies and slashing interest rates deep into negative territory, the ECB is now ready to double down on its policy by expanding the €1.35 trillion bond-buying programme with a supplemental €500 billion. A growing number of analysts take issue with the policy which has merely shifted inflation from consumer prices to asset classes such as real estate and stocks.

Disconnect

The enormous disconnect between the struggling ‘real’ economy and the buoyant one featuring on the big boards of major stock exchanges is starting to embarrass and scare investors who fear that their day of reckoning may be drawing near. A few major investment banks have already cautioned clients against believing the present bull run may still have legs.

In her report to the European Parliament, Lagarde last week said that inflation is expected to remain negative over the coming months. She also optimistically forecasted a 1.3 percent rise of the consumer price index by 2022. ECB Vice-President Luis de Guindos ascribed the disappointing results to ‘ephemeral effects’ and predicted that next year’s bounce back will see a return to inflation.

Though the European Union has agreed to a €750 billion recovery fund, the first payouts are not expected for another year. However, this week the commission is expected to begin raising €100 billion on international capital markets for the awkwardly named SURE (support to mitigate unemployment risks in an emergency) package agreed by the council in May.

Market watchers expect the bond sale to provide an early indication of Brussels’ sovereign risk premium. The EU boasts a AAA/stable outlook rating from the three major credit rating agencies. The commission has currently some €50 billion in outstanding bonds but is expected to raise an additional €200 billion next year. Though EU bonds are trading at a higher yield than the benchmark 10-year German bund, the dearth of AAA-bonds available has investors excited. It is likely that the EU will be able to place its bonds at a negative yield.

Draft budgets submitted by eurozone member states to the European Commission show the aggregate fiscal deficit ballooning to almost €1 trillion – or 8.9 percent of GDP – next year. This represents a 10-fold increase over 2019 when the major markets of the eurozone showed a healthy surplus. The gap between revenues and spending is expected to widen to well over 10 percent of GDP in Spain, Italy, Belgium, and France. The Netherlands, Germany, and Ireland dwell at the other end of the scale but still overspend by massive amounts equal to around 6 percent of their national income.

The current fiscal splurge exceeds the one that followed the banking crisis of 2010 when eurozone member states overspending averaged out at 6.6 percent. However, this time around fiscal largesse comes with the blessings of the International Monetary Fund and other former guardians of fiscal rectitude. Globally, the Corona pandemic has prompted governments to up their spending and/or cut taxes by an estimated $11.7 trillion, equivalent to 12 percent of global GDP.


Atif Mian: Theory, Practice, and Macro-economic Reality in a World Longing for Rebound

“Economic disasters are almost always preceded by a large increase in household debt.”

The above proclamation comes from a critically acclaimed 2014 book, House of Debt, written by research colleagues Atif Mian, from Princeton University, and Amir Sufi, from the University of Chicago Booth School of Business.

The duo presented macro-economic theories linking major increases in personal debt with major recessions — then backed those theories up with hard data.

“We have a number of different explanations for what might be causing those booms and busts,” Mian told Equitable Growth in 2018, “what might be causing some countries to grow more aggressively than others. But our number of theories is much larger than the number of observations we have, which is a limiting factor of macro-economics just from an empirical standpoint.

“So, this is where I feel micro-data comes in, which is that it allows us to open up this space by giving us, in technical terms, a lot more degrees of freedom. And that can be used fruitfully and intelligently if you keep the theories in mind as you dive deeper into the more ‘micro’ level of granular datasets.”

The proliferation of micro-level data over the past decade has shown Mian the importance of understanding heterogeneity across datasets. “That really allows us then to connect finance to the macro-economy in a way that is much more based in actual data.”

The Pakistani native notes that global debt to GDP has almost doubled, with over $70tn in global debt accumulated since the ‘80s. Mian attributes unequal and unbalanced global growth as the root of the debt addiction. Covid is only going to further complicate matters.

“If you look at the responses to this crisis, it is often going to lead to an incredible increase in the levels of debt that households, governments and corporations are going to have,” Mian said in an interview with Adil Najam, the inaugural dean of the Pardee School of Global Studies. “It’s very hard at that point in time to run macro policy the usual way.”

Interest rates have already hit rock bottom and investor coffers are running low, and Mian sees a return to normal as “close to impossible”. A massive restructuring of the financial system would be the only viable solution at this point, he believes.

Personal debt in a post-Covid world, according to Mian, will result in income shocks, layoffs or reduced salaries, forcing households to make adjustments that work against the overall economy. Local governments and businesses will be feeling the same pinch, and implementing similar measures. Mian calls for a collective restructuring of debt levels: “Some of it will have to be written-down, some restructured into debt of different maturities.”

Mian has been warning about the downward spiral that out-of-control debt foretells. Covid could hasten that — depending on policy response. Without a restructuring of debt, the danger of economic contraction could become more prevalent, he fears. He worries about families already stretched thin by lower incomes, uncertainty and debt.

“When [faced with] these kind of squeezes before this crisis, the typical response of policymakers effectively has been to somehow try to give them even cheaper credit,” he says. “That cycle is going to be almost impossible to pursue this time round.

“We’ve been kicking this can down the road by ramping up more and more on credit creation, and letting people binge on credit. Either them borrowing themselves or governments borrowing on their behalf, effectively.”

Mian says the trend of unequal economic growth has been gathering steam over the past 30 to 40 years, with a select few benefiting. “That process is fundamentally unsustainable at a global macro level. The creation of credit is the other side of the process that is generating this unequal growth.”

Indebted countries with greenback balances will have to seek alternatives to the traditional repayment plan of boosting revenues through exports. Mian predicts that path will be become more precarious due to the pandemic. Many countries will find it neither possible nor advisable for the IMF to intervene and “roll-over existing debts” — unlike other recent situations.

“I think it would help if the global economy comes together more in the spirit of the Marshall Plan,” Mian says, referencing the $15bn US programme that helped to finance European recovery after World War II.

For realistic recovery, Mian would like to see “more avenues of risk-sharing, where the richer countries lessen some of the burden of the poorer countries”.


Whither Interest Rates in Advanced Economies: Low for Long?

by Otaviano Canuto

[caption id="attachment_13569" align="alignright" width="300"] Author: Otaviano Canuto (Foto: Fabio Braga/Folhapress, MERCADO)[/caption]

We have previously discussed how, between March 2020, when the financial shock caused by COVID-19 occurred, and the end of August, the stock and corporate debt markets in the United States performed extraordinarily, despite gloomy prospects on the real side of the economy. The decline in technology stock prices in September ended up taking the equivalent of a month from gains starting in April, but prices remain high.

On the basis of such a ‘disconnect from reality’ in financial markets, we pointed to the Federal Reserve’s (Fed) interest rate cuts and liquidity flooding, which were done to avoid a dramatic credit crunch, massive bankruptcy waves, and even greater unemployment than what happened. Other central banks of advanced economies—the Eurozone, Japan, the United Kingdom—acted similarly. According to the Bank for International Settlements (BIS), the central banks in these countries have, since January, collectively created something around $3.8 trillion in new money, most of which ended up in government bonds yielding almost zero. Admittedly, such an attitude on the part of central banks was one of the factors that prevented an economic catastrophe even greater than that which has occurred.

In fact, the response of those central banks to the COVID-19 shock was the continuation of something already underway in the previous decade. It is true that, particularly in the case of the Fed, this time there was an extension of the set of tools, through the creation of credit lines and liquidity support in addition to banks, the basic vehicle for the operation of monetary policy.

But it is also a fact that, since the global financial crisis in 2008-2009, those central banks have resorted to quantitative easing (QE) policies, meaning direct acquisition of assets by central banks to reinforce reductions in interest rates. In the beginning, the objective was to prevent the global financial crisis from unfolding into a repeat of the Great Depression of the 1930s; however, the temporary appeal became more prolonged, in part because of the difficulties of getting out of it and returning to the ‘old normal’. The “unconventional has become conventional”, as Claudio Borio, from BIS, has said.

The abundance of liquidity has not been followed by inflation acceleration. However, concerns have been raised about the possibility of unviable companies and projects escaping closure—becoming ‘zombies’—or asset prices being overvalued, with the emergence of new bubbles, reflecting low interest rates and extremely favorable financial conditions. The policy of central banks came also to be seen by some as favoring asset holders, that is, the upper part of the income pyramid.

However, it is worth noting that the action of these central banks has been more reactive than proactive, more reflex than cause, and in their absence, macroeconomic performance would have been even more mediocre than it has been. The fact is that real interest rates—short and long term—have been declining for decades (see real 10-year benchmark rates in Figure 1).

[caption id="attachment_17457" align="aligncenter" width="671"] Figure 1. Source: Peterson Institute of International Economics, 8 October 2020.[/caption]

The counter-cyclical role of central banks has led them to take corresponding measures, with descending peaks and troughs over time (see the U.S. case in Figure 2). Since there has been no inflation acceleration, it can be assumed that ‘natural’ interest rates—those in which savings and investment flows are close enough to prevent excess demand or supply from causing inflation or recession—have been falling.

[caption id="attachment_17458" align="aligncenter" width="604"] Figure 2: Declining U.S. interest rate peaks and thoughs.
Source: Levy, D.A. (2019). Bubble or nothing. The Jerome Levy Forecasting Center LLC, September 2019.[/caption]

Strictly speaking, there seems to be a mismatch between the trend of increasing stocks of financial wealth, occasionally cut by shocks and crises, and the creation and incorporation of new assets accompanying real economic expansion. This underlies what Levy (2019) called the U.S. “Big Balance Sheet era” depicted in Figure 2. This is also illustrated in Figure 3 in the case of the U.S., where one may notice the mismatch between nominal holding gains on household assets as a share of GDP, and net private fixed investment, also as a share of GDP (with a brief convergence during the global financial crisis). Over time, the excess of savings over investments ends up leading to lower average real interest rates.

[caption id="attachment_17459" align="aligncenter" width="924"] Figure 3: U.S. household assets vs. private investments.
Source: Levy, D.A. (2019). Bubble or nothing. The Jerome Levy Forecasting Center LLC, September 2019.[/caption]

COVID-19 is helping reinforce such trends. As in other historical pandemic experiences, those who can, raise their individual savings for precautionary reasons. The uneven nature of the impacts of the pandemic, affecting mainly the bottom of the income pyramid, should increase the savings ratio as a proportion of GDP.

In addition, the preference for safer assets—such as bank deposits and government bonds, which are considered low risk—has increased, pushing down returns on such assets. The public deficits incurred by advanced countries, reflecting their responses to COVID-19, and the consequent increases in public debt are mitigating the mismatch between demand and availability of the assets that are considered safe.

In our previous article, on “real and financial disconnect”, we observed that the “role of superhero fulfilled by the Fed's monetary policy”—and that of other central banks—seems to be exhausted. It is not by chance that banks have demanded the strengthening of expansionary fiscal policies.

During its annual meeting (Oct. 12-18, 2020), the International Monetary Fund called on countries not to act too early in demobilizing their fiscal policies against the impacts of COVID-19. Low interest rates—and with the tendency to continue as such—would allow for the expansion of public debt without going into explosive trajectories. In the Financial Times, there was talk of “death of austerity” (October 16), contrasting the tone of the IMF now with a stronger reference post the 2008-2009 global financial crisis to the need for eventual fiscal correction programs in the medium term.

Before concluding, it is worth remembering that the ‘death of austerity’ can be decreed where and while issuers of public debt do not need to worry about returns demanded by buyers as compensation for risks, as is the case today with the advanced economies, whose sovereign bonds can be absorbed without major difficulties. The transplantation of the idea to contexts where this is not the case can have opposite and catastrophic effects.

Otaviano Canuto, based in Washington, D.C, is a senior fellow at the Policy Center for the New South, a nonresident senior fellow at Brookings Institution, a visiting public policy fellow at ILAS-Columbia, and principal of the Center for Macroeconomics and Development. He is a former vice-president and a former executive director at the World Bank, a former executive director at the International Monetary Fund and a former vice-president at the Inter-American Development Bank. He is also a former deputy minister for international affairs at Brazil’s Ministry of Finance and a former professor of economics at University of São Paulo and University of Campinas, Brazil.


John Häfelfinger, CEO of Basellandschaftliche Kantonalbank (BLKB): Finding Strength and Promise by Planning for the Long Term

[caption id="attachment_17544" align="alignright" width="300"] CEO of Basellandschaftliche Kantonalbank (BLKB): John Häfelfinger[/caption]

John Häfelfinger, CEO of Basellandschaftliche Kantonalbank (BLKB), talks to CFI.co about the opportunities afforded by sustainable finance.

BLKB positions itself as a future-orientated bank and was ranked Best Bank in Switzerland by Forbes in 2019, and Best Regional Sustainability Bank of Switzerland by CFI.co in 2020.

Sustainability is its business model. BLKB sees sustainability in its widest sense and takes a forward-looking approach. It’s an institution geared towards responsibility to people, society, and the environment.

At an operational level, that means its products and services, its role as an employer, and its business policy. It also means the company invests in its offer, in its employees, and in its processes and procedures. This approach is a catalyst for innovation and transformation.

CFI.co quizzed BLKB CEO John Häfelfinger to learn more…

Sustainability has many aspects. What do you regard as the key element?
It’s essentially about thinking and acting with the long term in mind. And indeed that’s what our owner — the canton of Basel-Landschaft — expects of us. Our purpose is to contribute to the balanced economic and social development of the canton and the north-west Switzerland region. It’s a mission based on the principles of stability, risk awareness and regional focus.

A history spanning over more than 150 years shows that these principles make us resilient and are a factor in our success. That’s particularly evident right now, with the Covid-19 situation.

What role does management play in ensuring sustainability is embedded within the bank?
Sustainability is a team effort. The key thing is that the topic is integral to our mission statement, strategy and brand, and also that it’s visible and tangible. It’s also important to have the right resources and budget, and management sets the direction here.

At the same time, all employees need to be empowered to promote sustainability on a proactive and independent basis in their own area. What’s crucial here is that employees have the requisite knowledge and capabilities. That’s why we’re investing heavily in training and development, and also why we’ve reduced hierarchies within the bank.

Where do you see the potential for sustainable finance in the case of regional banks in particular?
Sustainability is a huge opportunity for banks with a regional focus. The regional dimension can make a key contribution to ensuring that the full force of sustainability can be felt. Regional banks are closer to their suppliers and other stakeholders. Proximity in the sense of regional focus is a precious value when it comes to sustainability in particular.

The Covid-19 crisis has far-reaching consequences for business and society. What are your thoughts on the subject, and what role do you see here for BLKB?
Covid-19 is exposing weaknesses — and at the same time highlighting the strengths we can rely on. Our strong position serves us well in the current situation. Our capital and liquidity base is rock-solid, enabling us to assist our customers as well as the wider community both quickly and easily.

Our business model is resilient. It enables us to live up to our responsibilities towards our customers and the wider community as well as implement what we mean by our future-orientated approach.


BLKB: Regional Bank that Favours a Future-Orientated Approach

What impact do corporate actions have on individuals, society and the environment? Can we take responsibility for the world we live in, and if so, how? Swiss bank BLKB has some answers.

Swiss bank BLKB has been taking responsibility for its region for over 150 years. Established to meet the financial needs of the population and the local economy, it promotes sustainable development for people, society and the environment.

Although the Covid-19 crisis has brought sustainability to public attention, BLKB began addressing the issue some time ago. As a forward-looking regional bank, BLKB has been taking responsibility for people in the region and promoting economic development since its establishment. Sustainable thinking and action are at the heart of the bank’s business operations and the basis of its mission statement.

Sustainability is much more than just being “green”; it remains closely identified with environmentalism in the public discourse. But that is too narrow a definition for BLKB, which sees sustainability as an enduring mission.

The bank takes a far-sighted approach — and the question of whether what it is doing today is also right for tomorrow. “That’s why at BLKB we talk about our future-orientated approach,” explains Marilen Dürr, head of Sustainability at BLKB. “Our view reflects our deep conviction that sustainable development benefits everyone, and we assess issues from a comprehensive, long-term perspective.”

As a sustainable financial services provider, BLKB places an emphasis on environmentally responsible banking operations. The bank also demonstrates the requisite far-sighted approach when it comes to advising customers and helping them to make decisions. BLKB has been tasked by its owner — the canton of Basel-Landschaft — with contributing to the region’s economic and social development. BLKB is the bank for the people of the canton and the north-west region of Switzerland. “Their future should have a home in the region,” says Dürr.

BLKB’s regional importance has been revealed by the Covid-19 pandemic. During the crisis, BLKB has been able to support SMEs and start-ups in a straightforward way — with loans and bridging measures — thanks to its solid capital and liquidity base.

The bank is able to help where needed, strengthening the regional community as a whole. BLKB is more than just a financial services provider. It is also a reliable partner for local business, supports cultural life through targeted sponsorship, and plays an important role as employer.

“Sustainability is our business model. It’s about our responsibility towards people, society and the environment,” says John Häfelfinger, the bank’s CEO. “At an operational level, that means our products and services, in particular the advice we give our customers, and our role as an employer and our business policy.”

Sustainability is Teamwork

The wellbeing and development of its employees are important elements of the bank’s holistic understanding of sustainability. BLKB views capable, highly committed employees as a crucial success factor in a highly competitive market.

The bank promotes a values-based, motivating work environment as well as a far-sighted, responsible corporate culture. “As a financial services provider, we will achieve sustained success if we all adopt and embrace a forward-looking approach,” says Daniela Strohmeier, HR Development Specialist. To ensure employees are fit for the future, BLKB systematically invests in their personal and specialist training and development.

The bank set up a training initiative in 2019, and has around 20 percent of its staff currently in training or development. Older members of staff in particular are encouraged to undertake more training. The bank sees the promotion of staff aged 50-plus as an opportunity to address the upcoming retirement wave among the Baby Boomer generation. BLKB always accommodates its employees’ individual circumstances through flexible work models and methods.

Sustainable Products

BLKB understands that sustainable investment brings long-term success for its stakeholders. Studies show that responsible investment is becoming increasingly important in Switzerland, and enjoys strong customer demand.

BLKB identified this trend at an early stage, and quickly came to focus almost entirely on sustainable investment products. “BLKB is one of the few banks in Switzerland to have a comprehensive ESG approach across the breadth of its product line-up,” says Andreas Holzer, Sustainable Investment Specialist at BLKB.

ESG criteria have been standard in the bank’s investment business for many years. Its goal is to systematically integrate these criteria in all products and services. In addition to credit checks, BLKB takes into account the sustainability of companies before granting a loan. This year, it also began examining ESG criteria within the area of commercial lending. If a company exhibits shortcomings in relation to sustainability, BLKB — as a responsible bank — discusses the benefits of sustainable business management. The bank sees this as a forward-looking approach that will support the region on its path to becoming a resource-efficient economy.

Responsibility for the Environment

Climate protection, particularly in relation to CO2 emissions, is a major focal point for BLKB. The bank is committed to adhering to the 2015 Paris Agreement and is reducing its direct and indirect CO2 emissions on a continuous basis (Scope 1 – 3 of the Greenhouse Gas Protocol).

The bank already operates on a carbon-neutral basis and participates in numerous climate protection projects. The “Forest of Tomorrow” regional project combines climate protection with the promotion of biodiversity. Across the region’s forests, BLKB is funding the planting of 1,000 trees that are well suited to changing climatic conditions.

The forests of north-west Switzerland are suffering from the impact of climate change. Increasing drought and rising average temperatures are leading to the death of less heat-resistant native species. The bank’s customers can contribute to the project and indirectly support the initiative, as well as the funding of investment in energy-efficient buildings.

As a bank anchored within the region, BLKB believes it is important to couple its own CO2 offset with its commitment to a sustainable future. The bank has funded and launched a local climate protection project where the soil in the canton of Basel-Landschaft is used for CO2-storage through humus formation.

“From 2021, we’ll be providing our carbon offsets on a completely local basis,” says Marilen Dürr — thus ensuring the region has a bright future.


Liechtenstein Bankers Association (LBA): Modern Industry Association with the Ambition to Shape the Future

[caption id="attachment_17550" align="alignright" width="300"] Liechtenstein[/caption]

The Liechtenstein Bankers Association (LBA), established in 1969, is the domestic and international voice of banks operating in, and from, the tiny but influential principality.

It is one of the microstate’s most important associations and plays a key role in the successful development of the financial centre. Some figures underline the impressive growth of the banking centre over the past 50 years. The balance sheet total increased from around CHF1.5bn (€1.39bn) to CHF72bn (V66.82) and the number of employees from 272 to 2203.

At the end of 2019, Liechtenstein’s banks managed total assets of almost CHF350bn (€325bn).

Along with banks, insurers, and professional trustees, the financial centre includes fund companies, asset managers, and public-benefit foundations. The banks in Liechtenstein have unrestricted access to their two main markets: Switzerland, thanks to the Customs Union of 1923 and the adoption of the stable Swiss franc as the official currency, and the European Single Market, thanks to membership in the European Economic Area (EEA) since 1995 and the associated full incorporation of EU law.

"Liechtenstein stands for stability and security. It enjoys a AAA country rating by Standard & Poor’s."

The financial centre is a key industry for Liechtenstein's wealth. It accounts for more than half of the tax income and 23 percent of GDP. With this it is the second-most important sector in Liechtenstein — only surpassed by the indus-trial sector’s share of 43 percent.

Liechtenstein stands for stability and security. It enjoys a AAA country rating by Standard & Poor’s. The banks favour a low-risk business model which shows in an excellent capitalisation with an average Tier 1 ratio of around 20 per-cent.

Private banking has always been, and remains, the core business of Liechtenstein financial institutions. Despite this homogeneous orientation, the banks differ substantially with respect to their size. The three large institutions in Liechtenstein — LGT Bank AG, Liechtensteinische Landesbank AG and VP Bank AG — account for more than 85 per-cent of the balance sheet total. From the national perspective, they are considered to be systemic. A special aspect in this connection is that there is no lender of last resort, i.e. no central bank. Moreover, Liechtenstein is not a member of the International Monetary Fund (IMF).

Long before it has become mainstream, the country and its banks have embraced sustainability as a major driver for the future. However, they take a holistic approach. Sustainability for them is more than climate change.

The United Nations’ 17 Sustainable Development Goals (SDGs) are guiding principles for the LBA’s domestic and international activities. The goals address global challenges, including poverty, inequality, environmental degrada-tion, prosperity, and peace and justice. They interconnect and aim to leave no one behind.

Liechtenstein claims the title of “solar world champion”, having promoted the renewable energy source since 2015, and boasting the highest per-capita installed photovoltaic capacity. Every municipality is strongly committed and Liechtenstein has become the first “Energy Country”.

In two other areas, Liechtenstein launched public-private partnership initiatives of a unique and pioneering charac-ter. To mark World Water Day, on March 22, 2017, the Waterfootprint Liechtenstein initiative was launched. The principle behind the project is straightforward: “Drink tap water. Donate drinking water”. Liechtenstein is aiming to provide access to clean drinking water to one suffering person for every resident — which means improving the living conditions of around 38,000 people.

The second lighthouse project is the Liechtenstein Initiative, which aims to end human trafficking and modern slavery.The project is a partnership between the Governments of Liechtenstein, Australia and the Netherlands, along with the UN University Centre for Policy Research as well as a consortium of banks, philanthropic foundations, and associations. The LBA and its members are part of these supporting organisations tackling offences to humanity, and are leading causes of money laundering and terrorist financing.

The Liechtenstein government and the Financial Market Authority (FMA) realised the potential of digitalisation early on. With blockchain technology and the token economy, pioneering legislative work has been done. The objective of the Blockchain Act is to create legal certainty and transparency. Sustainability and digitalisation go hand-in-hand, and both are important for the reputation and development of Liechtenstein and its financial centre.

The Liechtenstein Bankers Association stands for market economy-based principles and for an efficient financial centre with the highest standards. The association is committed to ensuring an excellent framework for the business location of Liechtenstein, the financial and the banking centre. It represents the common interests of Liechtenstein banks at national, European and international level.

A major task is to identify those relevant national, European and international developments, in particular regulatory and legislative proposals, and to prepare common positions for its members and stakeholders.

Member interests are pursued in accordance with the principles of sustainability and credibility. As a member of the European Banking Federation (EBF), the European Payments Council (EPC) and the European Parliamentary Financial Services Forum (EPFSF), the LBA is a member of key European committees, and plays an active role in the legislation process. Since 2017, the LBA has been a member of the Public Affairs Council (PAC) with offices in Washington and Brussels, and is part of the international network Financial Centres for Sustainability (FC4S).

The Liechtenstein Bankers Association is involved in opinion-shaping and the maintenance of relations in political decision-making. It does not believe in hard, one-way lobbying, but focuses on dialogue. The association wants to contribute by educating on matters relating to banking, and expanding and preserving knowledge.


Ferrexpo: Heightened ESG Focus Taking Mining Company to New Level

[caption id="attachment_17553" align="alignright" width="300"] Ferrexpo Acting CEO: Jim North[/caption]

London-listed Ferrexpo PLC looking to bring its environmental credentials to the forefront of its corporate strategy.

Ferrexpo has been premium listed on the London Stock Exchange since 2007 and has been a member of the FTSE 250 Index of Companies since November 2016. It believes in open reporting of its Environmental, Social and Governance (ESG) activities to provide transparency to stakeholders and assurance to the public of good corporate citizenship.

In 2019, ESG investing moved into the mainstream, with high-profile investors suggesting that companies may not be considered for investment if frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB), were not adopted. ESG-focused funds saw record inflows in that year, pulling in an additional $20bn — four times the 2018 level. The company decided to take the initiative and has incorporated these frameworks into its reporting, starting this year.

Ferrexpo’s operations in Ukraine comprise two iron ore mines, a third mine in development, processing facilities and infrastructure for global delivery of the iron ore pellets it produces. On a Scope 1 emissions basis, Ferrexpo products are comparable with those of its peers, and it uses new technologies to improve productivity and reduce emissions.

With an increased focus on Scope 3 emissions — those produced by the firm’s upstream and downstream customers — it is notable that Ferrexpo’s ore pellets create 40 percent less CO2 pollution for steel production than the main forms of iron ore produced by its international competitors.

The company also uses biofuels such as sunflower husks for up to 30 percent of the energy for its pelletiser. Ukraine is one of the largest producers of sunflower oil in the world, so the husks are abundant and locally available. An upper limit exists for the use of husks as fuel, because of the need for even and consistent heat. The company is exploring avenues for other renewable energy sources. The cost-saving from the partial substitution of natural gas for husks equated to $0.2 per tonne of production in 2019.
Water consumption is also addressed, and its use largely comprises recycled water, with very little extracted for production purposes. In 2019, Ferrexpo marked the sixth successive year of steadily declining water extraction from the local network.

An independent review of its tailings (waste storage) facility in 2019 concluded that the Ferrexpo facility was suitable and well maintained. The company also commissioned an independent consultancy to conduct a review of biodiversity around its mines (ongoing), and to study work done in previous years to provide habitats for protected bird species and educate schoolchildren on biodiversity.

UN Sustainable Development Goals

The United Nations’ Sustainable Development Goals (SDGs), 17 interconnected ambitions to improve quality of life, are taken seriously by Ferrexpo. Global challenges such as poverty, inequality, climate change, environmental degradation, peace and justice are addressed. Ferrexpo acknowledges it has a part to play, and its efforts in Responsible Business align with the SDGs.

The company is working towards a strategic goal of carbon-free pellet production. Climate change and greenhouse gas emissions are of critical concern, and there is a drive to reduce the company carbon footprint. Mining is an inherently energy intensive industry, requiring fuel, electricity and natural gas (for pelletising). Energy-intensive activities do not have to be carbon-intensive however. Ferrexpo is pursuing studies into modern technologies such as solar power, greener alternatives to natural gas and improving efficiencies through autonomous trucks, all in a bid to reduce its carbon footprint.

Scope 3 Emissions Reporting

Scope 3 emissions relate to upstream activities, such as truck tyres, or downstream activities, which relate to the use of the company’s ore pellets. Scope 3 emissions are dominated by the emissions from blast furnaces that convert the pellets into steel. Ferrexpo has worked with independent consultancy CRU to understand the benefits of using pellets over iron ore sinter fines.

Ferrexpo plans to implement a greenhouse gas management system (ISO 14064) to quantify, monitor, report and verify emissions. This is the globally recognised standard for a number of existing emissions trading schemes. Ukraine does not currently have such a system, but the country is currently in the process of aligning local legislation to that of the European Union.

Tailings Management

Tailings are an inevitable part of processing ore. Taking iron from rock leaves behind a fine, inert material. Ferrexpo does not use any harmful chemicals in extraction, and its tailings are non-toxic. Its tailings facility is split into three sections, maintained and managed by the company since 1970, and covers an area of 1,300 hectares east of the Poltava mine. Ferrexpo produces gravel for road construction from the tailings. The reuse of this gravel represented seven percent of the material processed in 2019. Independent consultant Knight Piésold conducted a review of the tailings facility, and concluded that it was well managed and of an appropriate design, with regular inspections by the Ukrainian authorities. The tailings dam is constructed on flat land, with a drainage channel that diverts water from the base of the dam back to the processing plant. Around the perimeter, 34 piezometric borehole lines monitor the water levels.

Community Engagement

The Ferrexpo Charity Fund has been in place since 2011 and provides direct assistance to individuals for medical treatments, infrastructure projects, schools and — in particular during the current pandemic — hospitals. The fund consults with local community leaders, cultural institutions and local government to co-ordinate the company’s efforts in the towns and villages surrounding Ferrexpo’s three mines. Total expenditure by the charity fund rose by 49 percent to UAH117m ($4.22m) in 2019.

The fund has four main pillars through which activities are focused each year:

Social partnerships to improve infrastructure such as hospitals, schools, roads and other public institutions, including a veterinary clinic.

Direct assistance to individuals needing medical treatment, and support for pensioners through aid packages.

Construction and maintenance of sports facilities and amenities.

Budgetary assistance for the local council in Horishni Plavni, and development projects in the wider Poltava region.

In Ukraine, more than two-thirds of rural residents (almost nine million people) supply their own water, and do not have a piped supply to their homes. Ferrexpo Belanovo Mining (FBM) is the company’s development-stage project to the north of its active mines. It engages with communities, and is drilling 59 boreholes in the community of Solonytsya this year to provide access to clean water.

Ferrexpo’s Charity Fund has completed improvement projects at all six secondary schools in the local town of Horishni Plavni. Other community development efforts have focused on developing facilities for schools, sports, and local amenities. Ferrexpo also supports local media, print media and local TV channels, and supplemented local council budgets for the provision of basic services to local communities.

Activities in 2019 focused on seven villages and towns around the company’s operations. Ferrexpo supports dialogue with local communities through its three operating entities — Ferrexpo Poltava Mining, Ferrexpo Yeristovo Mining and Ferrexpo Belanovo Mining. Local CSR committees meet quarterly. The company consults with local community leaders on existing and proposed community action plans, and can discuss its ongoing Responsible Business efforts. These committee meetings also serve as grievance mechanisms for individuals and communities impacted by Ferrexpo’s business activities.

The company recruits locally, with 81 percent of new workers coming from within a 30km radius of Ferrexpo operations. It also hires locally for more senior roles, and 67 percent of management roles were filled by people from local communities.

Through thorough community engagement, Ferrexpo aims to dispel the negative image of mining. It is through close collaboration between all stakeholders, both locally in Ukraine and internationally, that Ferrexpo has managed to increase its production and expand its facilities to become the third largest pellet exporter in the world, all of which has only been possible through strong environmental, social and governance practices.


Ric Traynor: A Haven of Last Resort for Distressed Businesses

[caption id="attachment_17557" align="alignright" width="300"] Begbies Traynor Co-founder & Executive Chairman: Ric Traynor[/caption]

It is, perhaps, the ultimate countercyclical business: corporate recovery.

The UK’s leading independent business rescue and restructuring specialist Begbies Traynor (LSE: BEG) usually fares rather well when others don’t. However, co-founder and executive chairman Ric Traynor’s (60) job is to help business survive and prosper; preparing them for better times, improving their resilience, and ensuring the expectations of all stakeholders are met.

The Coronavirus pandemic has made for a particularly challenging environment for most businesses. According to the company’s own Red Flag Alert research, the total number of companies suffering ‘significant financial distress’ is already in excess of half a million and could rise considerably more than this over the coming year. Traynor has warned of a ‘double whammy’ as liabilities accrue whilst state support is being pulled: “I expect we’ll see numbers of insolvency in excess of what we saw in 2008.”

Though he eschews a one-size-fits-all approach to corporate recovery, he does not mince his words when considering the plight of corporate zombies and suggests that debt-laden companies without the prospect of a viable turnaround should be allowed to fail and fold: “The right thing might be to let the weak go to the wall.”

Traynor points to the financial crisis of 2009 and the widespread use of quantitative easing – a policy which encouraged businesses to load up with cheap credit. He argues that firms now burdened by unmanageable debts and without funds for development or innovation should make way for better capitalised competitors not dependent on artificial life support.

Traynor is clearly an admirer of the American approach and their how they separate the wheat from the corporate chaff: “Americans are much more red-blooded about how their economy works. That means they get sharper recessions but also faster recoveries.”

Sceptics may – and do – argue that Traynor’s sanguine attitude to corporate insolvencies is merely a way to drum up more business for his company. That, however, misses the point: he is very passionate about helping viable businesses weather storms not of their own making and navigating fickle and choppy markets. Begbies Traynor derives its success, and profit, not just from shuttering companies, but from flipping them back to black.

He also argues for proper training for directors and government backed training programmes for employees transitioning between careers.

Having taken a gap year working in a brick factory and a foundry, prior to qualifying as an accountant he has not taken the most traditional route, but experience he feels has served him well in shaping the business what it is today.

A Yorkshireman by birth, Traynor graduated from the University of Birmingham with a degree in Accountancy and Economics before learning his trade at the Manchester office of Arthur Anderson and subsequently founding Traynor & Partners in 1989. Eight years later, after the acquisition of London-based Begbies, the company rebranded as “Begbies Traynor”. Now with 75 offices spread throughout the UK, Begbies Traynor is recognised as a haven of last resort for companies of all sizes in all sectors.

Amongst many other noteworthy feats, Traynor’s business has been instrumental in preventing the demise of a number of iconic football clubs such as AFC Bournemouth, Southampton, and more recently the ongoing administration of Wigan Athletic FC, which all gained a renewed lease on life and continue to delight – or despair – their legions.

Traynor is determined to help distressed businesses find a way forward and expects a spike in demand for his company’s expertise once the government starts to wind down its covid-19 emergency support schemes.

During the company’s virtual annual general meeting, in September, Traynor reported strong growth in revenue and earnings. Last year, Begbies Traynor Group managed to significantly reduce its net debt and conclude three acquisitions. Traynor remains confident that market expectations for the current financial year will be met. Begbies Traynor has been listed on the London Stock Exchange since 2004.


Equiti: History of Firsts for Fintech Group with Inclusive Vision

Equiti is a pioneering fintech firm and world-class provider of online trading technology and multi-asset financial products.

The company believes that trading on the global financial markets within a safe and regulated environment should be open to everyone. Equiti’s clients include individual and professional clients, brokerages, regulated fund managers, and local and regional banks.

Providing trading support and services on the world’s leading trading platforms, including MT4 and MT5, the company offers a growing range of trading products, including CFDs on shares in top global companies, indices, commodities, currencies, futures, precious metals and more, and is quick-to-market with in-demand products.

FX Desk

Equiti's FX Desk provides CLOB (Central Limit order book) liquidity combined with pricing from a range of banks, and non-banks while also offering voice execution, macroeconomic analysis, market colour and trade idea generation.

History of Firsts

Equiti has a history of firsts. The company was one of the first brokers to offer liquidity and margin trading using Currenex Viking & Classic platforms along with native MT4 bridge to improve trading conditions for brokers. With growing popularity of the MetaTrader 4 platform, the Group began offering White Label type services via a newly established tech division in 2010. The result was reduced barriers of entry for smaller brokers who immediately benefitted from our expertise and infrastructure in platform administration.

In 2018, Equiti became the first online-forex broker to be awarded a licence by Kenya’s Capital Markets Authority, one of the most well-regarded regulatory bodies on the African continent; as well as the first broker to be granted a licence by the Jordan Securities Commission in over ten years.

In early 2019 Equiti launched FXPesa, an innovative web and app-based trading platform specially designed for the retail market in Kenya.

Equiti has plans to launch exciting innovative offerings and proprietary solutions and applications as well as a range of new financial products in the latter part of 2020.

Regulation and Compliance

Regulation, compliance and strong business ethics are at the core of the company’s operations that’s why Equiti Group has its subsidiaries licensed and regulated by six global market regulators, including Equiti Capital regulated by the Financial Conduct Authority in the UK. Others include Equiti Jordan regulated by the Jordan Securities Commission, EGM Futures DMCC, regulated and licensed by the Security and Commodities Authority in the UAE, Equiti AM regulated and licensed by the Central Bank of Armenia, Equiti Brokerage (Seychelles) regulated and licensed by the Seychelles Financial Services Authority, and EGM Securities regulated and licensed by the Capital Markets Authority in Kenya.

Equiti Group’s future growth is being cemented on the back of extremely stringent and robust corporate governance and management principles bolstered by the growing number of regulatory licenses to support its ever-expanding global footprint in new regions as well as new product offerings and solutions.

With offices in Europe, the Americas, the Middle East, Africa and the Asia Pacific region the company is able to support clients 24/6 in nine languages.


Iskandar Najjar, Equiti Group CEO - Pulling Out All the Stops in Bid to Be the Best: Equiti Group at the Forefront of Fintech Sector

[caption id="attachment_17563" align="alignright" width="300"] Equiti Group CEO: Iskandar Najjar[/caption]

Under the leadership of the Equiti Group’s CEO, Mr Iskandar Najjar, Equiti has transformed into a fast-growing global industry challenger. In recent years, the company has expanded its global footprint to new regions and new continents, growing threefold in size while increasing its product offering by over 300%.

The company’s mission is to deliver to its clients highly tailored solutions, superior service, fast execution, best value prices, and to be at the forefront of innovation in the fintech sector.

Innovation is one of the driving forces behind Equiti Group’s growth trajectory and will remain the focus of the company over the next five years.

Iskandar Najjar, Equiti Group CEO:

“Equiti is fully committed to exploring and developing new cutting-edge technologies, new product offerings, developing new ways of doing things better that will achieve scalability, and give us a leading advantage and added impetus for further global growth.

”Everything we do, everything we develop, at every level, and in every market, evolves around striving to deliver the best experience and world-class offerings for our clients.

“Our success is driven by our passion to be the best in the industry.”

“Every one of our clients is highly valuable to us, we invest in technology and in developing new offerings and solutions, and work extremely hard to continually improve, innovate and grow every day with our clients being top-of-mind and at the heart of our business.”

It is not only Equiti’s global Business Solutions and Product team that is responsible for innovation, but every employee is encouraged to actively apply their mind to new ways of doing things in their specialist area.

Innovation is one of the core company values highlighted in the Company’s Employee handbook, and regularly reiterated as a key message and business driver by the Group CEO.

Equiti’s mission to be at the forefront of innovation in the fintech sector is bolstered by two subsidiaries within the Equiti Group, namely AlgoLabs, a research and development company, and EGMLABS, focused on technology developments. In addition, Equiti Group partners with the world’s best technology providers to give its clients the most advanced trading experience.

Subsidiaries within the Equiti Group are headed by local CEOs that have made a strong mark in the industry and in their region.

Equiti Capital UK is headed by Brian Myers

Equiti US is headed by Gary Dennison who also oversees the Group’s growth in Latin America and Bloom Capital in New Zealand

Equiti Jordan is overseen by Iskandar Najjar and Mohamed Alahmad

EGM Futures is headed by Mohamed Alahmad who also oversees the Group’s growth in the MENA region

EGM Securities is headed by Samwel Kiraka

Equiti AM is headed by Artak Nahapetyan who also oversees the Group’s growth in the CIS region

EGMLABS is headed by Hesham Hasanin

AlgoLabs, located in the UK, is headed by David Lindsay, PhD

Equiti draws on the best local and global talent to support its fast-pace global growth and to apply a world-class standard across all its entities.


Q&A with Chairman of Eriell Group and Enter Engineering: Bakhtiyor Fazilov

[caption id="attachment_17582" align="alignright" width="300"] Chairman: Bakhtiyor Fazilov[/caption]

Please, tell us a little about yourself. How did you reach your current position?
As you may understand, it is not easy to talk about oneself, especially for a person in my position. I was born in Samarkand. After school I entered the Tashkent Economic University, the Faculty of International Economic Relations. My career in the oil and gas sector began in Uzbekistan in 2002. I was involved in various contracts for the supply of equipment and spare parts for the Uzbekneftegaz company, but always wanted to be an independent person and realize that my success largely depends on my own knowledge and efforts, so I looked for opportunities to become an entrepreneur. I am glad I succeeded, and today I have a fairly extensive portfolio of companies and interests.

We read a lot about the changes in Uzbekistan over the past three years. Is it easier to do business today?
The history of our country is rich and varied - it contains pages you would want to read over and over again, plus pages one would want to quickly turn over and begin writing new ones. Now we are on such a page - with our life and work we are writing a new page for a young independent Uzbekistan.

Firstly, I would like to mention large-scale fundamental reforms under way in Uzbekistan on the initiative of our President, Shavkat Mirziyoev. Under his leadership the economy and the legal sector of our country are being liberalised, thus creating an attractive investment climate. There are many examples of that. We successfully cooperate with both the CIS countries, and partners from the US, Great Britain, France, Germany, Hungary, Austria, Japan, China and many others.

Much attention is paid by our President to the construction of new facilities in the oil and gas industry, and the reconstruction and modernisation of existing enterprises in line with modern requirements. This gives us, businessmen, special energy and enthusiasm.

[caption id="attachment_17583" align="aligncenter" width="900"] Completed Humo Arena[/caption]

What do you consider your main business?
There are two companies in my portfolio of assets I would like to highlight: Eriell and Enter Engineering. Founded in 2004, Eriell is an international oilfield services company with extensive experience in harsh climatic conditions. This includes the Arctic Circle with temperatures of -50°C to the deserts of Central Asia with temperatures of +50°C.

It is clear the days of easy oil and gas have already passed. Many countries are making considerable efforts to find alternatives to the use of hydrocarbons for energy generation - and Uzbekistan is no exception. Millions of dollars are invested in the construction of solar and wind parks and the development of nuclear energy. But the complete replacement of hydrocarbons will not happen tomorrow. Hydrocarbons can be used to produce both energy and many other products necessary in people's lives. Therefore, sustainable oil and gas production is a very urgent task for our country. Deposits often occur in hard-to-reach geological formations and geographical locations. I am pleased to note Eriell’s specialists are well-qualified and experienced to work in such harsh environments.

Founded in 2012, Enter Engineering is a major engineering contractor for the construction of industrial and civil facilities. Over the past seven years, we have become one of the leaders among similar contractors in Central Asia. Our customers include international companies such as NK LUKOIL, OJSC AK Transneft, OJSC Arctic Gas, JSC Achimgaz, OJSC Severneftegazprom, NHK Uzbekneftegaz, AK Uztransgaz, Mitsubishi Heavy Industries Ltd, Hyundai Engineering Co. Ltd and other oil and gas companies.

We are also proud of the successful completion, in 2019, of the Humo Arena construction. The Arena is an ultra-modern multifunctional ice complex in the Republic of Uzbekistan. It’s 74,000m2 area holds a capacity of 12,500 people. The complex is intended for the development of winter sports and the holding of international competitions, exhibitions, concerts and other events.

[caption id="attachment_17584" align="aligncenter" width="900"] Eriell site in the Arctic[/caption]

How is your business coping with the coronavirus pandemic?
At the start of 2020, it was impossible to predict how events would unfold with the coronavirus. Like the rest of the world, Uzbekistan has experienced some troubling moments, and we continue to do our best to win the battle against the virus without seriously damaging our businesses, projects and livelihood.

Tens of thousands of people work at our enterprises. This is a huge responsibility. The health and safety of our employees is our top priority. Proper health protection, working and resting conditions during repair and construction of wells and on construction sites, in shift camps, and during transportation, require high levels of hygiene. The preventative measures we take help reduce the risks of the spread of COVID-19 infection and keep our city offices and local sites working without interruption as much as possible.

Enter Engineering also participated in the construction of a medical facility outside Tashkent. Unlike facilities in other parts of the world, the Tashkent facility is intended to be a permanent hospital for the treatment of infectious diseases.

What are your ambitions for these companies? Any specific plans for 2021?
The main ambition for these and other companies is their progressive development and strengthening of their position in international markets. We understand doing business around the world today is much more transparent and accountable than ever. For some companies this means switching to an international financial reporting system, obtaining an international rating, increasing competitiveness and market share. For others, consolidation of their position and the search for new markets; for a third group - attracting foreign investments and forming joint ventures.

How you approach your present situation determines where it will take you. We always try to get the most out of every experience. Even in tough times there are elements to help one achieve that ambition. I would also add quality is more important than quantity. My main companies have a high reputation and a strong impact on the lives of many people both in Uzbekistan and beyond. A big ambition is to preserve and strengthen this reputation with new achievements and projects.

For example, we took part in the construction project of a gas-chemical plant "OLTIN YO'L GTL" - which is unique for Central Asia. This enterprise will become the flagship of our economy and one of the most advanced facilities in the world. It will produce high-quality fuels with a low environmental impact, ensuring an eco-friendly future not only for our country, but the region as a whole.

The construction of this plant will create new high-tech production capacity in Uzbekistan, enabling deeper levels of hydrocarbon processing. It will contribute to the maximum use of our natural resources and creation of a new value chain.
We hear that you are the chairman of the National Hockey Association - why hockey?

I have always loved and continue to love sport. Today the world speaks not only Uzbek, English or Chinese, but also the language of new technologies, art, music and, of course, sport.

It all starts with a dream. For Uzbekistan, winter sports, and especially hockey, are a kind of dream. Last year we entered the International Ice Hockey Association. This became possible thanks to the construction of the Humo Arena, where athletes can train all year round and improve their skills in this exciting sport.

Hockey requires physical qualities, but also the ability to quickly respond to various situations, plan one’s actions clearly and fulfil one’s plans. In many ways, hockey resembles a business process. After years of practice each match gives you an hour of excitement. Similarly, it takes years to create a stable business and every successful deal is a reward.

What would you like to say to our readers?
Uzbekistan is an amazing country. I would like to invite your readers to visit Uzbekistan as soon as possible, and see for themselves how beautiful, warm, tasty and comfortable it is here. Uzbekistan is open for business and for the soul!

Bakhtiyor Fazilov is a prominent Uzbek businessman, Chairman of Eriell Group and Enter Engineering.