Week in Review
What We're Reading:
January 25, 2021
EU officials are cautiously optimistic about post-Trump US. As a new president takes over the White House, observers in the EU are speculating about what it means for trans-Atlantic relations, which suffered considerable setbacks during the Trump era. (DW)
UK retailers consider burning goods stuck in EU as costs of some items soar. U.K. retailers are considering abandoning goods returned by EU customers, with some even thinking of burning them due to the cost and trouble of bringing them back into the country. (Independent)
After Brexit, Ireland and France cut out the middleman: Britain. Confronted by red tape and delays after Britain’s messy exit from the European Union, Irish traders are shipping goods directly to and from European ports, shunning the once-speedier route through Britain. (Reuters)
20% of UK chemicals registrations face revocation after Brexit. Around 20% of registrations from U.K.-based companies to the European Union’s REACH chemicals database have not been transferred to EU companies and will be revoked after 31 March 2021. (EurActiv)
Fitch: Pandemic central to overwhelming downside risks to LatAm economy. Latin American economies will rebound this year from last year’s recession, but the risks to that outlook are almost all skewed to the downside, analysts at Fitch Ratings said on Jan. 20, citing in particular the evolution of the COVID-19 pandemic. (HSN)
Global trade trends: What will 2021 unwrap? 2021 is a handful of oliebollen [Dutch donuts] away in the rearview mirror and it’s time to prepare for new events. What will global trade unwrap? (Global Trade Magazine)
European Central Bank stimulus on track as economy struggles. With more than a trillion euros in stimulus still in the pipeline to the economy, the European Central Bank left its key bond-purchase program unchanged on Jan. 21 as the 19-country eurozone endures a winter economic slowdown due to the pandemic. (AP News)
Lebanon central bank governor denies transfer of capital. There were media reports in Lebanon that billions of dollars have left the country after banks blocked transfers abroad. Some media singled out transfers made by Lebanon's Central Bank governor himself. (Star Herald)
China slaps sanctions on 28 Trump administration officials, Including Mike Pompeo. In a statement released just minutes after President Biden took office, China's foreign ministry said it had decided to sanction those "who have seriously violated China's sovereignty and who have been mainly responsible for such U.S. moves on China-related issues." (CNBC)
France suggests pause on ‘poisonous’ US-EU trade standoff. The European Union and the U.S. should “pause” a long-running tariff disagreement to allow the issue to be resolved, France’s foreign minister suggested last week. (EurActiv)
What is next for Turkey? With the Turkish lira at a record depreciation amid the economic fallout of the COVID-19 pandemic, Turkish leadership is struggling to deal with an economic impasse and a seismic foreign relations shift as a result of the U.S. election. (Global Risk Insights)
Uganda elections: Museveni tests patience of international allies. After world leaders watched the incumbent, Yoweri Museveni, secure a victory in the presidential election last week, questions are being raised over the international community's relations with Uganda. (DW)
Why Indian cricket is competitive when its economy is not. It’s tempting to see sporting teams as metaphors for the nations and economies that produced them, and in the details, such comparisons don’t always hold up. Tending to the welfare of citizens is very different from coaching talented athletes. But on occasion, teams still meaningfully refract some of the qualities their countries possess—or, indeed, some of the qualities they lack. (Quartz)
Europe Hopes for ‘New Era’
Chris Kuehl, Ph.D., NACM economist
The animosity that developed between Donald Trump and Europe was always something of a surprise. What became a very bitter and angry relationship did not start out that way. In the first year of the Trump era, an expectation of cooperation and even friendship existed.
French President Emmanuel Macron considered Trump’s rise to be similar to his own: An outsider taking control of a failed system. The British Prime Minister at the time was David Cameron, and he looked forward to U.S. support as he dealt with the EU. Granted, there was no love lost between Trump and Germany’s Angela Merkel, but she had been no fan of Barack Obama either. The Trump relationship with Vladimir Putin was seen as a way to temper the Russians.
Soon enough, all of this goodwill vanished. Europe did not appreciate the Trump attitude or his emphasis on “America First,” and Trump was annoyed by the lack of deference. Today, a new set of expectations exist as far as Europe is concerned. However, these may be dashed as well. President Joe Biden is a great deal more foreign policy-centered than any other U.S. president in decades due to his years on the Senate Foreign Relations committee. In that capacity, he was often critical of many U.S. allies. Four issues stand out as priorities for the Europeans—at least at the start of this administration.
At the top of the list is trade. The last four years have featured threat after threat as the U.S. has imposed tariffs and other barriers on Europe. These actions have provoked the EU to impose barriers and tariffs of its own and have left trade relations between these regions in tatters. The combination of Brexit and the pandemic has left Europe very vulnerable. It is a high priority to see trade normalized again. The British need this even more desperately than Europe as a whole. China is as big a threat to Europe as it is to the U.S. Merkel and others have already made overtures toward the U.S. regarding a unified response to China’s growing economic power.
A second area of concern was the move away from supporting NATO. This remains a critical alliance for the Europeans. They do not trust the Russians under Putin and want to make certain there is a unified position towards their expansionist plans. The NATO connections are critical as far as the Middle East is concerned, and Trump’s dismissal of the U.S. commitment was extremely worrisome. On the other hand, the U.S. has had a point in regards to this support. Biden will likely keep pushing for more from the Europeans.
The third area has been the Paris climate change accord. Trump pulled the U.S. out, and Biden has made it clear he will put the U.S. back in. The climate change issue is not a national one and requires global cooperation. The two nations that have to alter their behaviors most radically are India and China. Neither will budge at all if nations like the U.S. are on the sidelines. The bottom line is the U.S. must be at the table.
The fourth issue is also an agreement from which the U.S. withdrew. The deal struck with Iran over development of nuclear weapons has always been extremely controversial. The question of trusting Iran is wrapped up in questions of who leads Iran. Europe asserts the U.S. has paved the way for the extremists to regain control there. Europe agrees that the deal is flawed, but it asks what alternative is there when it comes to halting Iran from getting this capability.
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Portugal: Novo Banco Standoff Highlights Risks
Relations between the government and the further-left parties on whose support Prime Minister Antonio Costa depends for a parliamentary majority have become testy amid the social and economic strains arising from the COVID-19 pandemic. Ostensibly, the Socialist government is still in a strong position, with no election required until 2023 and the PS holding a comfortable lead over the center-right PSD in the most recent polls of voter preferences.
The government does not have a formal arrangement with the left-leaning BE and the CDU, a coalition of Communists and Greens, which theoretically frees the government to negotiate with any or all opposition parties on a case-by-case basis. However, the shortcomings of the strategy have been made apparent by the united opposition of the PSD, the BE, and the CDU to a proposed transfer of funds to Novo Banco to cover the losses from the sale of bad debts, property, and other assets formerly owned by the failed BES bank.
So far, the total amount transferred into Novo Banco is about $3.6 billion, short of the contracted sum, and the government has proposed an additional injection under the 2021 budget. Finance Minister João Leão insists that the government will meet its contractual obligations, and Costa has offered similar assurances to ECB President Christine Lagarde.
The risk of a crisis is fairly low. PSD leader Rui Rio has stated that his party will drop its opposition if auditors determine that the transfer is appropriate. Moreover, the 2021 budget has already been approved, thanks to abstentions that enabled the PS to achieve a majority on its own. Nevertheless, the episode demonstrates the potential for protracted legislative delays and roadblocks that could lead to the minority government’s early downfall.
Yields on 10-year benchmark government bonds have fallen below zero for the first time, although there are reasons not to read too much into the market behavior. Some 40% of Portuguese debt is held by the IMF, with the debt stock biased toward long-term maturities contracted at low interest rates, and the ECB’s unprecedented asset purchase program effectively amounts to an underwritten guarantee for government bonds that were trading at a significant spread to the German benchmark.
To be sure, fiscal risks are present, given the potentially long-lasting impact from the health crisis on unemployment and incomes, which will create a potential impediment to rapidly reining in the budget deficit. A slow rollout of vaccines and a possible third wave of the virus could cause more pain for the economy in 2021 than is anticipated, delaying a reversal of the upward trajectory of a debt burden that is forecast to peak at 140% of GDP in 2022.
The analysis above is taken from the December 2020 Political Risk Letter (PRL). The best-in-class monthly newsletter, written by the PRS Group, provides concise, easy-to-digest briefs on up to 10 countries, with additional recaps updating prior month’s reports. Each month’s Political and Economic Forecasts Table covers 100 countries, with 18-month and five-year forecasts for KPIs such as turmoil, financial transfer and export market risk. It also includes country rating changes, providing an excellent method of tracking ratings and risk for the countries where credit professionals do business. FCIB and NACM members receive a 10% discount on PRS Country Reports and the PRL by subscribing through FCIB.
Global Risk Report Highlights Pandemic Fallout and Environmental Risks
World Economic Forum
For the last 15 years, the World Economic Forum’s Global Risks Report has been warning the world about the dangers of pandemics. In 2020, we saw the effects of ignoring preparation and ignoring long-term risks.
The COVID-19 pandemic has not only claimed millions of lives, but it also widened long-standing health, economic and digital disparities.
According to the Global Risks Report 2021, these developments may further impede the global cooperation needed to address long-term challenges such as environmental degradation.
When it comes to technology access and digital skills, the gap between the “haves” and the “have nots” risks widening and challenging social cohesion. This will particularly affect young people worldwide, as this group faces its second global crisis in a generation and could miss out altogether on opportunities in the next decade.
Financial, digital and reputational pressures resulting from COVID-19 threatens to leave behind many companies and their workforces in the markets of the future. While these potential disparities could cause societal fragmentation for states, an increasingly tense and fragile geopolitical outlook will also hinder the global recovery if mid-sized powers lack a seat at the global table.
Once again, environmental risks dominate by impact and likelihood, looking ahead towards the next decade. Societal fractures, uncertainty and anxiety will make it more difficult to achieve the coordination needed to address the planet’s continued degradation.
For the first time, the report rates risks based on when respondents perceive they will pose a critical threat to the world. Clear and present dangers (0-2 years) reveal concern about lives and livelihoods—among them infectious diseases, employment crises, digital inequality and youth disillusionment. In the medium-term (3-5 years), respondents believe the world will be threatened by knock-on economic and technological risks, which may take several years to materialize such as asset bubble bursts, IT infrastructure breakdown, price instability and debt crises. Existential threats (5-10 years) such as weapons of mass destruction, state collapse, biodiversity loss and adverse technological advances dominate long-term concerns.
The report also reflects on the responses to COVID-19, drawing lessons designed to bolster global resilience. These lessons include formulating analytical frameworks, fostering risk champions, building trust through clear and consistent communication, and creating new forms of partnership. The key risks outlined in the report are complemented with recommendations to help countries, businesses, and the international community to act, rather than react, in the face of cross-cutting risks. The report closes with an overview of “frontier risks,” nine high-impact, low-probability events drawn from expert foresight exercises, including geomagnetic disruption, accidental wars and exploitation of brain-machine interfaces.
The Global Risks Report 2021 has been developed with the support of the World Economic Forum’s Global Risks Advisory Board and collaboration with Marsh McLennan, SK Group and Zurich Insurance Group and academic advisers at the Oxford Martin School (University of Oxford), the National University of Singapore and the Wharton Risk Management and Decision Processes Center (University of Pennsylvania).
Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations