Week in Review
What We're Reading:
March 15, 2021
Greensill Capital tumbles into insolvency, spreading financial pain. SoftBank-backed corporate lending startup was once valued at $4 billion and now leaves a trail of losses for investors and bank depositors. (WSJ)
UK-EU trade slumps in first month of new Brexit rules. Trade between the United Kingdom and the European Union was hammered in the first month of their new post-Brexit relationship, with record falls in British exports and imports of goods as COVID-19 restrictions continued on both sides. (Reuters)
Biden signs $1.9 trillion stimulus bill into law on US lockdown anniversary. President Joe Biden signed his $1.9 trillion stimulus bill into law on March 11, commemorating the one-year anniversary of a U.S. lockdown over the coronavirus pandemic with a measure designed to bring relief to Americans and boost the economy. (HSN)
Lagging US, Europe speeds up help for virus-hit economy. The European Central Bank said it would step up its bond-purchase stimulus to support an economy whose recovery is expected to lag a year behind the rebound in the U.S., held back by slow vaccine rollouts and less relief spending by governments. (AP News)
Corporate cash soars $1.01 trillion in 2020 to $3.82T. Corporations in the U.S. added $1.01 trillion or 35.9% to their cash holdings in 2020 according to The Carfang Group analysis of Federal Reserve data released on March 12. (TMI)
UK plans sweeping markets review to give London a Brexit edge. The U.K. is preparing a wide-ranging review of financial markets to defend the City of London’s global pre-eminence after Brexit. (AJOT)
EU set to go it alone on tech tax if there’s no deal with Biden. European Union leaders are poised to affirm their commitment to a unilateral tax on tech giants if they fail to agree on a global framework with partners, including Joe Biden’s U.S. administration, by the middle of this year. (AJOT)
Credit Suisse overruled risk managers on Greensill loan. Credit Suisse Group AG brushed off concerns from some risk managers about a $140 million loan to Greensill Capital that the bank extended a few months before the trade finance firm collapsed. (Bloomberg)
Taiwan central bank plays down concern over manipulator label. The huge increase in Taiwan’s foreign-exchange interventions could lead to it being labeled a currency manipulator by the U.S., the island’s central bank governor said on March 11, but he insisted the designation is unlikely to have any immediate negative impact on the export-dependent economy. (Business Mirror)
Austria vetoes Mercosur deal saying it goes against EU Green Deal. Austria’s coalition government has confirmed it will block the landmark EU-Mercosur trade agreement—which should create the biggest free-trade area in the world—saying it goes against the EU’s environmental ambitions set out in the European Green Deal. (EurActiv)
China steps up talk of joining CPTPP. China has sent fresh signals it is seriously considering the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), as part of the Asian giant’s new drive to boost further trade integration. (Global Trade Review)
NATO and the EU: What does Brexit mean for the UK’s position in European security? The U.K.’s withdrawal from the EU last year calls into question the security implications that the split will have. (Global Risk Insights)
Getting paid for your exports: payment options for international transactions. The global economy is fluid; a firm will benefit from regularly examining their customer base and assessing political, credit and foreign-exchange risks to determine which payment term best suits the situation. (Shipping Solutions)
Lebanon's debt-resolution challenges continue, one year on from default. A year after Lebanon’s first sovereign default, the situation in the country has deteriorated sharply. Political paralysis, a dramatic decrease in standards of living and the fallout from the coronavirus pandemic have pushed protestors to the streets once again. (Forbes)
What are NFTs, anyway? One just sold for $69 million. “Nonfungible tokens” and blockchain technology are taking the mainstream art world by storm, fetching huge prices. We explain, or try to. (New York Times)
Will Supply Chain Disruption Feed Inflation?
Chris Kuehl, Ph.D., NACM Economist
Yes, it will, but likely not for long. A significant spike in freight costs all over the world has already occurred. Ocean cargo rates have been rising sharply between Asia and the U.S., Asia and Europe, and the U.S. and Europe..
To be honest, routes everywhere have seen hikes. Capacity issues and much higher costs for fuel have contributed to these hikes. The question is how long this pattern continues.
One factor has been driving freight at an unusual pace: lockdowns. As has been pointed out repeatedly, this has been a service sector recession and the vast majority of consumer demand has been altered because of it.
The consumer shifted to buying goods, creating a demand for freight transportation. It is now expected that consumers will have the opportunity to shift back to that service economy as the lockdowns are reduced and removed, cutting demand for goods. If the demand for imports declines, the need to ship will decline as well.
At the same time restrictions are falling, some semblance of normality will return as far as ports and ships. Fewer ports will face quarantine, and fewer ships will deal with crew issues and lockdowns, allowing a resumption of normal flow. This will affect costs as well. Much of the inflation seen so far stems from the fact that ships have been forced to wait extended periods of time to unload or forced to ports that are not as convenient.
The expectation is that inflation in the freight sector will be an issue through the summer, but it will begin to ease by the fourth quarter at the latest. The factors that would extend the freight driven inflation would be overheating in the U.S. and European economies as consumers start to react to the various stimulus efforts. Fuel prices could also keep rising although the majority of oil analysts are still asserting that per barrel prices will settle back to the $50s before year’s end.
|Blockchain Technology & Decentralized Finance
Speakers: Anjon Roy and David Wasson, SIMBA Chain
|NACM and FCIB Present Author Chat:
Leadership Reflections: 52 Leadership Practices in the Age of Worry
Author: Dr. Lisa M. Aldisert
|Regulatory Compliance 101:
What is regulatory compliance and why is it important?
Speaker: Chris Doxey, CAPP, CCSA, CICA, CPC, Doxey Inc.
|Global Expert Briefings - Trade Risk
Speaker: Jay Tenney, Trade Risk Group
US, UK Firms Prioritize Innovation to Speed X-Border Payment Flows
Cross-border commerce has become central to the success of countless United States and United Kingdom businesses, many of which are looking abroad for new growth opportunities. PYMNTS’ latest research shows that cross-border sales make up 26% of the total annual average for U.S. and U.K. businesses. In fact, making the management of cross-border payments is a key component of their broader payment operations.
Unfortunately, many of these businesses’ cross-border payment flows are mired in clunky legacy processes—including correspondent banking practices—that can make it more difficult for payors and payees alike to manage their cross-border payment flows. For example, both U.S. and U.K. businesses wait 55% longer on average to receive cross-border payments than they do domestic payments. More than one-quarter are concerned that factors such as payments fraud and unpredictable financial exchange (FX) rates could impede their ability to efficiently conduct cross-border commerce.
No two businesses face the same challenges when managing cross-border payment flows, however, and different circumstances call for very different cross-border payment solutions. What innovations are these vastly different businesses examining as they look to ease their major payments pain points? What can their innovation priorities tell us about the future of the cross-border B2B payments ecosystem?
In Innovating Cross-Border Payments: What US and UK Businesses Need to Know, a PYMNTS and Visa collaboration, drills into why cross-border commerce can be a sticking point for decision-makers on both sides of the Atlantic. We surveyed 456 professionals with senior positions in payments roles at both U.S. and U.K. businesses to get firsthand accounts of what they see as the biggest challenges they must overcome to optimize their cross-border payments flows—and which innovations they are planning to help them do so.
Our research shows that concerns regarding cross-border payment frictions like fraud, FX fluctuations and more have inspired many U.S. and U.K. businesses to invest in digital innovations to make their cross-border payments operations smoother, simpler and more secure. Thirty-one percent are planning to automate their cross-border payables, for example, while 32% are planning to automate their cross-border receivables. Forty percent hope to expand their B2B payments offerings by enabling supplier payments to digital wallets, and 11% intend to do so by enabling supplier payments to virtual cards.
Closer examination reveals a stunning amount of diversity in the types of payment innovations that businesses of different sizes and in various geographic locations plan to implement, however. Just 18% of the largest U.S. businesses already provide real-time payments options, while 28% of their U.K. counterparts say the same. U.S. businesses are, therefore, more likely to plan on implementing such payments within the next three years.
Mid-sized businesses also represent something of a sweet spot for innovations that deal with cross-border payment flow management, which might include expense management controls and rules-based automatic payments. Thirty-six percent of mid-sized businesses in the U.S. and the U.K. plan to adopt rules-based decision-making technologies to help them manage their cross-border payments in the next three years, in fact. This compares to 35% of larger businesses and 28% of smaller businesses that plan to do the same.
Even the best-laid innovation plans can fall flat if they are implemented inadequately, however. Therefore, Innovating Cross-Border Payments: What US and UK Businesses Need to Know goes one step further, examining businesses’ innovation plans and the strategies they are forming to make their cross-border payment dreams a reality.
To learn more, download the report.
Reprinted with permission by PYMNTS.com.
Staying Afloat: New Measures to Support European Businesses
Alfred Kammer and Laura Papi, European Department, IMF
Much of Europe rang in the start of 2021 with new lockdowns and weak economic activity. This same period saw the roll out of effective vaccines. While the end of the pandemic will remain a race between the virus and vaccines, there is now light at the end of the tunnel.
At the same time, government programs aimed at supporting lives and livelihoods have been highly successful. Amid the pandemic’s enormous human toll, these measures provided critical lifelines to people and have preserved the structure of the economy and the income of workers. The massive policy support saved millions of European firms, accounting for over 30 million jobs.
However, as the pandemic persists and measures—such as loan repayment moratoria—expire, bankruptcies could rise, leading to a surge in unemployment and nonperforming loans.
To support a rebound and strong recovery in 2021, emergency programs and lifelines will need to be maintained, but they also need to adapt.
Relief Policies for Businesses
Almost a year into the pandemic, many European companies, especially micro and small enterprises in high-contact sectors, continue to reel from the shock of COVID-19. With containment measures preventing many firms from operating at full capacity or at all, government support programs—such as job retention schemes, which at their peak benefitted 54 million people—have been essential for businesses and people to survive. Liquidity (ready cash) provided to companies prevented cascading bankruptcies. It allowed banks to extend loans rather than amplify the downturn by adding a credit crunch.
In a recent IMF staff study (see presentation here), which covers 26 European countries (of which 21 are EU members), we estimate that without policy support, the share of illiquid firms in Europe would have more than doubled and that of insolvent firms would have almost doubled by end-2020.
But Many Companies Remain Short of Equity
Public support so far is estimated to have filled 60% of European firms’ liquidity needs because of the COVID-19 shock, but only 30% of the equity shortfalls (the extent to which firms’ debt exceeds their assets). Even with this scale of support, the share of insolvent firms as a share of total firms is estimated to have increased by 6 percentage points. Equity shortfalls are largest for micro firms and small businesses, with current policies absorbing only one quarter of the equity gaps versus over two-fifths for larger corporations.
Without additional equity support, some 15 million jobs are at risk. About 2% to 3% of GDP will be needed to close the equity gap and provide firms sufficient equity so they would no longer be in difficulty, focusing only on the firms that were solvent before COVID-19. Both private and public sector action is required.
How Can This Be Done?
Liquidity support cannot address equity shortfalls. Policymakers will have to move the dial from debt-increasing liquidity support to more equity support for those firms that have good prospects after the pandemic.
Individual countries are coming up with innovative equity programs, but they face many implementation challenges. The public sector is not well placed to assess the viability of a large number of small businesses, nor to monitor their performance. Avoiding that public support is more attractive for bad firms than good—adverse selection—and preventing firms from mismanaging their business once they have received state support—moral hazard. Targeting support—something that is hard to do—will be critical to avoid wasting taxpayers’ money and should be improved. Mechanisms that target firms more accurately are likely to be more complicated, reducing take-up and timeliness of the aid. Another difficulty is how to ensure that the private sector does its part.
Involving banks, which know their clients and routinely assess business plans, is an important principle that can help address adverse selection. Incentivizing private investors to contribute equity mitigates moral hazard. Here are some examples:
- France’s proposed program of participatory, subordinated loans envisions a central role for banks in selecting viable firms and retaining a share of these loans on their books—ensuring “skin in the game.”
- In Italy’s program for small and medium-sized enterprises, private equity injections are encouraged by tax incentives and the government’s contribution is capped to a fraction of the private investors’ capital increase, who have to remain invested for some years.
- Adequate contributions and burden sharing by investors is required by Ireland’s support scheme for small businesses, whereby Enterprise Ireland—a government agency—assesses firms’ plans to restore long-term viability with the help of market appraisals.
Healthier Firms, Stronger Recovery
Europe now needs to gradually change the support to firms from providing liquidity toward strengthening their equity. For those firms that have to restructure debt or be liquidated, out-of-court debt restructurings and insolvency regimes will need to be enhanced. Healthier firms will forestall a return of “doom loops” between Europe’s real and financial sectors. Most importantly, healthier firms will create more jobs. Upskilling, training, and job search programs should help displaced workers find new jobs in sectors that are expanding. Countries will also need to invest in the green and digital transitions to boost resilience and productivity. This course of action will ensure a strong and lasting recovery after the pandemic.
Reprint with permission by IMFBlog.
Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations