Week in Review

June 24, 2019

Global Roundup

Swelling U.S. corporate debt raises risk of global financial meltdown. Surging U.S. business debt, already at historic levels, is posing a potentially huge risk for the global financial system and the world economy, raising concerns among market players and policymakers. (Nikkei Asian Review)

Iran nuclear deal: Enriched uranium limit will be breached on June 27. Iran has announced it will breach on June 27 the limit on its stockpile of enriched uranium that was set under a 2015 nuclear deal with world powers. (BBC)

China signals currency war truce ahead of Xi Jinping’s meeting with Donald Trump at G20 in Japan. China has signaled its intention to not “weaponize” the yuan’s exchange rate as a message of good faith ahead of next week’s meeting between President Xi Jinping and U.S. counterpart Donald Trump at the G20 summit in Japan. (HSN)

Warning lights are flashing in China’s money market. While the world has been focused on the U.S.-China trade conflict, another threat—potentially just as large—has been brewing beneath the surface of China’s financial system. (WSJ)

Trade war causing collateral damage to Global Economic Outlook. The trade war is weighing on investment prospects and has sharply increased downside risks to world economic growth forecasts, Fitch Ratings says in its new Global Economic Outlook (GEO). (Fitch)

Doomed: How there's no way out of the debt crisis for Italy. Forget Brexit, there's something far more worrying afoot in Europe: Italy's debt problem. It's on course to spark an existential crisis for Europe's single currency area, the eurozone. (Forbes)

Palestinian Authority faces most serious financial crisis in its history. The financial crisis currently facing the Palestinian Authority (PA) is the most serious in its history, according to a report published by Xinhua citing a number of officials and experts. (MeMo)

India is hitting the United States with more tariffs. India just increased tariffs on U.S. exports, dealing another blow to fragile global trade. The tariffs on 28 U.S. products, announced by India's finance ministry, went into effect on June 16. (CNN)

Egypt's ousted president Mohammed Morsi dies during trial. Egypt's former President Mohammed Morsi, ousted by the military in 2013 after one year in office, has collapsed in a courtroom and died, officials say. (BBC)

Chennai water crisis: City's reservoirs run dry. The southern Indian city of Chennai (formerly Madras) is in crisis after its four main water reservoirs ran completely dry. (BBC)

$12 trillion of negative-yielding bonds are sending a clear message of distress. If reading financial markets is usually as inscrutable as reading tea leaves, bond investors have decided now is the time to send a message in big, bold letters. (Quartz)

How China weaponized the global supply chain. The vessels of China’s state-owned shipping companies no longer merely carry merchandise. Sailing to a global network of ports under Chinese control, they’re carrying Chinese power. (National Review)

CETA explained. It has been described as “the most ambitious” and progressive trade deal ever signed by the EU, but what does CETA do? The historic agreement was signed into law in September 2017 by the EU and Canada, after years of negotiation and a protest campaign. (EurActiv)

Changing Positions on ECB Policy

Chris Kuehl, Ph.D.

The head of the German Bundesbank, Jens Weidmann, is angling to replace Mario Draghi as the head of the European Central Bank (ECB). He has the support of the Germans and their northern allies, but he is viewed far more skeptically by the nations of southern Europe.

Weidmann has to overcome his past to garner further support. As head of the Bundesbank, he saw his role as that of critic and hawk. He was critical of the various stimulus efforts undertaken by Draghi—even at the height of the recession.

In addition, he was a critic of the bond-buying program and other extraordinary moves. He was opposed to the lowering of interest rates and was an ardent critic of the various bailouts that were directed at Greece, Spain, Portugal and others.

Now that he is being considered as the next head of the ECB, these positions are softening as he asserts his role would naturally change. As the head of the German bank, his concerns were strictly the concerns of Germany and his role was that of critic. As the head of the ECB, his issues would, by definition, be much broader.

This is the week for some high drama within the ranks of the EU. Many top positions are set to be decided, and Weidmann’s chances have quite a bit to do with other decisions. The Germans also sought to place one of their own as the head of the EU, but Manfred Weber has been watching his popularity slip.

This has created a dilemma for Angela Merkel. If she continues to battle hard for Weber, she will see support slip from Weidmann because many in Europe resent the possibility of Germans holding the top-two positions in the EU. Should she essentially abandon Weber, she will be in a better position to throw her full weight behind Weidmann.

The opposition from the EU comes primarily from the southern tier states. Spain, Portugal, Italy and Greece are worried that Weidmann would be a hardliner and would resist any sort of stimulus or further bailout. It is not that Draghi was considered a pushover, but he maintained an activist role for the ECB—especially in the absence of stimulation from the national legislatures. Weidmann has tried to explain away his prior opposition as appropriate to his role at the time, but there are those who insist this caution is really his natural state.

When Draghi put together the Outright Monetary Transactions (OMT) program, Weidmann was the only member of the 25-member board to vote against it. That was in 2012, when the recession was in full swing. He even argued in court that OMT was not constitutional. This is not a position easily ignored by the nations that relied on that program.

The fear is that Europe may encounter another down period and with Weidmann in charge, the response would be slow and help may not be forthcoming at all. On the other hand, he has supporters who assert it is time for the ECB to tighten up and remove itself from the overt stimulating game.

Keeping Up with Changes in Credit Management

Greek philosopher Heraclitus said it first: Change remains the one constant in life. Chances are your career in credit management demonstrates this philosophy clearly. Looking back, how has your career changed? Do you know what your job will look like five years from now? 10 years? Compared with today, your job description will likely be very different in the not-so-distant future.

“If you look at the profession of credit management in the near future, our jobs are going to change,” said Raimond Honig, CT, managing director of the Credit Management Institute BV in Zoetermeer, the Netherlands. “While we have an idea of where things are going, we are not able to predict the future with absolute certainty.”

“… but we can predict how to prepare for it,” agreed Rick Hernandez, president and founder of Syntesis Global LLC in Westlake Village, CA. “The best hedging we can do is to control that which we can control—ourselves.”

Accepting, embracing and preparing for change allows you to adapt better and flourish within your professional lives, Honig and Hernandez said. Staying up-to-date on the trends that affect credit management is a key component of keeping careers on track.

Experts predict that there will be more jobs, but the required skills will be different, Honig said. So, “if you don’t change, there will be a time when you are no longer needed.”

This year’s FCIB International Credit & Risk Management Summit centers around the theme of credit management in transition and touches upon a wide variety of trends, issues and topics. Honig and Hernandez will present the opening keynote presentation on strategies for creating a professional roadmap to help bullet-proof your career and provide more value to your company amid a sea of change.

The Summit will also be the avenue for presenting the findings of several key surveys that delve into how credit management has changed over the past few years and how credit professionals are preparing for the future as well as case studies that highlight real-time projects undertaken to keep pace with digitalization.

Other highlights of the Summit include a look at the evolution of robotic process automation (RPA) and the credit functions that lend themselves to RPA, how RPA affects workflows and more. Two open forums will set the stage for a free exchange of ideas and information among global credit professionals. The first exchange will examine the elements that impact the country risk models used by credit professionals to assess risks to their global accounts receivables portfolios. The second forum will explore what lays ahead for corporates to further automate the order-to-cash cycle so that credit managers can focus more on value-added services within their organizations.

Other credit professionals will share implementation experiences and best practices for automating collections, risk assessments and order processing using machine learning, robotics, risk scoring models and cloud solutions. The Summit will close with another keynote presentation, which centers on managing and motivating a multi-generational staff to help develop their, yours and your department’s full potential.

Learn more about the International Credit & Risk Management Summit, Oct. 14-16, in Hamburg, Germany.

Italy: Strains Showing

PRS Group

The governing coalition of the anti-establishment and left-leaning M5S and the right-wing populist League will reach its one-year anniversary on June 1, but it is unlikely that the marriage will still be intact in another year’s time. Indeed, with polls putting support for the League at more than 30% and that for M5S at less than 20% (indicating that the relative strength of the partners has flipped since the 2018 elections), Deputy Prime Minister Matteo Salvini is under pressure from his League colleagues to end the partnership with M5S and force a snap election, at which the League would presumably make sufficient legislative gains to form a majority government composed of more ideologically compatible parties.

In the aftermath of the recently completed elections for seats in the European Parliament, which confirmed the diverging political fortunes of the coalition partners, Salvini denied any interest in an early general election. That said, he has signaled that he intends to exploit his partner’s weakness by pursuing the League’s preferred agenda, which includes massive tax cuts, and leaving it to M5S leader Luigi Di Maio to either support the initiatives, likely at the cost of a further erosion of his party’s popular support, or refusing to do so, and thereby forcing an early election at which M5S would likely sustain significant losses by refusing to do so.

As for the current leader of the opposition, neither the polling data nor the recent election results give the center-left PD much cause for cheer. The likely allies in a center-left coalition headed by the PD claim the combined support of barely more than one-quarter of the electorate, while the comparable figure for the center-right parties is close to 50%. Positively, recent protests in Milan against the government’s immigration policies drew sizeable crowds, and a recent leadership contest appears to have invigorated the PD’s grass roots. Nevertheless, the new head of the PD, Nicola Zingaretti, clearly has his work cut out to resurrect the former governing party.

Relations with EU officials in Brussels will remain strained in the meantime as the government resists taking the steps required to contain budget deficits and reverse the upward trajectory of public-sector debt burden. Italy’s partners in the EU are also uncomfortable with the government’s decision to sign on to China’s Belt and Road Initiative, which has potentially negative implications for security, transparency and competition, and raises a big red flag for the EU’s most heavily indebted member other than Greece.

In April, the government approved a “growth decree” that among other things ensures equal treatment for foreign investors with regard to access to subsidized loans, grants and tax incentives already available to domestic investors. However, in the absence of substantive action that bolsters confidence in the country’s longer-term financial stability, investors will remain wary, and Italy will continue to be vulnerable to market-based shocks.

The analysis above is taken from the May 2019 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.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations