April: global economic crisis not over

HomeNewsApril: global economic crisis not over

France and Brexit

France rules out post-Brexit financial services access deal.France warned last month there was little chance of securing a free trade deal for financial services firms based in the UK once the country leaves the EU next year.

Sustaining the country’s tough stance at the negotiating table, Bruno le Maire, the French economy minister, said: «Financial services cannot be in a free trade agreement... we have to rely on equivalence regimes, that is the best solution for financial services.»

London is proposing a mutual recognition system that automatically gives the financial services industry continued access to the EU’s markets.

EU banks back to crisis

The volume of «bad loans» in the EU banks is about EUR 1 trillion.

The volume of bad loans in the European banks is close to USD 1.17 trillion. The situation is particularly hard in Greece and Italy. To get rid of this burden, European banks even started implementing new recruitment schemes. American and Japanese banks also ran into certain problems. In Russia, the delay on loan repayments is relatively short, but there is also a risk of a ’mortgage bubble’.

According to Bloomberg, European banks are short loan settlements worth EUR 944 billion (USD 1.17 trillion).

«This is a serious headache for the European banks, and it won’t go away: EUR 944 billion in loans overdue maintain pressure on the balance sheet,» the agency reports. This amount of debts overdue prevents banks from issuing new loans.

«To guarantee the loans overdue, the credit institutions are forced to allocate additional reserves, thus diverting resources from investment in other assets or in new loans. This, in turn, affects the banks’ financial performance», analysts explain.

The greatest problems for banks from European countries, faced with severe consequences from the debt crisis. For example, Greece, which has not yet completed the rescue program, tops the list of countries with the highest share of non-performing loans (loans overdue for more than 1 day in Greece account for 50% of all loans issued). In Italy, the most bad debts in absolute terms (224.2 billion euros, 25% of all issued loans overdue).

In absolute terms, Greece has accumulated EUR 112.3 billion of non-performing loans, Spain EUR 131.4 billion and Ireland EUR 26 billion.

At the same time, most European banks are not in a position to eliminate their debt at once. Thus, in Italy, most of the major financial institutions have expressed their intention to dispose of it. However, under Italian legislation, the release of collateral by creditors is very slow process, observes Bloomberg.

«Given the current difficulties in the European banking sector, the ECB is not in a hurry to raise the base rate and curtail the asset buyback programme, in fact, prepared to extend it as long as it might be necessary,» the analysts comment.

Recently, European banks increased the recruitment of staff, for the first time in several years of continuous lay-offs. The main functional areas for new personnel are audit and the technology departments, which means, experts point out, that the emphasis is placed on streamlining, increasing accountability and eliminating process delays.

According to observers, current problem solving is not of a financial nature, calling rather for the continued growth of corporations and the EU economies in general, which, in turn, will gradually allow restructuring of the bad debts.

So far, neither Greece, nor Italy, for instance, have achieved this goal. Given the Italian debt, which exceeds GDP by 130%, the experts do not exclude a possibility of the country’s economic default.

«The European banks teething troubles began over 10 years ago since a wave of financial crisis swept over the world. It is the least stable states in Europe (mainly, those in the south, such as Greece, Spain and Italy) that faced the greatest difficulties. Should one try to assess the problems of the European within the global banking system, the state of affairs in the EU looks worse than that in the US and many other regions where problems are solved much faster,» the analysts say.

As for the rest of the world, however, banks have lots of problematic issues. The IMF has already expressed concerns over the situation.

The banks, which account for some USD 17 trillion in assets, or approximately one-third of the total G-SIB reserves (global systemically important banks), may so far, and even in 2019, have an insufficient level of profit for the long-term sustainability.
The IMF even names the specific banks with the profits expected below average. These include: Deutsche Bank, Barclays, Citigroup, Socièté Générale, Unicredit, Standard Chartered Bank (SCB), Sumitomo Mitsui Financial Group, Mitsubishi UFJ Financial Group and Mizuho Financial Group. At the same time, the interviewed analysts pointed out that the IMF’s warnings are quite appropriate.

Given the bottom line, Russian banks feel relatively good these days: according to the CBR, profits reported by the Russian banking sector in January 2018 amounted to 71 billion Roubles. «At the same time, the number of profitable credit institutions prevails: 415 organisations showed profit of 168 billion Roubles, while 130 firms reported 97 billion Roubles in losses», the CBR statement says.
The figures for overdue loans are not as striking as in the European countries. The share of overdue was 6.7% at the end of 2017.

Russia may obstain from investing hard currency reserves in the US bonds, the Russian finance minister Anton Siluanov said.

Last year, Russia invested USD 16.1 billion in the US national debt — a record over the last seven years. The government, however, «does not hold on to American securities».

According to the minister, Russia is prepared to invest in securities of other sovereign states, and the only vital criteria is for the securities to be high-rated, of high liquidity and moneymaking.

Russia already started acquiring the European bonds, although the American federal securities are still among the most reliable, Siluanov said.

According to the US Ministry of Finance, the CBR responsible for the management of Russia’s reserves began actively buying the US treasury bonds. Over the next two years, some USD 145 billion was invested in American securities, and by 2010 this amount increased to USD 176.3 billion, which marked a historical record.

In 2014, under the pressure of the financial crisis, the CBR sold off part of the bonds to support the ailing Rouble.

As of January 2018, Russia holds USD 102.2 billion of the US sovereign state debt, accounting for 23% of its total gold and currency reserves.

Experts believe that Russia will not be able to harm the United States even if it decides to dump all the securities, as USD 102 billion is a negligible amount.

In 2016, China sold off USD 180 billion worth of US bonds during six months without any effect on global prices. Russia holds and will keep holding its reserves in US dollars since nearly 60% of all foreign trade transactions are made in dollars.

Russian economy is the most volatile in G20

OECD: the global economy will grow by 3.9% in 2018.

The global economy will grow by 3.9% in 2018 and in 2019, the new OECD report affirms. Forecasts for growth were upgraded for all G20 countries compared to November 2017. The only exception is Russia: its economy is forecast to decline to 1.8%. The 2019 assessment remains unchanged with the GDP expected to grow by 1.5%.

The Organization for Economic Co-operation and Development unveiled an updated economic forecast in April confirming growth of 3.9% this year. This means the forecast is improved by 0.2%.

In 2019, the growth of the global GDP is also expected at 3.9%, although the previous estimates assumed an increase of 3.6% only, the OECD report says.

The previous forecast was published in November last year. Should the OECD predictions come true, the global GDP will show a record growth since 2011. In 2017, the global economy grew by 3.7%.

«This outlook indicates the positive short-term effect following the tax cuts and increases in public spending in the US, as well as the expected fiscal stimulus measures in Germany,» the OECD sums up.

At the same time, the OECD warns of risks that may undermine the economic growth. These are, first of all, trade wars. According to the OECD experts, the growing trade conflicts might affect not only the pace of economic growth, but also the labour market.

China in the lead on planetary scale

All G20 states will see their GDP grow. The current forecast is more optimistic than the one of November, in respect of almost all countries. In 2018 and 2019, not all G20 countries, however, will see their economy improve as much as in 2017.

In the US economy is expected to grow by 2.9% and 2.8% respectively in the next two years (against previously expected 2.5% and 2.1%).

The Canadian economy is expected to grow by 2.2% this year and 2% next year; the previous estimates were 2.1% and 1.9% respectively. The UK economy will grow by 1.3% this year, an increase of 0.1% from the last forecast. The 2019 growth remains unchanged at 1,1%.
The Euro zone forecast was improved by 0.2%, up to 2.3% and 2.1% growth, respectively.

Meanwhile, the Russian economy is an exception.

Of the entire G20, the OECD degraded the economic outlook only for Russia. In 2018, Russia’s GDP is expected to grow by 1.8% instead of the prior 1.9% forecast in November.

The 2019 forecast remained at the same level of 1.5%, according to the OECD report. In 2017, Russia’s economy also grew by 1.5%.
The resumed growth of the commodity-based developing economies, including Argentina, Brazil, Russia and South Africa, benefits to the global economic growth, the OECD report says.

«A moderate recovery resumed in Brazil and Russia in 2017 is projected to continue in 2018-2019 amid the easing monetary policy, improved market perceptions and the rising prices of raw materials,» the report states.

For Russia, however, the there is a certain amount of risk, such as the flight of capital. «The net capital flight in the private sector in January—February 2018, according to the estimates of the Bank of Russia, amounted to USD 9.8 billion (compared to USD 4.4 billion in January—February 2017) and was mainly associated with the growth of foreign assets in other sectors,» the CBR claimed in April.

On top of this, the economists point out a «decline in profits in the corporate sector» and a slowdown of the investment activity, which will have a negative impact on growth rates. Nonetheless, the economists have no intentions to revise the forecast for Russia.
«Our forecast remains the same, even though it is stricter than other forecasts. This year, the Russian economy is expected to grow by 1.5% only, and by 1.2% in the following year,» they believe.

The World Bank, on the contrary, improved the forecast for Russia in 2018, claiming GDP growth from 1.4% to 1.7%, justified by the increased oil prices in the second half of last year. In January, the IMF also improved the forecast by 0.1% for the Russian 2018 GDP growth up to 1.7%, while the forecast for 2019 remained unchanged with an increase of 1.5%.

Russian alternative to investing in USD assets

Russia is selling off the US sovereign bonds faster than ever since 2011, while also buying gold at the fastest rate over the past 12 years. Although last year the CBR increased the share of Treasuries in reserves, today the situation has changed: the Central Bank of Russia is selling off the US government bonds faster than ever since 2011. In January only, Russia reduced its investments in the US securities from USD 102.2 billion down to USD 96.9 billion.

Since March 2015, the CBR kept filling up its reserves with the base precious metal. Russia now occupies the sixth place among the top holders of gold with only the USA, Germany, Italy, France and China ahead. Over a 10-year period, Russia’s aggressive gold acquisition policy even made it surpass China.

In January, Russia added another 600,000 ounces of gold to its reserves (or 18.66 tons). Over the past year, 224 tons were acquired, and since June 2015 the CBR already purchased more than 576 tons of gold.

In a longer term retrospective, since 2009, Russia added over 1100 tonnes of gold to its reserves, that is, more than China, that paid for 775 tons.

Meanwhile, the country’s total international reserves keep growing. According to the Bank of Russia, in March they reached USD 455.2 billion, a maximum since September 2014. Yet in 2018, the growth of Russia’s reserves shows the best dynamics since 2006.

New era for Latvian banks: all shell companies banned

Last month, the Latvian government announced the changes expected in the service offered to non-resident clients of the Latvian banks. The major news was that all the shell companies would be banned by the Latvian legislation as of this spring. For the existing customers holding the shell companies there will be a transition period, during which they may close the accounts in Latvian banks.
As for the banks themselves, some of them had such a high rate of shell companies on the balance that their complete withdrawal from the market is not excluded. The authorities bear no regrets.

According to the country’s Minister of Finance, the decision of a full ban on shell companies is dictated by the Latvia’s intention to make the financial sector more sustainable and predictable. The forced disposal by the Latvian banks from this sort of customers is just a part of a plan with 22 steps on the list. To a large extent these measures concern the exchange of information between the states, the strengthening of control services, etc.

What are the shell companies? These are the firms that struggle to explain both the purpose of their business, and the purpose of the bank transfers executed. Most commonly, they are registered in offshore jurisdictions, their beneficiaries are also hidden and they do not have financial reports. At the same time, they hold accounts in the Latvian banks, and might have illegal funds funnelled through these accounts. Support of such companies will be banned. As the finance minister explained, should the shell companies start apply dodgy schemes shifting funds under other client categories in the same banks in order to avoid the ban, other economic tools will be introduced to limit their activities.

Speaking about specific losses on the balance sheet, i. e. about the cash of non-residents that will leak out of Latvia due to the ban, the minister gave an estimate of «several billion euros». Although previously more accurate figures were mentioned, about EUR 4–5 billion out of 8 billion of total deposits by non-residents in the Latvian banks. According to the finance minister, there is no reasons for fear that these billions will be drained from Latvia, since they do not bear any influence on the Latvian economy. «This cash, in fact, is the balance of private current accounts that are not invested in our economy,» the Minister said, adding that 90% of Latvian customers use 4 large domestic banks. Hence, according to the Ministry of Finance, there are no effects on the economy.

If an entrepreneur under certain circumstances ceases to find his/her place on the Latvian market, that should be the reason to withdraw. Should someone dislike something in the economic environment, then he may as well review his business strategy. Once the bankers are ready to maintain transparency as Latvia and the Eurozone insist, we will not create any legal obstructions for work," said the Minister of Finance.

UK began arresting suspicious Russian assets

The UK courts issued several warrants for the arrest of property of unknown origin held by the Russian citizens.

The law «On Criminal Finance» came into force in the UK. As of January 31, it has enabled the British courts to send requests to the foreign asset owners in respect of the the state of their property (so called Unexplained Wealth Orders). In case any questions arise, the state agencies may demand explanations about the origin of funds for the real estate and companies worth more than 50,000 pounds (or USD 71,000), as well as the corresponding accounts.

Should the owner fail to produce adequate justification, the property will be seized. The new rules also apply to the «politically significant persons,» experts say.