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How sick might banks get?

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FROM EBENEZER SCROOGE to Gru in “Despicable Me”, the villain redeemed is a time-honoured trope in fiction. There has been much talk lately of bankers enjoying a similar rehabilitation. Reckless overextension by lenders was the root cause of the financial crisis of 2007-09. This time the blame lies with a microbe, not moneymen, and banks are seen as potentially part of the solution, not least as conduits for massive state support for stricken firms and households.

The corona-crisis does indeed give banks a chance to improve their image. But it also presents them with some painful dilemmas and, worse, may ravage their bottom lines. Michael Corbat, boss of Citigroup, has warned that banks like his have to tread a “fine line” between supporting clients and undermining financial stability. They must conserve capital while also keeping dividend-dependent investors sweet. However they handle such choices, the risk of hefty losses looms: bank shares have fallen by twice as much as the stockmarket this year on fears of rising defaults.
The industry went into the crunch in decent shape. Capital cushions, depleted going into the last crisis, have since been plumped up. Banks have also been made less vulnerable to funding runs. This time the system has creaked but not buckled. Early evidence suggests that post-2009 efforts to push liquidity risk from banks into capital markets have worked, and to the extent that risk has rebounded it has been largely absorbed by central banks through their market-support programmes, not by commercial banks, says Huw van Steenis of UBS, a Swiss lender.

Under those schemes, and their own steam, banks have increased lending dramatically, especially in America (see chart). In March public companies there drew down $191bn from bank credit lines, after taking next to nothing in January and February. The odd one out is China, where loan growth is similar to last year’s rate. In 2008-09 officials arm-twisted lenders into leading stimulus efforts. They may fear that another such push could break them. Chinese banks’ assets have ballooned to 285% of GDP, from 195% in 2007.
To encourage banks to lend more and offer forbearance, regulators in the West have rushed to relax or delay rules brought in after the financial crisis. These cover everything from loan-loss accounting to the thickness of capital buffers (see chart). By one estimate, such (presumably temporary) regulatory forbearance has created $5trn of lending capacity.

At the same time, regulators in Europe in particular have nudged or ordered banks to bolster their defences by freezing payouts to shareholders and star performers. British banks, for instance, are withholding £8bn-worth ($9.9bn) of dividends. American ones have not followed suit, though they have suspended share buy-backs. Bonuses are in regulators’ cross-hairs too: Andrea Enria, the European Central Bank’s top bank supervisor, has called for “extreme moderation”.
For now, the threat to banks does not look existential. “Unlike 2008, it’s primarily an earnings issue, not a balance-sheet one,” says Nathan Stovall of S&P Global Market Intelligence, a data provider. If charge-offs are similar to back then, American banks’ capital ratios would remain above their levels after recapitalisation in 2008-09.
But with major economies at a near-halt for an indeterminate period, loan losses could be bigger this time. Analysts cannot seem to downgrade bank-earnings forecasts quickly enough. Some now think American banks, which made combined profits of $230bn last year, could slip into loss in 2020. Investment banking won’t ride to the rescue. Equity issuance and corporate dealmaking have sagged (though debt-raising remains strong in pockets). Trading volumes and profits have leapt, as they often do early in a crisis, but are expected to fall dramatically.
Europe is in worse shape. A senior banker says the outlook for British lenders is “really shitty”. He fears some smaller banks and non-bank providers may not survive. Italian lenders, battered by the euro-crisis, were on the mend until covid-19, having cut their bad loans in half, but now look precarious again. Deutsche Bank, which has been struggling to get back to good health for years, risks a relapse.

In China, the shock to growth will push banks beyond the limits of what regulators had anticipated. In 2019 the central bank stress-tested the resilience of 30 banks in a variety of scenarios. In the most extreme hit to the economy envisaged—growth slowing to 4.15%—it said 17 of 30 banks would need more capital. The World Bank expects growth this year to be just 2.3%. S&P has estimated—based on assumed growth of 4.4%—that the bad-loan ratio could climb to nearly 8%, a quadrupling from its pre-virus level. The questionable-loan ratio could hit an eye-watering 13%.
The growing worry in the West is that the short-lockdown, quick-snapback scenario proves too rosy. Several more months of restrictions could mean years of losses on soured loans. Bankers may start to find that there is a fine line between forbearance and forgiveness: in America calls for credit-card interest to be waived indefinitely are growing louder.
Ultra-low interest rates set by central banks to fight the pandemic are another headwind. An important factor in a bank’s profits is its “net interest margin” (NIM)—the difference between the rate at which it makes loans and that at which it remunerates the deposits it has gathered. Even before the corona-crisis this was a scrawny 3.3% for American banks. With policy rates likely to stay on the floor until well after the pandemic has abated, NIMs will remain emaciated for years.
Whether banks end up drowning in red ink, or merely spattered with it, depends on a host of unknowns. “The tail event is no vaccine in a year,” says Sir Paul Tucker, chair of the Systemic Risk Council, a group of former policymakers. “Banks need to be stressed against such scenarios, as post-crisis capital requirements were not calibrated against anything like that.”

In a letter on April 6th Jamie Dimon, boss of JPMorgan Chase (JPM), assured shareholders the bank could comfortably withstand an extreme (“and, we hope, unlikely”) scenario, in which GDP falls by 35% and unemployment hits 14%, emerging with capital above the safe minimum. JPM is the strongest, most profitable of the world’s big banks. Others, faced with such a storm, could find themselves in trouble. ■
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This article appeared in the Finance and economics section of the print edition under the headline “This time we’re different”
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Economists’ forecasts for GDP growth in 2020 vary widely

ECONOMISTS cannot revise down their forecasts of GDP growth for the effects of the coronavirus pandemic fast enough. All agree that 2020 will be dreadful, but some expect recovery to take longer than others, making for a much grimmer year.■
This article appeared in the Finance and economics section of the print edition under the headline “Economists’ forecasts for GDP growth in 2020 vary widely”

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What missed rent and mortgage payments mean for the financial system

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TO MOST WORKING Americans, the first of the month brings both joy and sorrow. It is payday, but also when rent and mortgage payments—their biggest bills—are due. Businesses must shell out wages and rent from revenues earned over the past month. This April 1st is likely to have been even crueller than usual. The government’s efforts to contain the spread of covid-19 have forced retailers to close shop and led to millions of workers losing their jobs. Many households and firms will struggle to pay what they owe. If rent and mortgage payments stop, the financial system risks seizing up.

The bill is huge. Around two-thirds of America’s 120m households own their homes. Together they owed around $11trn in mortgages at the end of 2019. Their monthly payments depend on their deposits and their interest rates, but using national averages as a guide suggests that around $52bn might have been due on April 1st. Another 43m households rent. Zillow, a property firm, estimates that they paid $43bn a month to landlords in 2019.
Few firms own their offices or shops, instead renting from commercial landlords. Green Street Advisors, a property-research company, estimates that total office rent exceeds $10bn a month. Monthly retail rents are worth another $20bn, according to Marcus & Millichap, a commercial-property services and consulting firm.
All told, households and firms owe around $125bn. How much of that might go unpaid? It seems likely that the 3.3m workers who signed up for unemployment benefits in the week to March 21st will have also sought relief from their landlords or their banks. Economists at the University of Chicago reckon that two-thirds of Americans cannot work entirely from home. Many may lose some pay as a result.
Some businesses might be able to keep earning even while their offices are shut. Retailers less so. A slew have already said that they won’t cough up. Nike, a sportswear-maker, says it will service half its rent this month. The Cheesecake Factory, a restaurant chain, plans to pay nothing at all.

The damage done to the financial system depends in large part on how flexible landlords and creditors can be. Government intervention should allow many households to postpone payments. The vast majority of residential mortgages are held, or backed, by government-sponsored entities (GSEs), like Fannie Mae and Freddie Mac (see chart). The government has ordered these to grant forbearance to homeowners, and has imposed a moratorium on foreclosures. The Federal Reserve will buy unlimited quantities of mortgage-backed securities (MBS) issued by GSEs. Small residential landlords should also be well-supported by such measures. These own the majority of rental properties and owe $4.3trn in mortgages.
The commercial sector, though, has less flexibility. Most mortgages for retail and office spaces, which are worth a combined $3trn, are taken out by professional landlords. They are usually owed to one of four groups: banks, life insurers, the holders of commercial MBS or real-estate investment trusts (REITs). Renegotiating payments with banks and insurers, which lend using their balance-sheets, might be manageable. But a quarter of commercial mortgages are owed toMBS holders and to REITs, which are less flexible. The commercial MBS market is governed by rigid rules; REITs are highly leveraged and will quickly suffer if payments stop.
Some middlemen are also being affected in unforeseen ways. For instance, mortgage-service providers—which originate loans and collect payments from homeowners for a fee—complain that they are running short of cash. They typically bet on rising interest rates by short-selling MBS, thereby hedging the risk they take when locking in rates for new customers. But as part of its response to the pandemic, the Fed is buying MBS so quickly that the providers are facing margin calls on the losses on their hedges, before the loans for which they have locked in the rates can be issued. With help from the Fed and the government, many homeowners will be able to delay repayments. Some of the corporate links in the chain may not be so lucky. ■
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This article appeared in the Finance and economics section of the print edition under the headline “Bills, bills, bills”
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Bills due on April 1st add to the financial strains of covid-19

As Americans lose their jobs and incomes, the government helps with rent and mortgage payments
Finance and economics

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TO MOST WORKING Americans, the first of the month brings both joy and sorrow. It is payday, but also when rent and mortgage payments—their biggest bills—are due. Businesses must pay out wages and rent from the revenues they have accrued over the past month. This April 1st is likely to be even crueller than usual. The spread of covid-19, and the government’s efforts to contain the virus, have forced many retailers to close shop and led to millions of workers losing their jobs. Many American households and businesses will struggle to pay what they owe.

How big is the bill? Around two-thirds of America’s 120m households are homeowners. Together they owed around $11trn in mortgages at the end of 2019. Their monthly payments will depend on their deposits and their interest rates, but using national averages as a guide suggests that around $52bn of mortgage payments might be due on April 1st. Another 43m households rent. Zillow, a property company, estimates that they paid $43bn per month to landlords in 2019.
Few corporations own their offices, restaurants or shops. Instead they rent from commercial landlords. Green Street Advisors, a property-research company, estimates that total office rent exceeds $10bn a month. Monthly retail rents are worth an additional $20bn, according to Marcus & Millichap, a commercial real-estate services and consulting firm.
Altogether, households and firms owe around $125bn. How much might go unpaid? It seems likely that the 3.3m workers who signed up for unemployment benefits in the week ending March 21st will have also sought some relief from their landlords or their banks. Economists at the University of Chicago reckon that as many as two-thirds of America’s 159m workers cannot work entirely from home. Many may lose some pay as a result.
Although their offices might be closed, many businesses might still be up and running. Those least likely to pay are retail businesses that have been shut. A slew have already said that they won’t pay up. Nike, a sportswear retailer, says it will pay half its rent in April. The Cheesecake Factory, a restaurant chain, plans to pay nothing at all.

The stoppage in the flow of rent or mortgage payments risks gumming up the rest of the financial system. But the damage done depends in large part on how flexible landlords and creditors can be. Government intervention should make it relatively easy for many households and businesses to postpone payments.

Homeowners struggling to pay mortgages will probably find that help is at hand. The vast majority of residential mortgages are held, or backed, by government-sponsored entities (GSEs), like Fannie Mae and Freddie Mac (see chart). The government has ordered Fannie and Freddie to grant forbearance to homeowners, and has imposed a 60-day moratorium on foreclosures. The Federal Reserve has said it will buy unlimited quantities of mortgage-backed securities (MBS) issued by GSEs. This support is likely to be extended if the crisis drags on.
Small residential landlords are likely to find themselves in a similar position. These own the majority of rental properties and owe $4.3trn in mortgage debt. Dave Bragg of Green Street Advisors says some 27m units, or around 60% of the rental stock, are owned by landlords who each own fewer than five units.
The commercial sector, though, is likely to have less flexibility. Most mortgages for retail and office spaces, which are worth $3trn, are taken out by professional landlords. They are usually owed to one of four groups: banks, life insurers, the holders of commercial MBS or real-estate investment trusts (REITs). Renegotiating payments with banks and life-insurance companies, which lend using their balance-sheets, might be relatively easy. But the commercial MBS market is governed by rigid rules, and REITs, which are highly leveraged, will quickly suffer if payments stop. A quarter of commercial mortgages are owed to MBS holders and REITs.
Some middlemen are also being affected in unforeseen ways. For instance, mortgage-service providers—which typically originate loans and collect payments from homeowners for a fee, and are usually an innocuous link in the chain—complain that they are running short of cash. They typically hedge interest rates by short-selling MBS, in order to lock in interest rates for new customers. But as part of its response to the pandemic, the Fed is buying MBS so quickly that the providers are facing margin calls on the losses on their hedges, before the loans for which they have locked in the rates can be issued.

For the median American laid off because of the coronavirus, it seems likely that the government will either ensure that they have enough cash, or that their landlords or bankers can afford to be flexible. But other bill-payers might be less fortunate.
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The ECB breaks its self-imposed rules

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CHRISTINE LAGARDE took over as the president of the European Central Bank (ECB) in November intent on peacemaking. The bank’s negative interest rates and bond-buying were reviled in the euro area’s northern countries. In order to heal the rift Ms Lagarde launched a year-long review of the ECB’s strategy. Few investors expected policy to change much in 2020.

Covid-19 upended all that. On March 18th the ECB announced an emergency asset-purchase scheme that would buy €750bn ($809bn) in government and corporate bonds. With its existing programmes, the bank will hoover up over €1trn in assets this year—equivalent to 9% of euro-area GDP. But even this might not be enough to gin up the economy.
The severity of the pandemic means that the ECB has been bolder and considerably more flexible than economists would have thought possible a few months ago, says Piet Christiansen of Danske Bank. In large part that is because the ECB is amending some of the rules that have until now governed its asset purchases.
One self-imposed rule concerns the composition of purchases. The ECB generally tries to buy government bonds in proportion to the capital each member state puts into it (or its “capital key”), which is roughly in line with the size of its economy. This time the bank will be more flexible. It could, for example, buy more Italian and Spanish bonds, even though these together account for around a quarter of the capital key. As the virus spread across the south of the euro zone, investors had begun to demand a higher premium for holding southern states’ bonds—and Ms Lagarde did not help when she remarked that she did not consider it the ECB’s job to close yield spreads. The announcement of the emergency bond purchases helped to calm those nerves.
More controversially, the ECB says its emergency purchases will not be bound by its self-imposed “issuer limit”, which had meant that it could not hold more than a third of a member’s sovereign debt. Its holdings of German and Dutch bonds have been fast approaching the cap. The decision could raise heckles in Germany, where the rule is seen as ensuring that the ECB’s purchases do not monetise national debt.

The ECB is breaking more of its own rules. It is expanding the range of assets it will buy. The new scheme will cover Greek sovereign bonds; they had previously been deemed ineligible because of their low credit rating. And the ECB will start to buy assets with maturities of less than a year. That has a happy interaction with recent fiscal easing. On March 23rd the German government said that it would borrow €156bn in order to support its economy (see article). Much of Germany’s borrowing will take the form of short-term bills, says Frederik Ducrozet of Pictet, an asset manager.
Even with all this flexibility, there is still a question of whether the stimulus is sufficient. The extent of the economic damage done by the virus is slowly becoming clear. On March 24th a survey of purchasing managers indicated the steepest drop in activity in its 22-year history. Investors’ medium-term inflation expectations, as measured by the five-year forward swap rate, have fallen to 0.8%, well below the bank’s target of inflation close to, but below 2%. That suggests that investors think more easing is needed to ensure a healthy expansion after the epidemic ends.
One reason for investors’ gloom may be that governments are still doing too little. Even after Germany’s splurge, new spending across the euro zone amounts to only 2% of GDP. Economists at Citibank estimate that something nearer 5% is warranted. Leaders were set to consider whether to make cheap credit lines available to governments through the zone’s bail-out fund after The Economist went to press. Such talks tend to become mired in arguments over what type of strings should be attached to the cash. The pandemic means that a deal looks likelier than ever. But central bankers are also well aware of another, less happy, link between monetary and co-ordinated fiscal policy. The more the ECB does, the less governments feel they need to take action. ■
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This article appeared in the Finance and economics section of the print edition under the headline “Ripping up the rules”
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America’s mortgage market sickens

AMERICA’S $19trn commercial and residential mortgage market is jittery as investors begin to fear that laid-off workers and shut-down firms will struggle to repay their debts. Plenty of investors—such as real-estate investment trusts—are highly leveraged. As the value of mortgage-backed securities has dropped sharply they have begun to face margin calls on their debt from their bankers. Some have warned investors that they are unable to meet cash calls. Demand for new residential mortgages is likely to suffer, too. Lockdowns and economic uncertainty have stopped homebuyers looking.■
This article appeared in the Finance and economics section of the print edition under the headline “America’s mortgage market sickens”
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An imaginative template for dealing with the cash crunch

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TAKE YOURSELF back, if you can manage it, to a more tranquil time—January, say. Imagine a smallish restaurant chain that had a bad Christmas. Its owner borrowed heavily to expand only to find its new outlets were slow to attract customers. The chain cannot meet its interest and other costs. A consultancy says $10m is needed to tide the firm over until its problems are fixed. The bank says it will forgo interest payments worth $5m, if the owner kicks in $5m of equity capital. A deal is struck.

Fast-forward a few weeks and imagine a similar chain that is temporarily shut down because of the covid-19 virus. The firm has no revenue, but it still has fixed costs. The hypothetical January deal is a template for dealing with the problem. But in a broader crisis, things are always trickier. The bank’s balance-sheet is stretched to the limit. The stockmarket crash has taken a bite from the owner’s wealth. And she is reluctant to sell a stake in the business.
An alternative is to turn to specialist private-credit funds. These are vehicles backed by long-term investors, such as insurance firms, sovereign-wealth funds and university endowments, which lend directly to companies, much as a bank would. Some will have discrete distressed-lending or “special-situation” arms. Many more are prepared to put up capital when others won’t. And everything is a special situation now. So the mindset and methods of these specialists will need to be broadly applied.
What might they offer our hypothetical restaurant chain? One option is a payment-in-kind (or PIK) loan. This affords the borrower flexibility. If the shutdown is protracted, it can roll up missed interest payments into the outstanding debt (ie, pay them in kind). Once the business gets back to normal, it can make interest payments in cash again. A PIK loan has two advantages, according to Mark Attanasio and Jean-Marc Chapus of Crescent Capital, a private-credit firm. It gives immediate relief, and it leaves the capital structure largely intact, so the owner retains control. The lender, in essence, says to the borrower “you take a spring break on interest payments; we believe in your recovery.”
Of course, the interest on any loan granted in a distressed situation will be steep. The opportunity cost to a lender is the double-digit yields now on offer in the high-yield bond market. A way to reduce the risk to the lender, and thus the cost to the borrower, is to secure a loan on fixed assets. Last week United Airlines agreed a one-year loan with banks backed by aircraft and other collateral, according to Bloomberg News. Part of the loan was then sold on to Apollo, a leading private-capital firm. More deals like this seem likely.

Not every business in need is a big airline. A lot of medium-sized firms, like our hypothetical restaurant chain, do not have many tangible assets. Property and equipment are leased. The firm’s worth is in intangibles, such as its brand. There is no value for a lender to recover if the company is liquidated. And in complex situations, such as this one, it is difficult to estimate the severity of the short-term damage and how quickly a business will recover. The ideal solution is an injection of equity capital. But shareholders are reluctant to issue equity in recessions, when stock values are depressed, as it dilutes the value of their stake. Convertible loans offer a way around this. These carry a lower rate of interest than a conventional loan, but give the lender the possibility of converting it into equity when things—revenues, profits, asset values—return to normal.
In our ideal world, there is one lender and one owner. The real world is messier. Lenders to firms in distress expect to be paid back before other creditors. But the company may have covenants on its existing debt that rule out a new lender pushing to the front of the queue. A unique situation calls for flexibility. “The right paradigm is a natural disaster,” says Jonathan Lavine of Bain Capital. “More than ever, banks, shareholders and other lenders will have to work together.”
The goal should be to keep healthy firms intact. There are some specialists that buy the debts of troubled companies in the expectation they will be forced into bankruptcy, wiping the shareholders out and leaving the debt-holders as owners. A change at the top is sometimes necessary. But in general, it makes sense only if the management has screwed up. That does not apply to the vast majority of companies now in distress. It will need a lot of ingenuity and capital to tide them over. It will also need a fair bit of goodwill.
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This article appeared in the Finance and economics section of the print edition under the headline “Bridges to somewhere”
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America’s central bank is not the only one doling out greenbacks

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WHEN AMERICA and its allies wanted to cheapen the dollar in 1985, their officials met in the Plaza Hotel in New York. When they sought to stabilise the currency two years later, they gathered in the Louvre Palace in Paris, conversing over turbot soufflé cardinale washed down with Puligny Montrachet, according to Funabashi Yoichi, a former journalist. The dollar is again a cause of international concern, strengthening from March 9th to 20th, as companies, banks and countries scrambled for the world’s dominant currency, before falling a little this week. But if the world’s policymakers wish to tame it again, where will they meet? In a time of lockdowns, any successor to the Plaza and Louvre accords will have a less resonant name.

America’s Federal Reserve has already tried to alleviate dollar scarcity by reviving a network of swap lines, which allow other central banks to borrow dollars in exchange for the equivalent amount in their own currencies, swapping them back again up to three months later. The Fed eased the terms of its existing lines with Britain, Canada, the euro area, Japan and Switzerland. It then reintroduced lines with nine other central banks, including those of Australia, Brazil, Mexico, New Zealand, Singapore and South Korea.
Many of these central banks are now busily furnishing dollars to banks at home. The Bank of Japan has offered over $156bn since March 17th. Its counterparts in the euro area, Britain and Switzerland have lent over $182bn combined. On March 18th Brazil’s central bank began offering dollar loans to financial institutions that could provide Brazilian government bonds, issued in global markets, as collateral. The Bank of Mexico said it would begin dollar auctions. Earlier this month, the Reserve Bank of India (RBI), which does not have a Fed swap line, but does have almost $482bn of its own foreign-exchange reserves, offered $2bn to its banks. It received bids worth over $4.6bn, prompting it to offer another $2bn auction on March 23rd.
Could the Fed extend these lines further? It has no appetite for assessing which countries warrant its help, or bearing the risk that it might not get its dollars back. Some have therefore suggested it should team up with the IMF. In 2015 Randall Henning of the American University in Washington, DC, proposed that the fund could decide confidentially which of its members has the “very strong” policies and institutions required to qualify for its own precautionary, strings-free loans. These countries would then also become eligible for a Fed swap line. If ever they could not repay, the fund would lend them the money to do so. Mr Henning calculated that, in addition to Mexico and South Korea, another seven emerging markets might qualify, including Chile and Malaysia.
If the dollar resumes its upward march, America’s Treasury could also help weaken it by buying other currencies, points out Zach Pandl of Goldman Sachs. But what to buy? The traditional choices would be the euro and the yen. But both Japan and the euro area fear the deflationary impact of a stronger currency. A better bet, Mr Pandl argues, might be Mexico’s peso or Brazil’s real. It’s just a pity officials cannot share a meal and a bottle of fine wine before they tuck in to each other’s currencies. ■
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This article appeared in the Finance and economics section of the print edition under the headline “The Zoom accord”
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Venues may close. Trading should remain open

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INSOFAR AS STOCK exchanges used to worry about viruses, it was of the type that infect the computers through which virtually all trading is done. But on March 18th the New York Stock Exchange (NYSE) became the latest venue to announce that its trading floors would close in response to the covid-19 disease, and that trading would become fully electronic from March 23rd. Such closures, amid extreme market volatility, may add to calls that all securities dealings should be suspended in response to the pandemic. But Stacey Cunningham, president of the NYSE, was not alone when she insisted that markets should stay open. With the world scrambling for cash, it would be the height of foolishness to shut off access to the capital markets.

Some markets have come perilously close to a prolonged shut down. On March 17th the Manila stock exchange was suspended as part of a lockdown on the main Luzon island. But amid fears of a backlash from investors, stock trading has resumed.
In America Steven Mnuchin, the treasury secretary, has mulled over the possibility of shortening trading hours, though he insists markets should stay open so savers can access their stockmarket holdings. Terry Duffy, the boss of CME group, a derivatives exchange, said cutting back trading time “makes no sense … especially during this unprecedented crisis when news, information and events are changing at such a rapid pace.”
When markets have closed in the past, it has usually been because of some physical limitation on their ability to operate—for example after terrorist attacks in September 2001, or in the wake of storms. Big exchanges stayed open during the financial crisis of 2007-09. When Greece closed its stock exchange in 2015 for five weeks during capital controls, bank shares fell by 30% on the first day that trading resumed and the overall market dropped 16%.
Closing venues for health reasons is less serious than it used to be because so much trading is done electronically. Banks have been rushing out business continuity plans to ensure markets can continue despite potential lockdowns. Traders are in theory able to work from home. Yet having lots of them operating remotely will pose challenges of its own, says one banker. The biggest is the plethora of rules to prevent market abuse by people on bank trading floors. Regulators are being informally asked to relax some restrictions temporarily, such as the need for all conversations by traders to be recorded.

The most tangible trading restrictions so far are on “short-selling”, which allows investors to profit if prices drop. Several European countries including France, Italy and Spain have limited the practice. Hedge funds worry that credit-default swaps, a sort of insurance policy which pays out if a company goes bust, may become difficult to collect because of political pressure. But the end result of such meddling is that investors who might have hedged their existing positions—so protecting themselves against further losses—are likelier to simply sell what they own and stay away.■
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This article appeared in the Finance and economics section of the print edition under the headline “The pits”
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The dollar is in high demand, prone to dangerous appreciation

AMERICA’S CURRENCY was not always as coveted as it is in today’s troubled times. In the 1960s European central banks had more dollars than they felt comfortable holding. To discourage them from converting their greenbacks into gold, the Federal Reserve introduced its first “swap line” in 1962, allowing foreign central banks to obtain dollars in exchange for their own currency, then swap them back at a later date. Combined with the Fed’s purchases of dollars, the swaps helped protect nervous foreign central banks from the dangers of a dollar devaluation.
The world now faces the opposite problem: a dollar in high demand, prone to dangerous appreciation. It has, unsurprisingly, strengthened against the currencies of emerging markets, which have suffered brutal capital outflows since late January (see chart). But the dollar has, more surprisingly, also strengthened against safe-haven currencies such as the yen and the Swiss franc, and pushed currencies like the pound and the Norwegian krone to their weakest level in decades. On March 18th Bloomberg’s dollar spot index, which measures the greenback against a basket of currencies, hit an all-time high, its seventh consecutive rise. Anyone seeking to swap their yen, francs or euros for dollars (and then swap them back again after a few months) must pay a premium, known as the cross-currency basis, which is deducted from any interest they earn. That premium has risen sharply on several occasions in the past two weeks.

One reason for this scarcity may be the dollar’s global role. Zoltan Pozsar and James Sweeney of Credit Suisse, a bank, have pointed out that supply chains are payment chains in reverse. When the flow of parts, components and assembly is interrupted, so is the flow of payments in the other direction. In East Asia, where the pandemic began, these payments are often made in dollars.

Some hospitals overwhelmed by covid-19 cases have reported a lull before the storm, a period when emergency rooms fall quiet, because people with other ailments are staying away, but the people who cannot breathe have yet to arrive en masse. Something similar befell the dollar funding markets in February. China’s shutdown reduced the need for trade finance, point out Mr Pozsar and Mr Sweeney, removing one source of demand for dollar lending. But as companies’ dollar earnings have dried up, more of them have turned to their banks for help. Companies with pre-arranged credit lines have drawn them down. Large firms that are accustomed to obtaining money directly from the capital markets, through bonds or commercial paper, have also turned to the banks instead.
The banks themselves can turn to the Fed, which can lend them dollars they cannot obtain on their own. But the Fed is less able to help banks that lack a presence in America. Last year non-American banks had $13trn-worth of dollar liabilities, according to calculations by Iñaki Aldasoro and Torsten Ehlers of the Bank for International Settlements. Only 22% of this total was booked with branches or subsidiaries in America. The rest was out of the Fed’s immediate reach.
The Fed can, however, reach out to its fellow central banks. And they, in turn, can help commercial banks within their own bailiwicks. On March 15th the Fed eased the terms of its swap lines with central banks in the euro area, Japan, Britain, Switzerland and Canada. Two days later, the Bank of Japan offered over $30bn in 12-week loans, the largest amount since the 2007-09 global financial crisis. The European Central Bank followed up with $112bn. That narrowed the “basis” that must be paid to obtain dollars through foreign-exchange swaps.
Fed-watchers immediately began wondering if it would expand its swap lines to include prominent emerging markets. There is precedent. The Fed’s first swap line to Mexico dates back to 1967. And in October 2008 it also offered lines to Singapore (which even then was overqualified for the role of emerging market), South Korea and Brazil (the “dodgiest of the lot”, according to Richard Fisher, then president of the Dallas Fed). But Fed officials back then were, and still are today, reluctant to serve as central bank to the world. Transcripts of the October 2008 meeting indicate that several other emerging markets (their identities remain redacted) had already inquired about joining the Fed’s magic circle. “We have done everything we possibly can to discourage” such approaches, said one Fed economist. “We’re not advertising.” ■
This article appeared in the Finance and economics section of the print edition under the headline “Multi-coloured swap shop”
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