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Rating Agencies’ Policy is Targeted at Undermining the Eurozone and Breaking down Trade Relations in Europe

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Activities carried on by rating agencies have a negative impact on the process of overcoming the crisis in various countries.

The slowdown in the anti-crisis management is especially evident on the European market. The analysis shows high frequency of ratings change which triggers panic on the markets and impairs capital raise and revival of markets.

Thus, if we analyse the situation in Greece, within the period between June 2011 and March 2012 long-term sovereign rating downgrade occurred thrice bringing it from B1 to C. Meanwhile, the budget deficit fell from 8.5% to 6.8%, the pace of sovereign debt growth slowed down, and agreements were made regarding the partial write-off of debts to creditors – which undoubtedly was a sign of economic recovery. The anti-crisis decisions made today are supposed to change the macro indices in future because the results of most of such measures can be seen only a while after the implementation thereof. That is why the decision on rating downgrading which was made in July of the previous year – a month after the previous revision – could not possibly be based only on the economic data, nor could it be a result of the government policy assessment.

It was a result of the fact that the restructured Greek bonds had been construed as distressed debt exchange which gave grounds to consider the mandatory part of the transaction as a form of sovereign default. Such approach of rating agencies proves that they have turned out to be incapable to adapt the methods of market risks assessment under crisis conditions, and thus, go on with their activities as if the situation concerned only one particular company under the conditions of general stability. Such systemic error – which especially has respect to sovereign ratings – impairs the recovery of national economies and reduces the efficiency of governmental decisions aimed at the reduction of the public debt.

As of today, Greece has got state immunity against the policy of rating agencies since the Bank of Greece and the European Financial Stability Fund (EFSF) took measures against the possibility of any impact on this country’s liquidity. However, the situation looks quite different if we analyse the impact of this policy on other countries and the corporate sector. Thus, the sovereign rating downgrading results in the revision of commercial companies and financial institutions ratings. And this – in its turn – poses a threat of affecting their capacity to recover the labour market, competitiveness and budgetary payments.

The agencies have revised their approach towards risk assessment recently. While they were only recording the deterioration of the economic situation – which gave grounds for rating downgrading – now the decisions are made in view of the long-term prospects based on prognostic assessment. Therefore, agencies’ decision have had a significant impact on the market and gave way to this negative scenario of the situation development.

In this context, a demonstrative example is the situation in Ukraine which – though not a Eurozone member – is also experiencing a negative pressure on the part of the Big Tree. The sovereign rating downgrading in the end of 2011 was caused – among other factors – by freezing crediting support of Ukraine by the IMF. This decision resulted in the rise of credit cost for the country and its companies on foreign markets, as well as decline of the foreign loan market which has only enhanced the impact of termination of crediting support from this international donor.

Another example could be “incorrect” publications of statements about the economic deterioration of Europe’s “locomotive” countries such as Finland which has had a negative impact on the European market and obvious political effect.

According to our estimations, activities carried on by rating agencies in Europe today only facilitate crisis aggravation in the Eurozone and the collapse of the latter, as well as   downfall of the European trade system. Because the collapse of the Eurozone will result in the enhancement of the protectionism on the European market and disturbance of the existing trade relations. Under the condition of the European sovereign debt crisis the downgrading of sovereign ratings leads to the increase of sovereign bonds profitability and reduction of volumes of the raised capital which impairs the recovery of the national economy and enhances the imbalance within the Eurozone. The fact that the rating of Greece and several other countries having issues with the public debt is approaching the default indicator is another factor posing the risk of undermining the Eurozone.

Global monopolization of the market by three agencies has resulted in politicizing the whole risk evaluation process and today is one of the threats for the stability of the European financial sector. Activities of the European rating agencies during the last year show the change of their functions from expert assessment to political influence. This opinion was supported by the European Central Bank Board member Christian Noyer. According to The New York Times earlier publications, there were two famous superpowers in the post-Cold War world: the United States and Moody’s. While the U.S. can destroy almost any enemy by military means, Moody’s is able to destroy any country through financial means, just setting the lowest rating.

We believe that the future of the European financial and economic system depends directly on the European Union’s ability to take measures on the creation of the European Rating Agency. This will have a positive influence on the development of the regional market and loosen the tensions and process politicizing. Therefore, the EU will get an objective risk evaluation instrument meeting the European standards and taking into consideration the geoeconomic interests of Europe. Moreover, market stabilization will enhance the efficiency of the anti-crisis steps of the Eurozone governments, including by means of recovery of the economic corporate sector. We believe that such institution could as well increase the assessment objectiveness in those European countries that are not members of the European Union and the Eurozone.

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Economy

Will the trade war between China and the United States come to end?

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USA China Trade War

Authors: Raihan Ronodipuro& Hafizha Dwi Ulfa*

The recent trade conflict between the United States and China has had a direct effect on some of the world’s economic players. These two countries are attacking each other with declarations and a trade war; the relationship between the two countries can be defined as a love-hate relationship because the two countries have a lot of mistrust for each other, but they still need each other.

The United States requires China as a global source of low-wage labor as well as a market for marketing American products, and China requires the United States as an investor in its companies as well as a market for marketing Chinese products known for their low-cost. What makes these two countries to be so cold to one another? To answer the question, let’s go back to when this trade war saga started.

Donald Trump is a successful businessman who owns enterprises and corporations all over the world. His candidacy for President of the United States in 2016 poses several concerns, including whether Trump is eligible to run for office. Trump replied by becoming the 45th President of the United States, succeeding Obama.

Trump adopted a protectionism agenda in order to shield the US economy from what he referred to as the “robber from China.” Trump has released a law stating that all steel and aluminum products entering the United States from Europe, China, Canada, and Mexico would be subject to 25% and 10% tariffs, respectively. Of course, China is outraged that the United States issued this order, as well as a related policy on all tribal products. Automobile components, as well as agriculture and fishery products, are manufactured in the United States.

In addition to the tariff battle, President Trump has expressly demanded that the TikTok and WeChat apps be prohibited from running in the United States. We know that these two technologies are very common in the larger population. Giant corporations, such as Huawei, have not survived Trump’s “rampage,” with the Chinese telecommunications giant accused of leaking US national security data to China through Huawei’s contract with US security authorities.

As a result, many US firms were forced to cancel contracts with Huawei or face sanctions. Google is one of the companies impacted by this contract termination, which means that all Huawei smartphone devices manufactured in 2019 and after will lack any of Google’s services such as the Google Play Store, Gmail, and YouTube.

Many of the world’s economic organizations predict a 0.7 percent drop in GDP in 2018 and a 2% growth in 2020. Coupled with the Coronavirus pandemic, the global economy has become increasingly stagnant, with global economic growth expected to be less than 0%.

Amid the tough trade negotiations between the United States and China, COVID-19 pandemic is also affecting their relationship. The United States domestic pressure to contain the pandemic, has led Trump to accuse China of being the virus spread source.  As a consequence, Trump put the US-China future relations at stake with his “China’s Virus” label. Besides, the United States absence from World Health Organization (WHO) during Trump administration along the pandemic, that become a new opportunity for China to expand its influence.  China uses the Covid-19 pandemic issue as an opportunity.

China’s successful in controlling the pandemic,  has also made China confident in facing the United States. Meanwhile, the United States is increasingly threatened by its position. Moreover, the United States dependence on overcoming Covid-19 which requires relations from many parties, including China, makes the United States’ position weak as a superpower.

This is what we hoped for when Biden took office. Many consider President Joe Biden to be willing to “soften” the United States’ stance on the trade war with China. After his inauguration on January 20, 2021, Biden has made many contacts with Beijing to address a variety of issues, one of which is the continuation of the trade war.

The United States and China agreed to meet in Anchorage, Alaska, on March 18-20, 2021, to discuss this issue. The meeting produced no bright spots in the escalation of the US-China trade war, but rather posed questions concerning the Middle East, Xinjiang, North Korea, and Taiwan.

The Biden administration stressed that it does not plan to abolish various regulations passed during the Trump administration’s term in the trade war with China, but it also does not intend to employ the same negotiation strategies as the Trump administration, which seemed to be very offensive. Besides, the Biden administration must be careful, If Biden prioritizes domestic challenges then China has room to push its agendas, including in the field of technology and territorial issues

Furthermore, the Biden administration’s policy has shifted from imposing tariffs on China to investing in industries that Biden believes are less competitive with China, such as nanotechnology and communication networks.

In conclusion, the trade war between the United States and China has ushered in a new age in the global economy, one in which China is going forward to replace the United States’ status as a world economic force, something that the United States fears.

The door to investment is being opened as broad as possible, the private sector is being encouraged to participate (under tight government oversight, of course), the cost of living is being raised, and the defense spending is being expanded. Today, we can see how the Chinese economy is advancing, becoming the world’s second largest economy after the United States, selling goods all over the world to challenge the United States’ status, and even having the world’s largest military after the United States.

The rise of China is what the US is scared of; after initially dismissing China’s problem as insignificant, the US under the Trump administration takes China and Xi Jinping’s problems seriously by starting a trade war that is still underway.

Will this trade war enter a new chapter in the Biden presidency, where the relationship with China will be more ‘calm’ and the trade war can be ended, or can it stalemate and maintain the stance as during the previous president’s presidency?

*Hafizha Dwi Ulfa is a Research Assistant of the Indonesian International Relations Study Center (IIRS Center) with analysis focus on ASEAN, East Asia, and Indo-Pacific studies.

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The “Retail Investor Revolution” in the U.S.

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st

Authors: Chan Kung and He Jun

Recently, the battle between retail investors and institutional investors is taking place in the U.S. stock market, with some short-selling institutional investors being driven to the brink of bankruptcy. The rise of the retail investor, which has led to huge volatility in the U.S. stock market, is nothing short of a “retail investor revolution” in a market dominated by institutional investors.

GameStop (GME), the world’s largest video game and entertainment software specialty retailer with a chain of nearly 7,000 retail stores worldwide, has continued to underperform in recent years under the impact of online gaming, with its stock price dipping from USD 28 per share in 2016 to USD 2.57 per share in April 2020. Nevertheless, since January 11, 2021, retail investors have been bullish on GME that it has soared to as high as USD 483 per share, a “crazy” move that drove Melvin Capital, a hedge fund with a large short position in the company, to the brink of bankruptcy. So far this year, short-sellers had lost USD 19.75 billion on GME, according to fintech and analytics firm S3 Partners. S3 Partners estimates that short positions in GME lost more than USD 7.8 billion on January 29 alone. The “long-short” battle between retail investors and institutional investors ended with the retreat of institutional investors.

Other U.S. stocks that have recently been caught up in the “long-short” battle have also been volatile. On January 28, American Airlines plunged after opening nearly 31% higher, closing up 9.30%. Castor Marintime, a Cypriot dry bulk shipping company, also plunged after opening with a 67.62% jump, closing up 14.77%. AMC Theatres, a U.S. cinema chain on the verge of bankruptcy, closed down 56.63% on the same day after soaring more than sevenfold in two weeks. Canadian mobile phone company BlackBerry and the U.S. fashion clothing chain Express also fell about 42% and 51%, respectively.

The U.S. capital market has long been dominated by institutional investors, and in mid-2018, institutional investors held 93.2% of the market value of the stock market, while individual investors held less than 6% of the market value. In the U.S. capital market, where institutions are the absolute majority, the market system and regulatory rules are set in favor of institutional investors. Market participants, i.e., investors (institutional investors and retail investors), regulatory authorities, and financing entities (enterprises) have formed a set of “self-consistent” system. However, the “retail investor revolution” has disrupted the conventional ecology of the market, with some young retail investors from the WallStreetBets (WSB) group on the Reddit forum throwing institutions into disarray. This “long-short” battle has put retail investors, represented by the “WallStreetBets”, at center stage and secured support from the top elites, including Elon Musk. In the face of this sudden “retail investor revolution”, the reasons and possible effects are worth in-depth observation and thinking.

First, who opposes the “retail investor revolution”?

The answer is of course, Wall Street as represented by institutional investors, who are the “establishment” in the capital market and represent the mainstream and value perspectiveof the financial market. Goldman Sachs, a prominent investment bank, saying the butterfly effect of the GME short squeeze is leading to the worst short squeeze in the U.S. stock market since the financial crisis. Over the past 25 years, the U.S. stock market has seen a number of severe short squeezes, but none as extreme as has occurred recently. Goldman Sachs warned that if the short squeeze continued, the entire financial market would collapse. According to Goldman Sachs, unsustainable excess in one small part of the market has the potential to tip a row of dominoes and create broader turmoil. In recent years, the pattern of low volume and high concentration in U.S. stocks has increased the risk of funds unwinding their position across the market.

Market maker brokers and trading platforms have also imposed strict restrictions on retail trading. In the midst of a fierce battle between retail investors and short sellers in the U.S. stock market, for example, several brokerage houses, including Robinhood, a zero-commission online brokerage, and Interactive Brokers, one of the largest online brokerages in the U.S., abruptly shut down buying of WSB related stocks such as GME, AMC, and Nokia. Robinhood said the restrictions had to be put in place because of the pressure on data processing and margins brought by the volume of retail trading. But the move immediately drew accusations from the market that the decision was “market manipulation”.

Second, what gathers a group of scattered retail investors?

According to Chan Kung, founder of the ANBOUND, the answer lies in the internet. A group of young retail investors gather in a Reddit subsection called WallStreetBets (WSB), and rely on the convenience of the internet to mobilize and convene, forming a force that can influence institutions in specific areas (such as WSB concept stocks). As in recent years, public use of social networking platforms in the social and political spheres has shifted to the stock market investment sphere.

Chan also pointed out in that the role of the internet is not only in mobilizing and convening, but also in providing and sharing quality analysis. The dominance of institutions in the stock market is not only reflected in funds, but also in research capabilities. They rely on professional teams to collect information, conduct market research, and conduct modeling and analysis, forming a certain information monopoly and an overall investment advantage over retail investors. However, the development of the internet has broken up this information monopoly. Due to the convenience of information acquisition and sharing, some small institutions and professional investors also have a high analytical ability. Their participation and sharing make the Internet platform another kind of “large institutions”, which provide investment analysis and advice to retail investors in a distributed manner. The rapid information sharing and investment actions make the retail investor cluster a “disruptor” and “challenger” that cannot be underestimated in the capital market. Chan Kung also pointed out that among the retail investors, a group of people with strong information ability will further decide the market trend in the future, and the investment in the capital market will gradually become information-oriented, and the size of the funds will not be as important as in the past.

Third, how would the U.S. financial regulators handle the short squeeze and the stock market turmoil?

The U.S. Securities and Exchange Commission (SEC) said on January 29 that it is closely monitoring extreme price volatility and will review entities that “unduly inhibit” traders’ ability to trade certain stocks. The SEC also added that extreme stock price volatility has the potential to expose investors to rapid and severe losses and undermine market confidence, and that market participants should be careful to avoid “illegal” manipulative trading activity. The SEC is working with regulators to assess the current situation and review the activities of regulated entities, financial intermediaries, and other market participants. White House Press Secretary Jen Psaki said that Treasury Secretary Janet Yellen and the White House economic team are closely watching the stock market activity around GameStop and other heavily shorted companies. She called the trading in the video-game retailer “a good reminder, though, that the stock market isn’t the only measure of the health of our economy.” Fed Chairman Jerome Powell declined to weigh in on the activity around GameStop. “I don’t want to comment on a particular company or day’s market activity or things like that. It’s just not something really that I would typically comment on,” Powell said. This information suggests that the U.S. regulatory authorities are cautious in their stance on market volatility, but hope that the market will remain stable and compliant.

Fourth, what will happen to the market relationship between retail investors and institutions?

The “retail investor revolution” has exposed the contradiction between retail investors and institutions, and made the market relationship between retail investors and institutions the focus of the market. Retail investors are within their rights to take legal action against brokerage houses for restricting trading. In the market, it is not only the so-called “regulators” that can deliver justice. Chan Kung stressed that the real problem with institutional restrictions is that if Wall Street establishes a firewall for market trading and prohibits retail investors from uniting to make the market, then the market becomes an inter-agency market, and may even further evolve into a false trading market, shaking the foundation of the entire market system. Therefore, this unprecedented short squeeze triggered by retail investors has exposed a systemic defect in the U.S. capital market. To solve this problem, there is the need to continue observing and following up.

Remarkably, the same problem exists in China. People who speculate in Chinese stocks gather on WeChat and online forums to lead a large number of hot money to hit the market. Drawing on the example of the “retail investor revolution” in the U.S., the following questions are worth considering: Is such trading activity legal? If it is “illegal”, then what kind of market has the Chinese stock market become? If there are certain winners in the market, limits on how much the stock price can go up and how much they can go down, and, in short, all the criteria that are set internally, isn’t the market trading becoming akin to sham game? Such questions are also worth pondering in China’s retail investors-dominated stock market.

Final analysis conclusion

The historical experience shows that the enthusiasm of the market can never prevent the laws of the market from working, and that the rules formed on the basis of previous experiences and lessons are still the main keynote of the market. At the same time, one should also see that with the changes in the information world and the changes in the behavior of retail investors, retail investors are forming a force that can affect the market. Therefore, certain changes in the market system and regulatory approach as a result are likely to be a future trend.

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Economy

ESG as the New Loadstar for the Global Economy

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The ills of the world economy and the frequency of crises may in part emanate from a loss of the sense of direction. With economic policy rules increasingly undermined at the level of countries and international organizations, the resulting loss of an anchor resulted in a rising frequency of economic crisis episodes. Instead of the weakening norms and top-down conditionality of international organizations a new set of rules and standards is starting to propagate throughout the global economy from the micro-level of the corporate and financial world. This new moral code is epitomized in the ESG (environment, social, governance) framework, with the propagation of ESG principles taking place across all key segments of the global economy.

The buy-side is witnessing a growing volume of assets under management that is tracking ESG principles by 2020 the value of global assets employing environmental, social and governance data to deliver investment decisions has almost doubled over four years, and more than tripled over eight years, to $40.5 trillion. Sell-side research is actively advancing ESG products in the corporate research space as well as in evaluating the macroeconomic implications of the use of ESG standards. The largest corporates are starting to compete in the ESG space, with a rising importance attached to corporate ESG ratings. At the country level governments are actively elaborating the national ESG strategies and evaluating the risks and the opportunities harboured in the rising global presence of the ESG agenda.

For corporates the importance of complying with ESG principles is driven increasingly by the rising share of ESG-driven investments, most notably among the largest institutional investors. According to PwC, ESG funds are set to hold more assets under management than their non-ESG counterparts by 2025, with ESG funds’ market share projected to rise to 57% in 2025, compared with the current 15%. In effect, companies not complying with ESG norms deprive themselves of a rising share of the global investment pool, which may impart negative implications for the companies market capitalization.

There may be also notable implications for countries and companies in terms of borrowing costs depending on the resilience and susceptibility to environmental factors as climate change. According to the estimates of the IMF, an increase of 10 percentage points in climate change vulnerability is associated with an increase of over 150 basis points in long-term government bond spreads of emerging markets and developing economies, while an improvement of 10 percentage points in climate change resilience is associated with a decrease of 37.5 basis points in bond spreads.

Importantly, there are notable regional variations in perceptions and regulatory regimes governing ESG factors as revealed by a Blackrock survey of 425 investors in 27 countries with nearly $25trn in assets under management. For more than half of the respondents in EMEA (51%), the top reason for adopting sustainable strategies was because it is the right thing to do, while just 37 per cent of respondents in the region said mitigating investment risk was a key consideration. At the same time in the Americas, mitigating risk is the second highest driver of adoption (49 per cent), followed by better risk-adjusted performance (45%) and mandate from board or management (45%).

The positive aspect of the ESG agenda is that it broadens the time-horizons of the world economy, including its financial and the real sectors, and allows for longer term risks and vulnerabilities to be incorporated into the current decision-making.

The Covid crisis was the bell toll that greatly underscored the importance of such a re-calibration of the time-horizons in economic strategies away from the excessive short-termism of the pre-Covid era. There is also the greater emphasis on sustainability as the core principle that aligns the operation of the corporate and financial markets with the broader global agenda as reflected in the UN development goals.

On the other hand, the transition towards the ESG principles also involves risks that have to do with the significant differentiation across countries in terms of values and preparedness to incorporate ESG standards. Developing economies, most notably those with a sizeable share of the mineral resource sectors in their economies, will likely find it more challenging to compete with advanced economies in the speed of ESG transformation indeed with respect to environmental standards there is the risk of green protectionism being employed against developing countries. Another risk may be the use of ESG norms as the new universal rules-based framework that separates rather than unites the global community.

In the end, just as the apocalyptic predictions regarding the coming of the WTO membership for Russia have proven to be unfounded so the ESG challenge may well turn out to be a factor of creative change rather than destruction. In many respects the ESG value code aligns well with the crucial exigencies facing Russia’s economy the need for longer time horizons in economic policy-making and investing as well as greater emphasis on environmental standards and social issues. For Russia’s financial realm this is an important element related to the development of deeper and less speculative markets, more emphasis being placed on education and support for the fledgling class of retail investors, and greater transparency and higher governance standards in the corporate world.

From our partner RIAC

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