US Seeks EU Sanctions Guarantee To Back $50bn Ukraine Loan

Samantha Luan

Economic

Political

Russia-Ukraine Conflict

Summary:

Washington needs Russian assets held in Europe to be frozen indefinitely to support fresh finance for Kyiv.

The US is ready to lead a loan of $50bn to Ukraine repaid by profits from frozen Russian assets if the EU can indefinitely extend sanctions against Moscow, according to a leaked discussion paper.

Washington needs the EU to prolong the bloc’s sanctions on Russian state assets, which expire every six months unless renewed by unanimous consent, until the end of the war to ensure the US is not left on the hook for repayments.

But any such change to the EU regime would require the approval of leaders including Hungary’s Viktor Orbán, who has jealously guarded his regular veto rights over sanctions decisions.

The US proposal is outlined in an EU discussion paper, seen by the Financial Times, prepared for a virtual meeting of the bloc’s finance ministers on Wednesday to discuss how to raise upfront money for Kyiv.

Washington is pressing for agreement ahead of a summit of G7 leaders in Italy next week, where the funding mechanism backed by profits from frozen assets is expected to be a centrepiece of support for Ukraine.

The main option under consideration is a US plan to lend money to Ukraine, possibly in tandem with other G7 states, roughly matching the estimated “windfall profits” from hundreds of billions of dollars of Russia’s frozen assets held in the west. Diplomats say this could raise as much as $50bn.

Precise details of the loan — including its maturity, interest rate, whether it would be provided directly or through an intermediary such as the World Bank — remain to be determined, according to the paper.

But Washington sees any such a loan as “conditional” on the EU allocating profits from the assets for repayments, and guaranteeing that “Russian central bank assets held in the EU remain immobilised until Russia has agreed to pay for the damage caused to Ukraine”, according to the paper.

Such a pledge is crucial because the bulk of Russia’s assets are held in Belgium’s central security depository Euroclear, generating an estimated €3bn a year of profits.

Should the profits fall short of required repayments, or should the EU fail to agree a rollover of sanctions, the US would potentially be liable. The US is discussing other potential options to share that risk with other G7 partners.

Some EU governments are wary of the potential financial repercussions of such assurances. “The Americans are probably going to have to accept that the EU cannot give a cast-iron guarantee [on] losses,” said a person briefed on the negotiations.

Another option under consideration would involve the EU — along with other G7 nations — in effect issuing bilateral loans to Ukraine, backed by profits on Russian assets frozen in their own jurisdiction.

This would potentially require the EU using “headroom” within its common budget — a step that would also require unanimous agreement. “The time needed to put in place such guarantees, together with the legal and operational constraints, would not facilitate a swift implementation of this option,” the paper concludes.

Pressure to utilise the assets has increased in recent months as Washington seeks to maximise financial aid to Kyiv with an eye on November’s presidential election.

While France, Germany and Italy are individual members of the G7, decisions taken by the EU require consensus among its 27 members.

“What you will get tomorrow is a sense from EU ministers of whether they are willing to work to this effect,” said the person involved in the negotiations. “People are churning through all the details but we’re getting to a point where people are willing to say: ‘OK, this makes sense.’”

Source:Financial Times

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Kevin Du

Economic

Participants from UBS Group AG to Hang Lung Group Ltd. highlighted how geopolitics are on the minds of the richest investors, as they try to navigate wars in Europe and the Middle East, escalating tensions between superpowers, and a year of key elections around the world from Mexico to South Africa and the US.

“Geopolitical risk and the possibility of a tail risk event has gone up dramatically,” said Sonja Laud, chief investment officer at Legal & General Investment Management Ltd. “As investors, we should not ignore this.”

Indian stocks tumbled the most in four years on Tuesday after Prime Minister Narendra Modi's party lost its majority in parliament. In Mexico earlier this week, the peso sank and equities plunged after the ruling party's landslide victory sparked concerns that it may increase state control of the economy.

Family offices around the world ranked geopolitics as the biggest risk over the next 12 months in a UBS survey published last month.

“Geopolitics are definitely a big concern on all fronts, not just in Asia, but across the world,” said Pierre-Yves Lombard, head of private banking in Japan at Lombard Odier Group. “That concern is leading clients to look for the safest and strongest financial centers” and institutions, he said.

The biggest question from investors trying to manage political risk is whether they can hedge it, said LGIM's Laud. “The answer is ‘no,'” she said. “The only thing you can do is prepare. Do not try to predict.”

UBS's Asia wealth chief Amy Lo said geopolitical tensions are prompting the richest families to buy more gold. “Given the geopolitical situation, some of the family offices have been diversifying into gold,” including physical, she said.

Laud said issues of inequality have come to the fore with the cost of living crisis, spurring protest votes. In Europe, that's fueled a shift to the right, while in India, wealth disparity was a big reason why Modi was unable to extend his majority, she said.

“We can't have such a wide gap,” Vikram Malhotra, co-founder and CEO of wealth management firm 360 ONE Global, said on a panel at the event. “We need to see the benefit of the growth of the economy percolating down.”

Some businesses have benefited from geopolitical tensions. Southeast Asia has received a significant amount of capital diverted from the US or China, said Rachel Lau, managing partner at Malaysian private investment firm RHL Ventures. The region is seen as “neutral” in the US-China trade war, she said.

Property development veteran Ronnie Chan urged investors to discern the difference between politics — which tends to be short-lived — and longer-term economic fundamentals.

“Over time, the whole world will have to rebalance,” said Chan, former chairman of Hang Lung Group. “So let's make sure that our heads are clear: what is political and what is purely economic.”

Source: Bloomberg

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Alex

Economic

The world economy is headed for a soft landing, inflation is going down, and rate cuts are coming, according to Kristalina Georgieva, International Monetary Fund managing director, but she says the rise of trade restrictions, including tariffs, from the world’s largest economies is the “most worrisome” risk to global growth.

“Trade is slowing down even more than it would be slowing down otherwise,” Georgieva said during an interview with CNBC “Squawk on the Street” co-anchor Sara Eisen at the CNBC CEO Council Summit in Washington, D.C., on Tuesday.

The IMF has tracked a tripling of trade restrictions over the last year, from 1,000 to 3,000, and the IMF managing director said two-thirds of those tariffs lack justification. “The most worrisome thing is we see an embracement of industrial policy willy-nilly everywhere,” she said.

By everywhere, Georgieva meant mostly the three largest economic powers in the world: the U.S., China and the European Union. “Half of the industrial policy measures come from these places and when we analyze [the tariffs] ... we can find justification for one-third,” she said.

The IMF managing director tried to strike a balance between understanding the need for greater trade restrictions while also calling for more thoughtful approaches to tariffs.

“We have to accept there are some reasons why this love for tariffs has reappeared,” Georgieva said. “Globalization didn’t really work for everybody.”

She also noted that the Russia-Ukraine war taught many countries about the importance of supply chain security and the need to diversify supply sources.

As the two major party candidates for the U.S. presidency, President Biden and Donald Trump, both pursue aggressive tariff policies, Georgieva said the changes in trade patterns already are leading to slower growth than the IMF would otherwise expect. "I remember the many times industrial policy becomes 'favorable' and then super-disappointing, for the simple reason governments are not good at choosing companies that are going to be the winners," she said.

IMF calculations indicate that trade restrictions can cost the global economy between as little as 0.2% growth in a best-case scenario, to up to 7% of GDP in a worst case. "Taking 7% out of the world means Japan and Germany are gone," Georgieva said. She added that when a country implements a trade restriction, the probability of reciprocity is 75%, ratcheting up her concerns about the law of unintended consequences. "We are appealing for carefully calibrated actions that meet needs of national security and economic security, but don't throw the baby out with the bath water. The question is how far we take the logic."

In the short-term, things look good, with the IMF recently upgrading its growth outlook to 3.2%. The recent performance of the global economy has outperformed expectations, as well, led by the U.S., with global GDP gaining 6.7% over the past two years — almost a full percentage point higher than the IMF forecast back in 2022.

Georgieva said her concern is centered on the medium-term growth prospects, which she said "are quite disappointing."

The IMF projects roughly 3% global growth annually in the years ahead, which she noted is almost 1% less than before Covid. "This slow growth means people will be disappointed, families worry about financial futures. Unless we get growth up, productivity up, we will have people on the streets," she said.

The divergence between advanced countries and emerging economies that benefitted from globalization may increase, with poor countries falling further behind for first time in the past three decades, she said. "Small open countries beg us to bring some common sense into the decision making."

Over the past 30 years, the world economy tripled, while emerging markets in developing economies quadrupled. "We're better off protecting a degree of integration that works for everybody. ... Push costs up, what do you think is gonna happen to prices? They go up!" Georgieva said. And when "poverty is up, and hunger is up, ultimately it affects global security."

Source:CNBC

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Warren Takunda

Economic

The call comes amidst a downturn in U.S. data that saw the Atlanta Fed's closely watched GDPNow projection for Q2 2024 nearly halve from 3.4% to 1.8% within just one week, following downward revisions to Q1 GDP to 1.3%.

“What’s going on? Surely that recession which almost everyone has given up on isn’t about to hit?” Edwards questions, pointing to the unexpected weakness in May’s manufacturing ISM index, which fell to 48.7 from 49.2 in April.

Image courtesy of Societe Generale.

While some dismissed this data as an anomaly, Edwards underscores that it coincides with weak consumption and trade deficit figures, each shaving 0.5% off Q2 GDP growth estimates.

The market’s reaction to these developments is crucial. "Markets do not move on outcomes alone, but on how they differ from expectations as signalled in market pricing," Edwards explains.

In early 2023, almost every economist predicted a US recession, but to widespread embarrassment, this did not materialise. By early 2024, he notes few economists remained committed to their recession forecasts as macroeconomic data painted a more optimistic picture, suggesting a ‘No Landing’ scenario where the Fed might even resume rate hikes.

This shift in sentiment, combined with rising analyst optimism on earnings and inflation trends, pushed major equity indices to all-time highs. However, Edwards warns that equity bear markets, defined by declines of 30% or more, typically occur during recessions. "Proper equity bear markets only really occur in recessions and so that is what equity investors fear most," he notes, emphasising the potential risks as expectations of continued economic recovery persist.

Edwards says US authorities have been adept at avoiding typical macro-triggered recessions since the 2008 Global Financial Crisis through easy monetary policies and extreme fiscal expansion. Yet, Edwards cautions that investors’ luck might be running out. “Even if Armageddon looms, I guarantee the investment air will be filled with the sound of the bulls singing their soft-landing siren songs,” he warns, sceptical that Fed rate cuts will prevent significant market downturns.

The upcoming US election and geopolitical risks add further uncertainty. Both political campaigns are focusing on tariffs rather than a weak dollar policy, making the dollar a strong hedge against geopolitical deterioration. Despite potential Fed easing, Edwards argues that as long as the dollar remains a high yielder, the dollar’s strength will be resilient.

Source: Poundsterlinglive

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Alex

Economic

The Bank of Canada is ready to pivot. The only question is when it will act.

It’s becoming clear that Canada’s economy no longer needs restrictive interest rates. But for a cautious Governor Tiff Macklem and his policymakers, the decision between cutting on Wednesday or on July 24 will depend on how certain they are that inflation is under control.

The bank’s credibility is at stake. Faulty output gap and inflation forecasts led to a delayed start to rate hikes in 2022. Officials need to be confident that price pressures won’t reignite after they start lowering borrowing costs. Cutting prematurely, only to reverse course and hike again, would strike a major blow to public confidence in the institution.

Still, conditions appear ripe for a cut. Growth in gross domestic product has been below potential for a year, and there’s mounting evidence that inflation – which hit 2.7% in April – is sustainably headed to the 2% target. Most analysts in a Bloomberg survey expect a cut Wednesday, though Canada’s six biggest lenders are split. Markets put the odds at over three-quarters.

“If they want to cut, they have all the pieces they need now,” Andrew Kelvin, head of Canadian and global rates strategy at TD Securities, said in an interview. He expects a cut Wednesday, changing his call after first-quarter GDP data surprised to the downside last week.

Bank of Canada Prepares for Interest-Rate Cut Pivot_1

The Bank of Canada’s meeting comes a day before the European Central Bank is widely expected to lower borrowing costs, so the northern nation could become the first in the Group of Seven to launch into an easing cycle. European officials have more clearly telegraphed a rate cut is coming, however. If Macklem holds this week, he’s likely to signal that a cut is imminent.

A cut in the policy rate from 5% this week would mean the Bank of Canada is moving well before the Federal Reserve. Historically, the countries’ interest rates have tended to take a similar path, and when they don’t, there’s some pressure on the currency. A weak loonie means higher import costs, risking higher inflation. Macklem has said there are limits to how much his central bank can diverge from its US counterpart.

“They might as well wait and see a bit more evidence,” Veronica Clark, an economist with Citigroup, said in an interview. “The US experience should probably be a pretty cautionary tale — we had six to seven months of core inflation that was right around target and it came back.”

In Canada, the consumer price index rose at a 2.9% yearly pace in the first quarter, in line with the central bank’s projections. Core measures have continued to decelerate and the labor market is loosening. Still, inflation has been above 3%, the cap of the Bank of Canada’s operational target band, for 32 of the past 37 months.

Importantly, there are questions about lingering economic momentum. Domestic demand rose at a 2.9% annualized pace in the first quarter, and preliminary data show GDP growth tracking 0.3% in April. At the same time, record immigration-driven population gains have made it harder for the bank to read underlying momentum in consumption and inflation.

Canadians are holding up better than expected amid one of the fastest run-ups in borrowing costs in the history of the central bank. Canadian households carry some of the largest debt burdens in advanced countries, and while that’s working to slow consumption spending, mortgage defaults remain low. The mortgage delinquency rate was just 0.17% in the fourth quarter of 2023, up from 0.14% in the third quarter of 2022, according to the Canada Mortgage & Housing Corp.

But it’s unclear how households will fare over the next two years as a growing proportion renew their mortgages at higher rates than before. For some analysts, that’s an important argument for the Bank of Canada to start normalizing monetary policy this week.

“A lot of people will have to make material changes to their spending habits to be able to service their mortgage debt,” Royce Mendes, managing director at Desjardins Securities, said in an interview. “If the bank is too slow to adjust rates, you could force the economy into an unnecessary recession.”

Waiting for July would allow the bank to outline its plan more clearly in the form of a monetary policy report, which would contain fresh forecasts for inflation and the economy.

Another question is how policymakers communicate the pace at which they’ll lower borrowing costs. In their most recent summary of deliberations for the April meeting, they indicated they’d move gradually.

Source:Bloomberg

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Kevin Du

Economic

In a briefing at the Shangri-la at The Fort in Bonifacio Global City, HSBC Global Research ASEAN economist Aris Dacanay said reducing the rice tariff to 15 percent from the current 35 percent until 2028 will help unleash 2 percent of household income, which in turn will support household consumption and boost overall growth.

Dacanay said that under a best-case scenario, the tariff rate cut has the potential to boost growth by a maximum of 1.4 percentage points (ppt).

"Consumption is 70% of GDP (gross domestic product). So that's basically your household budget. That's how much people spend. People spend 10% of their budgets on rice. If you reduce rice prices by 20%, you're basically saving 2% of your household budget," he said.

"So let's say if all the unleashed basically household savings or freed up household savings goes to buy goods that are domestically produced and all of them, basically all of them are spent, nothing is saved, then the potential, the highest, the maximum growth it could deliver is 1.4 ppt," Dacanay added.

For this year, HSBC Global Research expects economic growth to hit 5.8 percent and is seen to further accelerate to 6.1 percent in 2025.

Dacanay, however, explained that the forecast does not include the impact of the tariff rate cut.

"There's no tariff rate cut yet. It [economic growth] could be higher. There's an upside risk," he said.

For inflation, HSBC Global Research expects that the tariff rate cut once fully implemented could help ease inflation by 1.8 ppt.

Dacanay said that based on their current projection which does not take into account the impact of the tariff rate cut, headline inflation will likely range between 4 and 4.5 percent until July this year and will return within target by August.

For the full year 2024, inflation is projected to settle at 3.6 percent and will slightly go up to 3.8 percent in 2025.

"But, let's say, the rice tariff rate cut happens tomorrow or happens within June, I do think that's a big downside risk to the inflation outlook, and perhaps inflation will not breach the target," said Dacanay.

"If the policy transmission of the tariff rate cut is really fast, it was very fast during 2019 when the tariff rate cut happened. If we apply the same logic, then that's a big downside risk to the inflation outlook," he added.

HSBC Global Research believes that if the new tariff schedule is implemented within the next month, inflation could quickly go down and touch the 2.0-percent level and could even go lower if global oil prices ease at the same time.

Dacanay said that with the big reduction in inflation, the Bangko Sentral ng Pilipinas will have an opportunity to cut interest rates faster than the Fed.

Source: PNA

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Samantha Luan

Central Bank

Economic

The uptick in euro-zone inflation is increasingly drawing comparisons to the US — fueling concern that the European Central Bank could face similar impediments to lowering interest rates as the Federal Reserve.

While there have been clear differences in the drivers of price growth either side of the Atlantic – a point ECB officials repeatedly stress — some economists see important parallels and warn against underestimating the risk of more persistent pressures.

Thursday’s widely telegraphed reduction in the deposit rate from a record-high 4% isn’t in question. The danger is that stubborn inflation akin to that in the US makes rapid subsequent moves less likely. The Fed has already had to rethink monetary loosening after price gains surpassed expectations, even if traders are still hopeful of a rate cut this year.

ECB’s Inflation Challenge Looks More and More Like the Fed’s_1

“America’s troubles with sticky inflation could yet wash up on European shores,” said Carsten Brzeski, global head of macro research at ING. “The ECB would be well-advised not to categorically reject the risk of reflation witnessed in the US and to remain cautious.”

May’s inflation reading for the 20-nation euro area provided the latest warning sign for the ECB, accelerating by more than anticipated to 2.6% from a year earlier. Even more worrisome for officials were the surge in services prices and the unexpected strengthening of underlying pressures.

The setback followed a steep pullback in inflation and won’t have come as a total shock to ECB policymakers who are braced for a bumpy road back to their 2% target. But the pattern emerging also resembles that of the US, with about a third of economists in a recent Bloomberg survey saying American price gains lead those in Europe.

No one contests that the main catalysts for the original inflation spike were different in the two regions — enormous fiscal stimulus in the US versus the energy crisis that struck Europe after Russia invaded Ukraine. What fuels European prices from here, however, may not be so unlike what’s been behind their endurance in the US.

Andrzej Szczepaniak, an economist at Nomura, cites stronger-than-expected expansion in gross domestic product and the prospect of a consumer-led recovery underpinned by record-low unemployment that’s pushing wages markedly higher. Robust demand is also allowing firms to pass higher costs on to consumers. ECB’s Inflation Challenge Looks More and More Like the Fed’s_2

ECB’s Inflation Challenge Looks More and More Like the Fed’s_2

Konstantin Veit, a portfolio manager at Pimco, describes inflation as “highly correlated” globally. “So if the US turns out to have a bigger problem, it’s unlikely that the euro zone doesn’t have at least a minor one.”

He highlights a 2022 speech by ECB Executive Board member Isabel Schnabel in which she discusses “tangible evidence” of a “globalization” of inflation. Bundesbank President Joachim Nagel told Bloomberg in April that sticky consumer prices in the US “teaches us that we should approach the subject of inflation with humility.”

President Christine Lagarde and others have downplayed links between the economic situations in the US and Europe. “I don’t think that we can draw conclusions based on an assumption that the two inflations are the same,” she said after April’s policy meeting. “The two economies are not the same.”

Many analysts still agree with that assessment.

“The cause of US inflation hasn’t yet been resolved,” said Holger Schmieding, chief economist at Berenberg Bank. “Domestic final demand continues to grow strongly. In the euro zone, however, the Putin shock has largely been overcome. Here, however, the economy is weakening. This is a clearer reason to reduce rates as soon as possible.”

Katharine Neiss, chief European economist at PGIM Fixed Income, sees the inflation picture in Europe as “somewhat clearer” than in the US. “In particular, smoothed monthly rates of headline inflation in the euro area have recently come in line with the 2% target, unlike in the US which continues to run hotter.”

But the fact that euro-region inflation appears to track its US equivalent with a lag of a few months is too much for some to ignore. ING’s Brzeski reckons there’s a high risk that this similarity will continue.

“It’s not about copying the US but rather understanding the inflation mechanisms over there, even those they’ve developed quite similarly over the past few years,” he said. “The job market is the best explanation for the parallels, and of course energy prices. In both cases, the level is different in the US and the euro zone, but the trend is not.”