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Hello and welcome to Trade Secrets, a day later than normal due to Queen Elizabeth’s funeral yesterday. The British officials we know were forced into service last week, tending crowds of mourners in London or greeting visiting dignitaries at airports, are back at their desks, resuming normal political duties, from where more can be expected in the coming days. Today we look at a bold attempt to cushion the impact of Covid-19 and the energy shock on middle- and low-income countries by strengthening the lending power of Multilateral Development Banks (MDBs). Mapped bodies of water look at the canary in the mine, FedEx.
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The political capital of development finance
Supporting companies during the corona lockdown, protecting households from rising energy prices, financing the enormous investment costs of the green transition: Public finances worldwide are under extraordinary strain. It’s enough expense for rich economies to afford it. A trickle of defaults threatens to skyrocket in middle- and low-income countries.
Overall, poorer countries managed their financial affairs quite well in the pre-Covid years. But spending to deal with the chain of crises has created enormous pressure at a time when rising US interest rates are driving up the cost of borrowing in capital markets and through banks. The average public debt-to-GDP ratio in emerging markets rose from 5 percent before the pandemic to 67 percent now, and as the charts show, the IMF expects it to rise in the coming years.
The demand for publicly funded concessionary financing (or grants) has risen accordingly. Unfortunately, the help promised by rich nations to fund the green transition has not materialized. (I was amazed, too.) And one of the biggest sources of cheap infrastructure finance, China, is pulling out of its Belt and Road initiative after disappointing yields and political backlash.
They would hope that the multilateral development banks (MDBs), led by the World Bank, would fill the gap. Unfortunately, the World Bank in particular does not have sufficient capacity due to its established practices, and going back to the shareholder countries to ask for more capital may not go down well.
Instead, a move is underway that has resonated with the G20 of leading economies, according to which the MDBs are moving more aggressively to increase their clout. This involves changing banks’ risk ratings and capital requirements, relatively small adjustments that can have a significant impact on lending capacity. The technical details are here in a report commissioned by the G20, and there is an excellent discussion hosted by the Center for Global Development think tank.
A paper by the Central Bank of Italy (Italy pushed this issue as host of the G20 last year) estimates that the four main MDBs – the International Bank for Reconstruction and Development (IBRD, the commercial arm of the World Bank), the Asian Development Bank (ADB), the African Development Bank (AfDB) and the Inter-American Development Bank (IADB) – could increase their collective free lending capacity from $415 billion to $868 billion without damaging their triple-A credit rating. If they wanted to go further and accept a credit rating of AA+, one notch lower, their lending capacity could increase to nearly $1.4 trillion. (Now talk.) The New Development Bank created by the Brics countries has done just that with its credit rating and is a strong advocate of others doing the same.
This seeming miracle involves many technicalities, but relies on the idea that the agencies underestimate the extent to which the MDBs are supported by their preferred creditor status in the event of default and their (never activated) ability to whistle “callable capital”. be ” by its shareholders in times of stress. Banks need to persuade rating agencies to take a more positive view and rely more on their own assessment of capital adequacy.
Sounds like an easy decision, but any change requires the adoption of an entrenched institutional culture, particularly at the World Bank, which protects its triple-A rating with the tenacity of an emperor penguin protecting its egg. Bank employees often say that this is the case for both economic and financial reasons. They are always concerned that the US Congress could suddenly end its support for the bank, as the need to keep Capitol Hill in check is one of the main reasons the bank’s presidency has traditionally gone to an American. Congress is unlikely to be keen on the idea of the bank doing weird things with its balance sheet and taking risks with its creditworthiness.
It’s a legitimate concern. Multilateral development banks are political institutions per se in the sense that their existence depends on their legitimacy with their shareholder governments. For example, preferential creditor status for MDBs is generally a market custom rather than a contractual matter: it stems from debtors’ belief that the cost of avoiding shareholder governments is too high. Using the MDSs cannot be just a technical exercise. Banks need to be sure that shareholders are ready to wholeheartedly support their decision and lobby on their behalf with bond investors, rating agencies and potentially nervous lawmakers.
In addition to this newsletter, I write a trade secrets column for FT.com every Wednesday. Click here for the latest information and visit us ft.com/trade-secrets to also see all my columns and previous newsletters.
Mapped bodies of water
FedEx’s success as a postie for the world means the world – and especially everyone concerned about global trade – needs to sit up and take notice when things go down for the company. That’s why last week’s release of preliminary results — a week before the company was due to report numbers — triggered the largest daily drop in its share price on record.
A swallow doesn’t make a summer and a woodcock doesn’t make a winter, but FedEx is sending out a warning to those who still believe the world is heading for a soft landing. (Jonathan Moules)
A proposed text (first reported by Politico) is circulating to revise the controversial Energy Charter Treaty, an agreement that has come under fire for making governments legally liable for phasing out fossil fuels.
South Korea joins EU in list of economies in dispute with US over EV tax credits that discriminate in favor of North American suppliers.
The FT details progress toward “Fortress China,” Xi Jinping’s quest for economic independence.
It turns out that Russia and China do not have a solid unconditional alliance after all, grist to my claim that the world is not in fact split into geopolitical blocs.
The silent but bitter global war to set technology standards sees another battle in the coming weeks as the International Telecommunication Union elects a new leadership.
Intel’s plans to set up chip manufacturing in the US after being showered with taxpayers’ money are welcomed by the government but not by its shareholders.
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