Banking Behemoth Barclays Buys a Stake in Crypto Firm Copper

Key Insights:

  • Barclays is expected to invest millions of dollars in the London-based cryptocurrency firm. 
  • The fundraising round is set to be finalised within days. 
  • The round had previously been delayed due to temporary registration issues with the UK’s financial regulator. 

Barclays, one of the largest banks in the United Kingdom, has joined a funding round for Copper and is expected to invest millions of dollars in the cryptocurrency firm that counts former Chancellor of the Exchequer Lord Philip Hammond among its advisers.

Copper, which provides custody, prime broking and settlement services to institutional investors deploying money into crypto-assets, is aiming to finalise its funding round within days.

Nine-month Delay

UK Mining and Financial Stocks Deliver Early FTSE100 Support

It has been a particularly quiet morning on the economic calendar. There were major economic indicators from the Eurozone or the UK to spook the markets going into the open.

Appetite for riskier assets improved through the morning. A rebound in Chinese stocks provided much-needed support. In response to hopes of Beijing delivering stimulus, the Hang Seng Index surged by 9.08%, with the CSI300 rallying by 4.32%.

The FTSE100 Early Movers

Following a Tuesday slump that left bank and mining stocks in the deep red, it was risk-at the open.

At the time of writing, the FTSE100 was up 1.01% to 7,260.45.

UK100 160322

Standard Chartered led the banking sector, rallying by 3.27%. Barclays (+1.85%), HSBC Holdings (+0.97%), and Lloyds (+1.76%) saw more modest gains.

The upside across the miners was more impressive. Rio Tinto (+2.28%), Glencore (+2.12%), and Antofagasta (+2.55%) led the way, while Anglo American (+0.46%) and BHP Billiton (+1.07%) trailed.

Hopes of economic stimulus eased pressure on mining stocks early in the session, with the upside coming despite an anticipated FED rate hike after the market close.

Risk Appetite Delivers Early GBP/USD Support

Following Tuesday’s gain, today’s shift in market risk sentiment provided further respite for the Pound.

At the time of writing, the Pound was up by 0.18% to $1.30673. On Tuesday, the Pound rose by 0.31% against the Dollar to end the day at $1.3042.

Cable 160322 Daily Chart

For the day ahead, much will now rest in the hands of the FED. The markets are expecting a 25-basis point hike. Of greater influence will be the interest rate and economic projections. Russia’s invasion of Ukraine is likely to push inflation even higher. The markets will be keen to see how the FED plans to respond.

Wall Street Week Ahead Earnings: Caesars Entertainment, Home Depot, Lowe’s and Moderna in Focus

Investors will focus on December quarter earnings for stocks that are economically sensitive, which should show better profits than technology stocks. Increasing Treasury yields and risk aversion could hit the stock market hard over the coming months. In addition, investors will closely monitor the latest news on the rapidly spread Omicron coronavirus variant to see how it impacts earnings in 2022.

Earnings Calendar For The Week Of February 21

Monday (February 21)

The New York Stock Exchange and NASDAQ will all be closed on Monday, February 21 for President’s Day.

Tuesday (February 22)

IN THE SPOTLIGHT: CAESARS ENTERTAINMENT, HOME DEPOT

CAESARS: The largest casino-entertainment Company in the U.S. company is expected to report its fourth-quarter loss of $-0.71 per share, up over 58%, better compared to a loss of $-1.7 per share seen in the same period a year ago. The Las Vegas-based company would post revenue growth of over 77% to $2.58 billion.

Caesars Entertainment (CZR) is currently trading at below its historical NTM multiple on 2023e EBITDAR, despite our expectation of >1,000bps higher core casino margins and faster growth. We believe regional casino markets (55% of mix) have structural tailwinds from customers acquired post-COVID and sports betting legalization,” noted Thomas Allen, equity analyst at Morgan Stanley.

“We expect CZR to improve its sports betting / iGaming market share in coming qtrs, a key driver to Gaming stocks in recent years. High leverage now (7.5x at YE21) but significant FCF and a planned Vegas asset should drive leverage to ~5x by YE22, opening up a broader investor base.”

HOME DEPOT: The largest home improvement retailer in the United States is expected to report its fourth-quarter earnings of $3.22 per share, which represents year-over-year growth of over 17% from $2.74 per share seen in the same period a year ago.

The home improvement retailer would post revenue growth of over 7% to $34.6 billion. The company has beaten consensus earnings estimates in most of the quarters in the last two years, at least.

“We are Overweight Home Depot (HD) given its best-in-class nature and structural housing tailwinds beyond N-T disruption from COVID-19. The stock seems attractively valued in the context of a potential 2021/2022 economic/housing boom,” noted Simeon Gutman, equity analyst at Morgan Stanley.

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE FEBRUARY 22

TICKER COMPANY EPS FORECAST
CNP CenterPoint Energy $0.33
HR Healthcare Realty Trust $0.44
HD Home Depot $3.22
M Macy’s $1.91
MDT Medtronic $1.38
PANW Palo Alto Networks $-0.42
TOL Toll Brothers $1.26

 

Wednesday (February 23)

IN THE SPOTLIGHT: LOWE’S

Home improvement retailer Lowe’s is expected to report its fourth-quarter earnings of $1.69 per share, which represents year-over-year growth of over 27% from $1.33 per share seen in the same period a year ago. The company that distributes building materials and supplies through stores in the United States would post revenue growth of over 2% to $20.82 billion.

“We view Lowe’s (LOW) favourably given its longer-term transformation opportunity and structural industry tailwinds, with substantial near-term uplifts from COVID-19 spending shifts that likely translate to longer-term sales retention,” noted Simeon Gutman, equity analyst at Morgan Stanley.

“Assuming a healthy underlying housing backdrop, we think comps can accelerate longer-term from stronger sales/sq ft trends, driven by e-comm accelerating, better in-stocks, product refreshes/exclusive launches, greater traction with Pro initiatives, and removing friction from the customer shopping experience. Combined with productivity initiatives, this should enable EBIT margin expansion going forward.”

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE FEBRUARY 23

TICKER COMPANY EPS FORECAST
BBWI Bath & Body Works $2.25
BCS Barclays $0.29
EBAY eBay $0.82
HEI Heico $0.57
NTAP NetApp $1.07

 

Thursday (February 24)

IN THE SPOTLIGHT: MODERNA

Moderna, the biotech company focused on drug discovery, is expected to report its fourth-quarter earnings of $8.62 per share, which represents year-over-year growth of over 1,340% from a loss of -$0.69 per share seen in the same period a year ago.

The Massachusetts-based biotechnology company would post revenue growth of 1,075% to around $6.71 billion.

“We are Equal-weight Moderna. While we believe there is long-term upside for Moderna, we believe the significant valuation increase associated with the success of the COVID-19 vaccine limits the near-term upside,” noted Matthew Harrison, equity analyst at Morgan Stanley.

“The company has taken an industrialized approach to developing mRNA based therapeutics and has rapidly generated a broad pipeline of 21 programs, 11 of which have entered clinical development. We believe Moderna’s mRNA drug development platform is more diversified and scalable compared with competitors, and is validated through broad partnerships with Merck and AstraZeneca. We see vaccines and rare diseases as the key valuation drivers of the company.”

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE FEBRUARY 24

TICKER COMPANY EPS FORECAST
ADSK Autodesk $0.89
AXON Axon Enterprise $-0.07
SQ Block $-0.06
CVNA Carvana $-0.76
DELL Dell Technologies $1.94
DISCA Discovery $0.84
GCI Gannett $-0.03
NTES NetEase $0.82
NKLA Nikola $-0.46
VMW VMware $1.44
ZS Zscaler $-0.57

 

Friday (February 25)

TICKER COMPANY EPS FORECAST
AES AES Corp. $0.46
CNK Cinemark Holdings $-0.16
DSX Diana Shipping $0.30
SSP E.W. Scripps $0.46
FL Foot Locker $1.46

 

Binance New UK Partnership Worries Regulator

Binance‘s recent partnership with PaySafe doesn’t sit well with the UK’s top financial regulator, the Financial Conduct Authority (FCA). 

PaySafe is a retail payment processor which would allow Binance to facilitate pound sterling deposits for its customers.

FCA Expresses Concern on Binance new Partnership

The UK regulator, in June, last year, had ordered the exchange to stop all its operations in the UK because it considers the exchange as a significant risk. 

This led to prominent banks in the country, including Barclays, suspending their banking services support for CZ-led exchanges. This also meant that the exchange users in the UK couldn’t make Pound Sterling transactions with the exchange.

However, the exchange is now looking to solve that problem with its new partnership with PaySafe.

The partnership gives it access to Faster Payments Services, which means it has access to the retail payments network. On January 26, Binance started offering Single Euro Payments Area transfers again.

While the FCA didn’t make any comment on the partnership, it instead stated that PaySafe is aware of its concerns and “subject to close ongoing supervision consistent with our approach for firms of its size.” 

Binance, however, has insisted that it is working with the authorities to become more regulatory compliant.

Binance regulatory issues have been one of the banes of its accelerated progress because authorities in Japan, Hong Kong, The Cayman Islands, Thailand, Singapore, the United States, and South Africa have repeatedly warned their citizens about using the platform.

US SEC is Investigating Binance

Earlier today, we reported that the United States arm of Binance is currently facing investigations from the country’s Securities and Exchange Commission (SEC). 

The SEC is investigating the relationship between the exchange’s CEO, Changpeng Zhao, and two trading firms. The two firms are Merit Peak Ltd. and Sigma Chain AG.

Both companies serve market makers as market makers for Binance US. Market makers help to provide liquidity for exchanges and, at the same time, help to manage volatility.

The current investigation centers on whether the companies got preferential treatment from the exchange and if the crypto firm duly informed its customers about their ties to the CEO.

Weaker Sterling Boosts FTSE, Barclays Slides as CEO Steps Down

Barclays was down 2.7% in early deals after it said CEO Jes Staley is to stand down following British regulators’ investigations into his ties with convicted sex offender Jeffrey Epstein.

The FTSE 100 index gained 0.3% by 08:10 GMT, with drugmakers AstraZeneca and GlaxoSmithKline among the top boosts.

Investor focus now is on the Bank of England meeting on Thursday, with a better-than-even chance of the central bank raising interest rates for the first time since the pandemic. [BOEWATCH].

The domestically focussed mid-cap index advanced 0.3%.

Commercial landlord Land Securities Group gained 0.7% after it announced plans to buy the property regeneration firm U and I Group for 190 million pounds ($259.46 million).

(Reporting by Bansari Mayur Kamdar in Bengaluru; Editing by Shounak Dasgupta)

 

Marketmind: Back to The Blues

Markets are in a somber mood on Thursday.

There is little let up on the Chinese property sector front with investors wondering how much damage the Chinese economy might suffer from a potential default of embattled property giant China Evergrande Group – now possibly just days away.

Evergrande shares suffered a double-digit tumble after it scrapped a deal to sell a stake in its property group, though it also secured an extension on a defaulted bond, according to media reports.

Adding to the woes is resurgence of COVID-19 and ensuing curbs. Russia is suffering record deaths and has reported some COVID-19 infections with a new coronavirus variant believed to be even more contagious than the Delta one.

Poland is facing an explosion of cases that may require drastic action, according to its health minister, while Latvia starts its lockdown today until mid-November to slow a spike in infections.

Futures point to more pain ahead for U.S. stocks later in the day.

But a batch of fresh earnings results might sooth some frayed nerves.

Unilever and Hermes sales beat estimates, Truck maker Volvo profit beats forecast, but companies do flag lingering chip woes.

Barclays Q3 beats expectations on strong investment bank performance, while Anglo American Q3 production inches higher.

Earnings highlights in the U.S. to come today are Intel, AT&T and Danaher.

In emerging markets, Turkey’s central bank will take centre stage. Policy makers are expected to deliver another interest rate cut despite stubbornly high inflation after President Tayyip Erdogan’s midnight reshuffle of the monetary policy committee.

Key developments that should provide more direction to markets on Thursday:

-EU starts two day summit

-NATO defense ministers meet

-U.S. initial jobless claims/Philly Fed index/existing home sales

-U.S. 5-year TIPS auction

-Fed speakers: San Francisco President Mary Daly

-Emerging markets: Turkey, Ukraine central banks

-U.S. earnings: AT&T, Blackstone, Dow, American airlines, Southwest airlines, Alaska Air, Intel Whirlpool Mattell

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Karin Strohecker)

UK Shares Rise on Travel, Banking Boost; Retail Sales Data Ease Taper Fears

The blue-chip FTSE 100 index rose 0.3%, with banking shares gaining after a series of brokerage upgrades and price target hikes.

Asia-focused banks HSBC Holdings and Standard Chartered jumped 1.8% and 0.5%, respectively, after Barclays raised price targets on the stocks. RBC also upgraded HSBC to “outperform” from “sector perform”.

However, gains on the FTSE 100 were capped by miners Rio Tinto and Anglo American, which slipped 2.7% and 3.6% after Morgan Stanley cut its price targets on the stocks.

The domestically focused mid-cap FTSE 250 index advanced 0.5%.

British retail sales dropped 0.9% on the month in August versus a Reuters poll for a rise of 0.5%, after data earlier this week pointed towards a sharp recovery in the jobs market and a spike in inflation.

Investor focus will now be on the outcome of Bank of England’s (BoE) policy meeting next week.

“Next week’s policy decision should reaffirm that some tightening will be needed over the next few years to keep inflation (and the economy) in check. But we don’t expect the BoE to conclude that there is a sufficient case yet for near-term rate hikes,” Deutsche Bank economist Sanjay Raja said.

Airlines Wizz Air, Ryanair Holdings and British Airways owner IAG, and holiday company TUI AG rose between 1.2% and 4.7%, as Britain was set to consider easing its COVID-19 rules for international travel.

“The hope will be that a shift in the rules is the precursor to people jetting off for autumn and winter getaways,” said Russ Mould, investment director at AJ Bell.

Wickes Group jumped 5.6% to the top of FTSE 250 index after Deutsche upgraded the DIY retailer to “buy” from “hold”.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Devik Jain in Bengaluru; Editing by Uttaresh.V and Shounak Dasgupta)

FTSE 100 Drops 1% as Commodity, Financial Stocks Weigh

The blue-chip index fell 1.1% and was on course for its worst daily performance in three weeks. Life insurers and banks dragged the most, dropping 2% and 1.3%, respectively.

Miners slumped 1.4%, tracking iron-ore prices, while BP and Royal Dutch Shell shed 1.4% each.

The domestically focused mid-cap FTSE 250 index declined 0.5%.

Globally, investors treaded lightly as a resurgence in COVID-19 cases fuelled concerns about slowing global growth amid talk of major economies easing crisis-era stimulus measures.

The European Central Bank’s policy decision, due later in the day, was on the radar for cues on whether the bank would take a step towards reducing its emergency economic support for the bloc.

“The potential taper talk doesn’t necessarily please investors, as the COVID situation remains uncertain and European businesses need the ECB’s support to go through what might be another dark winter,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

“I believe that the divergent opinions at the heart of the ECB won’t let the bank make any sharp move in the close future.”

Domestically, Bank of England governor Andrew Bailey said policymakers were split evenly last month on whether basic conditions for a rate hike were met by the British economy’s recovery.

easyJet fell 9.7% after the British airline said it rejected a takeover offer and would raise $1.7 billion from shareholders to fund its pandemic recovery and expand operations.

Genus slid 9.5% as Peel Hunt downgraded the livestock genetics firm’s stock to “hold” from “buy” after it missed annual profit estimates.

On the other hand, Hays jumped 3% to top the FTSE 250 index after Barclays upgraded the recruitment agency’s stock to “overweight” from “equalweight”.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Devik Jain in Bengaluru; Editing by Saumyadeb Chakrabarty and Devika Syamnath)

Barclays Pays Out More Than $1 Billion to Investors as Profits Rebound

By Lawrence White and Iain Withers

The British bank, which reported a near-quadrupling in first-half prvofits, said it would pay an interim dividend of 2 pence per share, equivalent to around 340 million pounds in total, after the Bank of England in July scrapped payout curbs.

Barclays will also buy back 500 million pounds of its own shares, as it forecast bad loan charges would remain below historical levels due to the improved economic outlook and low default rates on unsecured lending.

CEO Jes Staley, the subject of long-running succession speculation, told reporters he planned to stay a “couple more years” but would at some point look at succession plans.

The bank said that the full impact of the wind-down of government support measures on customer finances was not yet known.

“No one has really lived through the unwind of these schemes, and therefore we don’t entirely known how many furloughed people will get jobs or not get jobs,” Finance Director Tushar Morzaria told Reuters.

Barclays shares were up 3% at 1130 GMT.

The bank reported profit before tax of 5 billion pounds ($6.94 billion) for the six months to June 30, well above the consensus forecast of 4.1 billion pounds from analysts polled by the bank and up from 1.3 billion a year ago.

The results were boosted by the British lender releasing 742 million pounds in cash set aside for bad debt charges that have yet to materialise, as government support measures prop up the economy.

“Barclays undertaking a further share buyback and upping its half-year dividend marks another step on the road to recovery for the UK’s major banks and financial sector, at large, from the dark days of dividend suspensions,” said John Moore, senior investment manager at Brewin Dolphin.

The British bank’s positive set of results matched a similar forecast-beating first half for German rival Deutsche Bank, which also saw results boosted by lower provisions.

TRADING FRENZY

Barclays’ investment bank continued its strong run, as volatile markets during the pandemic led to frenzied trading, while companies have raised record amounts through blank-cheque investment funds and stock listings.

Equities income rose 38% and investment banking fees from advising on deals rose 27% in the first half of the year, Barclays said.

Its fixed income, currencies and commodities (FICC) business meanwhile fell 37% against a strong first half a year earlier.

The bank said its costs rose 10%, mainly from 300 million pounds of expenses associated with cutting its real estate footprint and higher bonuses due to its improved performance.

Analysts said that while Barclays’ results were strong, it would need to rein in those costs and put forward a convincing plan to improve revenue in the longer term.

“The key question as with other banks, is the outlook on the growth of their loan book and net interest income,” said Sudeepto Mukherjee, financial services consultant at Publicis Sapient.

“Barclays shares have been under pressure in the last few months and we have not seen them capture significant share from the buoyant mortgages market in the UK,” he said.

($1 = 0.7206 pounds)

(Reporting by Lawrence White and Iain Withers; editing by John O’Donnell, Jason Neely and Jane Merriman)

Bank of England to Ease Rule for Small Lenders to Boost Competition

Banks are required to issue MREL, or minimum requirement for own funds and eligible liabilities, which is a form of debt that can be written down to absorb losses and avoid repeating the 137 billion pound ($188.6 billion) taxpayer bailout of lenders in Britain during the financial crisis more than a decade ago.

The targets were set under European Union rules, which Britain now can amend more easily after leaving the bloc last December.

“Making it easier for firms to grow into MREL responds directly to firms’ concerns about barriers to growth created by the step up in MREL requirements as firms expand their balance sheets,” Bank of England Deputy Governor Dave Ramsden said in a statement.

The central bank has authorised 27 new banks since 2013, but Lloyds, Barclays, HSBC and NatWest continue to dominate retail lending and the so-called challenger banks have said that blunt thresholds for issuing MREL create a “cliff edge” that holds them back from building market share.

The BoE proposed replacing its indicative threshold of 15 billion to 25 billion pounds with a notice period setting out when a lender can enter transition to its MREL targets if the company grows beyond 15 billion pounds in total assets.

The central bank would assess a lender’s business plan as it approaches the 15 billion pound threshold and issue a bespoke transition path.

“The banking industry must now assess the implications of the new regime in terms of ability to compete, and highlight any potential challenges to how they serve customers or change their business models as a result,” said Tom Groom, a financial services partner at consultant EY.

The proposals for an extended transition path directly respond to calls for change, the BoE’s Ramsden said.

“They are inherently flexible and agile as they allow for a further extension if unforeseen circumstances demand it,” Ramsden said.

Challenger lenders Metro Bank, TSB and Co-op Bank did not respond immediately to requests for comment.

For a look at all of today’s economic events, check out our economic calendar.

($1 = 0.7264 pounds)

(Additional reporting by Iain WithersEditing by Alison Williams and David Goodman)

Barclays Nabs UBS Banker Tan to Lead Singapore Private Bank

Barclays has been expanding its private banking business in Europe, taking advantage of its investment bank’s ties to wealthy entrepreneurs, family offices and businesses.

With the appointment of Tan, Barclays is hoping to pursue a similar strategy of providing the ultra-rich with bespoke investment services and sophisticated products in Singapore, it said in a statement.

“By further strengthening our presence here, we see this appointment as a great opportunity for us to serve (ultra high net worth individuals) and family offices, connecting them to our expertise and capabilities in one of the fastest growing wealth management locations globally,” Jean-Christophe Gerard, head of Barclays Private Bank, said in the statement.

Tan will join the British lender from the world’s largest wealth manager UBS, where she ran business for ultra high net worth individuals in Singapore.

(Reporting by Brenna Hughes Neghaiwi; editing by Jason Neely)

How Will EU Ban on 10 Banks From Bond Sales Impact Markets and Banks?

Here’s what the move means for EU debt sales, bond markets and the affected banks:

WHICH BANKS ARE AFFECTED?

Banks from all corners of the world are affected: U.S. lenders JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. as well as British peers Barclays Plc and NatWest Group Plc are on the list.

In continental Europe, Deutsche Bank AG, Natixis SA and Credit Agricole SA and UniCredit SpA are affected. Plus Japan’s Nomura Holdings Inc.. All banks declined to comment.

All on the list of 39 primary dealers responsible for managing debt sales — syndicated and auctioned — for the bloc and managing its debt trading in the secondary market.

Many are Europe’s go-to banks in the public sector bond market; seven are among the top 10 fee earners from syndicated debt sales in this market since 2020, according to Dealogic.

WHAT DID THEY DO?

The ban relates to lenders found being part of three cartels in the past three years. One saw a number of banks fined over tinkering in FX spot markets between 2007-2013. Another one found a number of banks colluded on trading strategies and pricing between 2010-2015 on public sector bonds – debt issued by government-linked institutions. A third one related to a cartel of traders at various banks in the primary and secondary market for European government bonds.

HOW BIG WILL FEE LOSSES BE?

Sitting out from syndications, where investment banks are hired by an issuer to sell debt directly on to end investors, means losing out on lucrative fees. Banks netted 20 million euros – 0.1% of the 20 billion euros – in fees from Tuesday’s debut bond, according to Reuters calculations.

Fees vary with debt maturities; the longer the bond, the higher the fees.

An average of its fees across all maturities for the remaining 60 billion euros of this year’s long-term debt issuance would translate into a pool of another 66 million euros if all that debt were to be syndicated, Reuters calculations showed. Considering it will be divided among all banks participating, that’s a relatively small amount compared to the $224 million top earner JPMorgan alone reaped from syndicated European public sector debt sales since the start of 2020, according to Dealogic.

The EU also pays smaller fees for its recovery fund debt than European sovereigns. However, it currently issues all its debt through syndications and will rely on them much more heavily than sovereigns even after auctions start in September, meaning it is a fee source banks won’t want to miss out on.

Exclusion also means smaller lenders could see their fee share increase. Graphic: EU syndication fees: https://fingfx.thomsonreuters.com/gfx/mkt/azgvooddjvd/4Xyrm-eu-syndication-fees-for-recovery-fund-bonds.png

HOW LONG WILL THE BAN LAST?

No timeline has been given. EU Budget Commissioner Johannes Hahn said the commission would work through information provided by banks on how they addressed the issues “as fast as possible”.

Sources told Reuters some banks already submitted information, with the remaining ones expected to follow soon. This could mean some of the banned banks could get the green light to rejoin bond sales, the sources said.

A senior debt banker at a primary dealer not banned said he expects at least a few of the banks to be re-admitted by September, when EU auctions begin.

WILL IT HIT LIQUIDITY?

ECB bond buying has zapped some liquidity in the bloc’s fixed income markets. Liquidity matters to investors, making it easier and cheaper to transact.

Syndication fees are a key factor that motivate banks to participate in auctions that are much less lucrative but crucial to maintain liquidity.

European governments have lost primary dealers in recent years as banks have judged the business to be less profitable.

And having less major banks left to underwrite its syndications could also pose risks for the EU.

(Reporting by Yoruk Bahceli, Abhinav Ramnarayan, Dhara Ranasinghe and Iain Withers in London, John O’Donnell in Frankfurt and Foo Yun Chee in Brussels; writing by Karin Strohecker; Editing by Chizu Nomiyama)

 

As Interest Rates Hit Bottom, Debt Does Matter, Says Barclays

By Sujata Rao

Barclays’ annual Equity Gilt study, released on Tuesday, contradicts the debt-doesn’t-matter thesis, championed by several high-profile economists, prescribing countries should spend big to lift economies from the COVID-19 funk — a reversal of the long-held wisdom that high indebtedness is risky.

While acknowledging that the interest rate decline since the 2008 crisis had cushioned countries against rising debt, the study warned the cycle was turning, as interest rates hit the so-called effective lower bound, the point beyond which policy easing does more harm than good.

Pointing out risks to emerging markets in particular, Barclays said “limits on debt expansion do exist and are being bumped up against in the post-COVID-19 world, creating a high likelihood of macro-credit events in the coming decade”.

“Rates are unlikely to fall further, but global growth rates likely will. This will stress repayment capacity, particularly for low-growth high-rate EM economies,” it added.

Barclays said its approach differed from that of many economists, including the International Monetary Fund, in that first, it took into account total economy debt rather than just public debt, and second, it treated local and foreign currency debt burdens as equally important.

Its analysis shows that countries with the greatest savings shortfalls were most unsustainable and it highlighted Brazil with a shortfall of around 8% of annual GDP.

An estimated 1% potential growth rate “implies Brazilians would have to forego any new consumption or investment for eight years to return to sustainability…Without a radical change in Brazil’s potential growth rate, the pain of necessary adjustment for the country will be dramatic”, Barclays wrote.

However, with Brazil facing elections in 2022 there are concerns of an acceleration in spending growth that could further undermine the country’s standing.

Barclays also highlighted the example of Turkey, where low public indebtedness is offset by high levels of private sector debt, with the risk that these debts could ultimately migrate to the sovereign balance sheet.

Overall, the note said, a key difference between sustainable and unsustainable developing countries was that the latter already had real — or inflation-adjusted — interest rates at the upper end of the range seen between 2005 and 2017 while the opposite was true for the sustainable group.

Ratings agency Fitch forecasts global government debt will reach $95 trillion by 2022, a record 40% increase in nominal terms compared with the pre-COVID-19 level of 2019.

Meanwhile, total global debt stood at $289 trillion at the end of the first quarter, the Institute of International Finance said in a report earlier in May.

(Reporting by Sujata Rao, additional reporting by Marc Jones, editing by Ed Osmond)