Frank Partnoy, law professor at UC Berkeley, has written in The Atlantic warning that the US banking system is at greater risk of collapse than you might think, particularly because of its exposure to CLOs.
“Later this summer, leveraged-loan defaults will increase significantly as the economic effects of the pandemic fully register…" he writes. "We already know that a significant majority of the loans in CLOs have weak covenants that offer investors only minimal legal protection; in industry parlance, they are cov lite... As the banks begin to feel the pain of these defaults, the public will learn that they were hardly the only institutions to bet big on CLOs... Pension funds, mutual funds, and exchange-traded funds [popular among retail investors] are also heavily invested in leveraged loans and CLOs… As defaults pile up, the Mnuchin-Powell view that leveraged loans can’t harm the financial system will be exposed as wishful thinking.”
And eventually, a rerun of 2008: “At some point, rumours will circulate that one major bank is near collapse. Overnight lending, which keeps the American economy running, will seize up.”
Not everyone agrees. Nathan Tankus takes particular issue with the piece. He argues that it is wrong to compare CLOs to CDOs, among other reasons.
He writes: “The financial instruments which blew up the world financial system in 2008 are not present in the quantities, combinations and locations that they would need to be to threaten a crisis today. To the extent we are facing a financial crisis today, it is because of conventional credit risk due to a pandemic-induced depression.
“There is no sexy investigative narrative at the centre of the macroeconomic issues we face today and the fact that there was one 12 years ago has greatly hampered the approach to macroeconomics which has prevailed in the popular press.”
On the topic of macroeconomics, Dario Perkins at TS Lombard asks where investment is going to have to come from for a new economic expansion. His answer: the public sector. He says that focusing on rebalancing government budgets once the pandemic has gone “would be a mistake, not least because — in the unlikely event that the world returns to normal faster than most economists expect — a large part of the 2020 budget deterioration would correct itself”.
He says that if the deficit does not in fact fall automatically, “it will be because we are left with permanently higher unemployment and lower incomes — hardly a reason for austerity.”
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In the developing world, the debate on debt sustainability has a different focus: debt relief. Unsurprisingly, China, as one of the largest creditors to Africa, has come under the spotlight. Yun Sun writes for the Brookings Institute examining the Chinese response to calls for debt relief. She talks about a “long game between China and Africa”.
On the topic of China, who needs enemies when you’ve got friends? US president Donald Trump and others may be worried about Huawei and other Chinese tech companies having influence in the US or advancing the Chinese Communist Party’s agenda. But what about homegrown US companies doing the same thing?
Zoom has admitted having blocked commemorations of the Tiananmen Square massacre on June 4, Paul Mozur at the New York Times reports, and is preparing software that will enable it to exclude specific users at China’s request.
On the other side of the Atlantic, the crisis has reignited conversations about the future of the eurozone. One strand of this relates to the euro’s continued failure to compete with the dollar as the world’s premier currency.
Grégory Claeys and Guntram Wolff write on this topic at Bruegel and how the currency could assume a more international role. Boosting the importance of the euro would go hand-in-hand with other reforms, the pair argue, like finishing the banking union, progressing with the capital markets union, increasing the supply of euro safe assets and increasing growth.
They also indicate that the EU could flex its muscles more in order to encourage internationalisation of the currency: “A less neutral attitude on the part of the [European Central Bank] (for example, by offering easy currency swaps to countries in which euro liquidity is important) would help, as would progress on an EU external/defence policy and a more visible geopolitical role.”
Meanwhile, as companies react to the economic turmoil, Naomi Eide at CIO Dive writes about how spending on technology will change as a result of the crisis. While cloud-based services seem to be enjoying a good crisis, and cybersecurity spending could increase as people work from home, the more exotic fringes of tech spending may be put on hold.
“Containing risk becomes the priority,” she writes. “Businesses don’t want to invest in capital-intensive, moonshot projects — think artificial intelligence and blockchain. Unless it can payoff in the near-term, companies are going to shelve it.”
Finally, Albert Hunt at The Hill writes about how to try to start to solve income inequality in the US. His approach is to focus on what he sees as pragmatic, middle-ground solutions. His proposals include tax credits for the working poor; a national programme combining trade adjustment assistance for those who lose their jobs to foreign competitions and unemployment insurance; expansion of the Obamacare health policy; and universal pre-kindergarten childcare.
“Sanders would say this isn't sufficient; Dimon might shudder at the dramatically enhanced public role,” says Hunt. “But tens of millions of the poor and near poor would be better off.”