Version: 4 (current) | Updated: 11/13/2025, 6:20:34 AM
Added description
Key concepts such as debt crises, payments theatre, default risk, bond spreads, and monetary tightening are interwoven throughout the articles.
@file_pinax:document {title: "Economic Analysis: Debt Crises, Payments Theatre, and Global Financial Risks", creator: [@world_bank, @financial_times, @the_economist], created: @date_2022, subjects: ["Debt crises", "Economic analysis", "Global financial risks", "Inflation", "Interest rates", "Russia-Ukraine war", "Emerging markets", "Developing economies", "Financial sanctions", "European Central Bank", "Italian economy", "Pakistan economy"], place: ["Global", @russia, @ukraine, @italy, @pakistan, @eurozone]}
@file_pinax -> contains -> [@file_51565821_debt_crises, @file_52061773_payments_theatre, @file_52063453_pakistan, @file_52063795_ecb]
@file_51565821_debt_crises:document {title: "Debt Crises", type: "newsletter"}
@file_51565821_debt_crises -> discusses -> @debt_crises_concept:concept {description: "High sovereign debt in emerging markets and developing economies, risk of debt‑service distress"}
@file_51565821_debt_crises -> mentions -> [@russia, @ukraine, @paris_club:organization {description: "Informal group of creditor nations"}, @hipc_initiative:concept {description: "Heavily Indebted Poor Countries Initiative"}, @sri_lanka:place, @imf:organization, @bond_spreads:concept, @italian_economy:place, @european_central_bank:organization, @inflation:concept, @interest_rates:concept]
@file_52061773_payments_theatre:document {title: "Payments Theatre", type: "newsletter"}
@file_52061773_payments_theatre -> mentions -> [@anton_siluanov:person {role: "Russia's finance minister"}, @anna_gelpern:person {role: "Georgetown University professor, senior fellow @peterson_institute_for_international_economics"}, @mitu_gulati:person {role: "University of Virginia law professor"}, @georgetown_university:organization, @peterson_institute_for_international_economics:organization, @russia, @western_sanctions:concept {description: "Sanctions imposed by Western countries on Russia"}, @default_risk:concept, @bond_market:concept, @english_law:concept, @paris_club, @bond_spreads, @eurozone, @ukraine]
@file_52063453_pakistan:document {title: "Pakistan Economic Stress", type: "newsletter"}
@file_52063453_pakistan -> mentions -> [@shehbaz_sharif:person {role: "Prime Minister of Pakistan"}, @nawaz_sharif:person {role: "Former Prime Minister, imprisoned"}, @imran_khan:person {role: "Former Prime Minister"}, @nasir_ali_shah_bukhari:person {role: "Head of brokerage @kasb"}, @kasb:organization {type: "brokerage"}, @asfandyar_mir:person {role: "US Institute of Peace expert"}, @us_institute_of_peace:organization, @pakistan_bureau_of_statistics:organization, @inflation:concept, @fuel_tariffs:concept, @commodity_prices:concept, @double_digit_inflation:concept, @economic_stress:concept, @pakistan:place]
@file_52063795_ecb:document {title: "ECB, Italian Debt and Eurozone Inflation", type: "newsletter"}
@file_52063795_ecb -> mentions -> [@european_central_bank:organization, @christine_lagarde:person {role: "ECB President"}, @mario_draghi:person {role: "Italy's Prime Minister, former ECB chief"}, @italy:place, @greece:place, @japan:place, @germany:place, @inflation:concept, @interest_rates:concept, @bond_buying_programme:concept {description: "ECB sovereign asset purchase programme"}, @quantitative_easing:concept, @asset_purchases:concept, @bond_spreads:concept, @btp:concept {description: "Italian government bonds"}, @bund:concept {description: "German government bonds"}, @eurozone:place, @andrew_balls:person {role: "Pimco analyst"}, @pimco:organization, @vincent_mortier:person {role: "CIO @amundi"}, @amundi:organization, @athanasios_vamvakidis:person {role: "Bank of America FX strategist"}, @bank_of_america:organization, @katharine_neiss:person {role: "PGIM Fixed Income chief European economist"}, @pgim_fixed_income:organization, @martin_arnold:person {role: "FT journalist"}, @tommy_stubbington:person {role: "FT journalist"}, @stability_and_growth_pact:concept, @fiscal_facility:concept {description: "Centralised EU fiscal tool similar to coronavirus recovery fund"}, @sovereign_spreads:concept, @monetary_tightening:concept]
@debt_crises_concept -> linked_to -> @emerging_markets:place
@debt_crises_concept -> linked_to -> @developing_economies:place
@debt_crises_concept -> linked_to -> @debt_service_burden:concept
@debt_crises_concept -> linked_to -> @global_financial_risks:concept
@payments_theatre:concept -> described_by -> @anton_siluanov {quote: "We have no plans to borrow in 2022; the cost would be cosmic"}
@payments_theatre:concept -> described_by -> @anna_gelpern {quote: "Payment theatre is a bullish political move to project power"}
@payments_theatre:concept -> described_by -> @mitu_gulati {quote: "Russia's default claim is not crazy but a legal maneuver"}
@inflation -> impacts -> @italian_economy:place
@inflation -> impacts -> @eurozone
@inflation -> drives -> @monetary_tightening
@interest_rates -> affect -> @bond_spreads
@bond_spreads -> affect -> @sovereign_spreads
@european_central_bank -> implements -> @asset_purchases
@european_central_bank -> targets -> @inflation {target: "2 %"}
@mario_draghi -> pursues -> @denominator_strategy:concept {description: "Use EU recovery fund to lower debt‑to‑GDP ratio"}
@mario_draghi -> leads -> @italian_government:organization
@vincent_mortier -> predicts -> @euro_parity:concept {description: "Euro to fall to $1"}
@vincent_mortier -> works_at -> @amundi
@christine_lagarde -> states -> @inflation_outlook {quote: "Upside risks intensified, especially near term"}
@andrew_balls -> notes -> @btp_cuspiness:concept {description: "Yield spikes trigger panic selling"}
@asfandyar_mir -> observes -> @pakistan_military:organization {description: "Military seeks to reduce Sharif‑Bhutto influence"}
@shehbaz_sharif -> faces -> @economic_stress
@nawaz_sharif -> faces -> @corruption_allegations:concept
@imran_khan -> faces -> @political_opposition:concept
@file_51565821_debt_crises -> url -> "https://blogs.worldbank.org/voices/are-we-ready-coming-spate-debt-crises"
@file_52061773_payments_theatre -> url -> "https://www.ft.com/content/9e248abf-aa48-4b32-9f0f-c13289ba44a7"
@file_52063453_pakistan -> url -> "https://www.ft.com/content/6b90c9ae-1435-4c53-88ce-f2de7e93f1df"
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<p>Higher inflation. Slower growth. Tightening financial conditions.</p><p><a href="https://twitter.com/intent/tweet?text=In+recent+weeks%2C+Russia%E2%80%99s+invasion+of+Ukraine+has+exacerbated+global+economic+risks.&url=https://blogs.worldbank.org/voices/are-we-ready-coming-spate-debt-crises/?cid=SHR_BlogSiteTweetable_EN_EXT&via=worldbank">In recent weeks, Russia’s invasion of Ukraine has exacerbated global economic risks. </a> There is a fourth element, however, that could make the mix combustible: the high debt of emerging markets and developing economies.</p><p>These economies account for about 40 percent of global GDP. On the eve of the war, many of them were already on shaky ground. Following up on a decade of rising debt, the COVID-19 crisis expanded total indebtedness to a 50-year high—the equivalent of more than 250 percent of government revenues. Close to 60 percent of the poorest countries were already in debt distress or at high risk of it. Debt-service burdens in middle-income countries were at 30-year highs. Oil prices were <a href="https://openknowledge.worldbank.org/bitstream/handle/10986/36519/9781464817601.pdf">surging</a>. And interest rates were <a href="https://voxeu.org/article/anchoring-inflation-expectations-emerging-and-developing-economies">rising</a> across the world.</p><p>In such conditions, history shows, <a href="https://www.brookings.edu/wp-content/uploads/1997/01/1997a_bpea_bernanke_gertler_watson_sims_friedman.pdf">one more surprise</a> is all it takes to touch off a crisis.<a href="https://twitter.com/intent/tweet?text=+The+Ukraine+war+immediately+darkened+the+outlook+for+many+developing+countries+that+are+major+commodity+importers+or+highly+dependent+on+tourism+or+remittances.&url=https://blogs.worldbank.org/voices/are-we-ready-coming-spate-debt-crises/?cid=SHR_BlogSiteTweetable_EN_EXT&via=worldbank"> The Ukraine war immediately darkened the outlook for many developing countries that are major commodity importers or highly dependent on tourism or remittances. </a> Across Africa, for example, external borrowing costs are rising: bond spreads are up by an average of <a href="https://research.cdn-1.capitaleconomics.com/9d1a1f/war-in-ukraine-exacerbates-external-pressures.pdf?utm_source=Sailthru&utm_medium=email&utm_campaign=Africa%20Economics%20Update%20230322&utm_term=ce_updates">20 basis points</a>. The calculus for countries for high debt, limited reserves, and payments coming up soon is suddenly very different: Sri Lanka, for example, opted <a href="https://www.ft.com/content/c898054d-e76b-4c2e-985b-01418cf04109">last week</a> to consider an International Monetary Fund-supported program in the face of a heavy debt service burden.</p><p><a href="https://twitter.com/intent/tweet?text=Over+the+next+12+months%2C+as+many+as+a+dozen+developing+economies+could+prove+unable+to+service+their+debt.+&url=https://blogs.worldbank.org/voices/are-we-ready-coming-spate-debt-crises/?cid=SHR_BlogSiteTweetable_EN_EXT&via=worldbank">Over the next 12 months, as many as a dozen developing economies could prove unable to service their debt. </a>That’s a large number, but it would not constitute a systemic global debt crisis—it would be nothing like the <a href="https://www.federalreservehistory.org/essays/latin-american-debt-crisis">Latin American debt crisis of the 1980s</a>, for example. It would be nothing like the 30-plus cases of unsustainable debt that prompted the establishment of the <a href="https://www.worldbank.org/en/topic/debt/brief/hipc">Heavily Indebted Poor Countries Initiative</a> (HIPC) in the mid-1990s. Yet it would still be significant—the largest spate of debt crises in developing economies in a generation.</p><p>These crises, should they occur, would play out in a transformed landscape. Thirty years ago, developing economies owed most of their foreign debt to governments—official bilateral creditors—nearly all of whom were members of the <a href="https://clubdeparis.org/">Paris Club</a>. Not so today: <a href="https://twitter.com/intent/tweet?text=at+the+end+of+2020%2C+low-+and+middle-income+economies+owed+five+times+as+much+to+commercial+creditors+as+they+did+to+bilateral+creditors.&url=https://blogs.worldbank.org/voices/are-we-ready-coming-spate-debt-crises/?cid=SHR_BlogSiteTweetable_EN_EXT&via=worldbank">at the end of 2020, low- and middle-income economies owed five times as much to commercial creditors as they did to bilateral creditors. </a> This year, of the nearly $53 billion that low-income countries will need to make in debt-service payments on their public and publicly guaranteed debt, just $5 billion will go to Paris Club creditors. Much of the debt of developing economies, moreover, now involves variable interest rates — meaning they could rise almost as suddenly as rates on credit-card debt.</p><div><hr></div><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" target="_blank" href="https://substackcdn.com/image/fetch/$s_!EzIW!,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F9761bdde-df0e-459d-98f3-6fc75df9e44c_1766x1284.png" data-component-name="Image2ToDOM"><div class="image2-inset"><picture><source type="image/webp" srcset="https://substackcdn.com/image/fetch/$s_!EzIW!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F9761bdde-df0e-459d-98f3-6fc75df9e44c_1766x1284.png 424w, https://substackcdn.com/image/fetch/$s_!EzIW!,w_848,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F9761bdde-df0e-459d-98f3-6fc75df9e44c_1766x1284.png 848w, https://substackcdn.com/image/fetch/$s_!EzIW!,w_1272,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F9761bdde-df0e-459d-98f3-6fc75df9e44c_1766x1284.png 1272w, https://substackcdn.com/image/fetch/$s_!EzIW!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F9761bdde-df0e-459d-98f3-6fc75df9e44c_1766x1284.png 1456w" sizes="100vw"><img src="https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/9761bdde-df0e-459d-98f3-6fc75df9e44c_1766x1284.png" width="1456" height="1059" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/9761bdde-df0e-459d-98f3-6fc75df9e44c_1766x1284.png","srcNoWatermark":null,"fullscreen":null,"imageSize":null,"height":1059,"width":1456,"resizeWidth":null,"bytes":306894,"alt":null,"title":null,"type":"image/png","href":null,"belowTheFold":false,"topImage":true,"internalRedirect":null,"isProcessing":false,"align":null,"offset":false}" class="sizing-normal" alt="" srcset="https://substackcdn.com/image/fetch/$s_!EzIW!,w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F9761bdde-df0e-459d-98f3-6fc75df9e44c_1766x1284.png 424w, https://substackcdn.com/image/fetch/$s_!EzIW!,w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F9761bdde-df0e-459d-98f3-6fc75df9e44c_1766x1284.png 848w, https://substackcdn.com/image/fetch/$s_!EzIW!,w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F9761bdde-df0e-459d-98f3-6fc75df9e44c_1766x1284.png 1272w, https://substackcdn.com/image/fetch/$s_!EzIW!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F9761bdde-df0e-459d-98f3-6fc75df9e44c_1766x1284.png 1456w" sizes="100vw" fetchpriority="high"></picture><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-refresh-cw"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-maximize2 lucide-maximize-2"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p></p><p>https://blogs.worldbank.org/voices/are-we-ready-coming-spate-debt-crises</p><!--
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<p>Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of <a href="https://www.ft.com">FT.com</a> <a href="https://help.ft.com/help/legal-privacy/terms-conditions/">T&Cs</a> and <a href="https://help.ft.com/help/legal-privacy/copyright/copyright-policy/">Copyright Policy</a>. Email <a href="mailto:licensing@ft.com">licensing@ft.com</a> to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be <a href="https://www.ft.com/tour">found here</a>. <br><a href="https://www.ft.com/content/9e248abf-aa48-4b32-9f0f-c13289ba44a7">https://www.ft.com/content/9e248abf-aa48-4b32-9f0f-c13289ba44a7</a><br><br>Russia relies on ‘payment theatre’ as bondholders prepare for default Moscow says it will sue if western powers force non-payment but legal experts dismiss the effectiveness of such a move Anton Siluanov, Russia’s finance minister, said Moscow had no plans to borrow in 2022: ‘The cost of such borrowing would be cosmic.’ © Simon Dawson/Bloomberg Share on twitter (opens new window) Share on facebook (opens new window) Share on linkedin (opens new window) Share Save Tommy Stubbington and Polina Ivanova 5 HOURS AGO 47 Print this page Stay across the latest Ukraine coverage Get instant email alerts Russia has vowed to sue if sanctions force it to default on its bonds but academics and lawyers have dismissed the threat as “payment theatre” designed to project the state’s financial strength. Over the weekend, finance minister Anton Siluanov said western sanctions were an attempt to “artificially create a man-made default” — Moscow’s first since 1998. Siluanov, who has already sought to flip some dollar repayments in to roubles, did not say who the government might sue or in which country. But bondholders and rating agencies assume a default process is under way, and academics argue the country’s efforts to be seen as willing to make payments are political rather than practical. “Paying contrary to expectations is a bullish political move that’s rather cheap,” said Anna Gelpern, a professor of law at Georgetown university and a senior fellow at the Peterson Institute for International Economics. “If the whole point of [the invasion of Ukraine] is partly about projecting that ‘we are a global power, respect us’ then this kind of payment theatre is quite important for [President Vladimir] Putin.” Moscow has already missed payments on two of its dollar bonds, after US authorities blocked American banks from processing cash as part of measures to punish the country over its invasion of Ukraine. It is unclear what bearing any Russian legal action might have on the process of a default. “If we don’t get our dollars after 30 days it’s a default,” said one Europe-based investor who holds Russian dollar bonds, referring to the grace period after last week’s scheduled coupon and principal payments. Already, S&P Global has downgraded Russia’s credit rating to “selective default”, saying it does not expect investors to receive payment in dollars within the 30-day window. Meanwhile a panel that determines payouts on derivatives contracts on Monday ruled that state-owned Russian Railways had defaulted on its debt after an interest payment failed to reach investors within a 10-day grace period, despite the company’s attempts to pay the cash last month. Russia’s foreign-currency bonds — like those of many sovereign borrowers — are governed by English law. Unusually, however, in the terms under which the bonds were issued, Russia said it would not submit to the jurisdiction of a foreign court. The legal ambiguity surrounding the bonds means the Kremlin could potentially launch legal proceedings at home, according to Mitu Gulati, a law professor at the University of Virginia, who described Russia’s argument that it has been thwarted from making payments by US authorities as “not crazy”. “To the extent they litigate they will say ‘look, we want to pay, we just can’t, somebody is stopping us’,” Gulati said. “But here’s the rub: usually it’s supposed to be some kind of exogenous event to both parties [that is preventing payment] whereas investors would argue that’s not true. You have caused this, they could say. If you don’t invade countries then you don’t get this situation. Get out of Ukraine and you can pay.” In any event, a court in the UK would be highly unlikely to defer to a Russian court’s judgment on whether the bonds were in default, Gulati added. Both Gulati and Gelpern likened Russia’s situation to Argentina in 2014, when a New York judge prevented Buenos Aires from making payments to holders of new debt until it had paid off older creditors, effectively forcing the country into default. Recommended War in Ukraine: free to read What to expect as Russia warns of historic debt default Countries typically strive to avoid default to make it easier to eventually sell new debt once the stress on government finances has eased, perhaps through a restructuring agreement with creditors. However, the severe sanctions against Russia leave little prospect of any negotiation with bondholders, or of Moscow regaining access to bond markets in the foreseeable future. “This isn’t like a normal default,” said one investor. “As far as I’m aware no one is talking about forming bondholder groups and talking to the Russians. I don’t even think that would be legal.” Siluanov also said Russia had no plans to borrow in 2022. “We are not planning to enter the domestic market or foreign markets this year. This makes no sense, because the cost of such borrowing would be cosmic.” Russian bond prices have collapsed since the invasion of Ukraine, with bonds currently trading at around 22 cents on the dollar, a level that implies a default is priced in. After the 30-day grace period has expired, bondholders are able to “accelerate” repayment, demanding they get their money back immediately if 25 per cent of the holders of a specific bond vote to do so. Such a decision is likely to depend on whether investors think they can seize any of Russia’s overseas assets in order to enforce their claims — an exercise complicated by the fact that Russian assets are largely frozen by sanctions — said Gelpern. “The current environment is so incredibly muddled that bondholders may not want to play their one big card with no clear game plan,” Gelpern said. “But then it’s a little bit optimistic to expect a civil negotiation [between bondholders and Moscow] to ensue any time soon,” she added, “so some may want to accelerate if they think they can reach some assets.”</p><p><strong>APR 10, 19:37</strong></p><h2>Russia threatens to sue if the west deems it in default</h2><p>Polina Ivanova in London</p><p>Russian finance minister Anton Siluanov has said that Russia would take its case to court if western countries rule it to have defaulted on its bond repayments.</p><p>“The Russian Federation tried in good faith to pay its foreign creditors by transferring the corresponding sums in currency as payment for our debt. Nevertheless, the conscious policy of Western countries is to artificially create a man-made default by all means,” Siluanov said in an interview with the Izvestia newspaper published early on Monday.</p><p>He said Russia had attempted to make repayments in dollars but its foreign accounts were blocked and the payments could not be made. “Western countries have banned the use of our frozen funds to pay obligations to foreign creditors, thus punishing their own investors.”</p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" target="_blank" href="https://substackcdn.com/image/fetch/$s_!0MpQ!,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fcb99a18b-5235-40d1-837c-c9d4491cff76_700x467.jpeg" data-component-name="Image2ToDOM"><div class="image2-inset"><picture><source type="image/webp" srcset="https://substackcdn.com/image/fetch/$s_!0MpQ!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fcb99a18b-5235-40d1-837c-c9d4491cff76_700x467.jpeg 424w, https://substackcdn.com/image/fetch/$s_!0MpQ!,w_848,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fcb99a18b-5235-40d1-837c-c9d4491cff76_700x467.jpeg 848w, https://substackcdn.com/image/fetch/$s_!0MpQ!,w_1272,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fcb99a18b-5235-40d1-837c-c9d4491cff76_700x467.jpeg 1272w, https://substackcdn.com/image/fetch/$s_!0MpQ!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fcb99a18b-5235-40d1-837c-c9d4491cff76_700x467.jpeg 1456w" sizes="100vw"><img src="https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/cb99a18b-5235-40d1-837c-c9d4491cff76_700x467.jpeg" width="700" height="467" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/cb99a18b-5235-40d1-837c-c9d4491cff76_700x467.jpeg","srcNoWatermark":null,"fullscreen":null,"imageSize":null,"height":467,"width":700,"resizeWidth":null,"bytes":null,"alt":"Russian finance minister Anton Siluanov said that Russia had no plans to borrow domestically or overseas in 2022","title":null,"type":null,"href":null,"belowTheFold":false,"topImage":true,"internalRedirect":null,"isProcessing":false,"align":null,"offset":false}" class="sizing-normal" alt="Russian finance minister Anton Siluanov said that Russia had no plans to borrow domestically or overseas in 2022" title="Russian finance minister Anton Siluanov said that Russia had no plans to borrow domestically or overseas in 2022" srcset="https://substackcdn.com/image/fetch/$s_!0MpQ!,w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fcb99a18b-5235-40d1-837c-c9d4491cff76_700x467.jpeg 424w, https://substackcdn.com/image/fetch/$s_!0MpQ!,w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fcb99a18b-5235-40d1-837c-c9d4491cff76_700x467.jpeg 848w, https://substackcdn.com/image/fetch/$s_!0MpQ!,w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fcb99a18b-5235-40d1-837c-c9d4491cff76_700x467.jpeg 1272w, https://substackcdn.com/image/fetch/$s_!0MpQ!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fcb99a18b-5235-40d1-837c-c9d4491cff76_700x467.jpeg 1456w" sizes="100vw" fetchpriority="high"></picture><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-refresh-cw"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-maximize2 lucide-maximize-2"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a><figcaption class="image-caption">Russian finance minister Anton Siluanov said that Russia had no plans to borrow domestically or overseas in 2022 © Bloomberg</figcaption></figure></div><p>Payments were therefore made in roubles, he said. “Do foreign holders of our debt have access to this money? They do. They can spend this money to buy new securities issued by the finance ministry, to pay taxes and for a number of other operations.</p><p>“Would they be able to convert the rouble funds into foreign currency? They can do it, but our position is that this can be done only after the unfreezing of Russia’s currency accounts has been ensured.”</p><p>He said Russia as a reliable borrower had done all it could to fulfil its obligations regardless of the “economic war” being waged against it. If it is ruled to have defaulted, however, Siluanov said Russia would sue.</p><p>“Of course, we will sue, because we have taken all necessary steps to ensure that investors receive their payments,” he said.</p><p>Siluanov also said Russia had no plans to borrow in 2022. “We are not planning to enter the domestic market or foreign markets this year. This makes no sense, because the cost of such borrowing would be cosmic.”</p><p></p><p>Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of <a href="https://www.ft.com">FT.com</a> <a href="https://help.ft.com/help/legal-privacy/terms-conditions/">T&Cs</a> and <a href="https://help.ft.com/help/legal-privacy/copyright/copyright-policy/">Copyright Policy</a>. Email <a href="mailto:licensing@ft.com">licensing@ft.com</a> to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be <a href="https://www.ft.com/tour">found here</a>. <br><a href="https://www.ft.com/content/926e94e5-4590-4e4f-b141-73aa82f73fdf">https://www.ft.com/content/926e94e5-4590-4e4f-b141-73aa82f73fdf</a><br><br>Whisper it quietly . . . . ... But Russia’s financial system seems to be recovering from the initial sanction shock The next big sanctions target? © APA/AFP via Getty Images Share on twitter (opens new window) Share on facebook (opens new window) Share on linkedin (opens new window) Share Save Robin Wigglesworth APRIL 7 2022 59 Print this page Stay across the latest Ukraine coverage Get instant email alerts The rouble’s recovery has been wrongly used as evidence of Russia shrugging off the west’s sanctions. But there are signs that the country’s financial sector is finding its feet after the initial barrage from the sanctions. The Institute of International Finance’s economists Elina Ribakova and Benjamin Hilgenstock rightly point out that the rouble’s bounce should not really surprise anyone. Imports have been crushed, interest rates have been doubled, harsh capital controls have been put in place, and Russia’s oil and gas sales means it continues to accumulate foreign earnings. Those revenues are absolutely monstrous. The IIF estimates that Russia made more than $1b a day in March, which — absent further action on oil and gas sales — will help make up for chunks of its central bank reserves being frozen by the west: While the CBR’s reserve operations have been limited due to sanctions, historically-high current account surpluses —$39bn in January-February, likely an additional $30-40bn in March, and possibly above $250bn for the full year (absent an energy embargo) — Russia should be able to regain “lost” reserves in a relatively short period of time. The domestic banking sector also seems to have stabilised, after bank runs in the initial days of the war. The need for central bank liquidity has faded sharply and the commercial banking sector as a whole could soon end up having surplus deposits with the CBR, the IIF notes. The IIF therefore concludes that if the west wants to maintain the pressure on Russia, let alone ramp it up, then sanctions will have to be continually calibrated and expanded, such as by cutting more Russian banks off from Swift. The next big step, however, would be an embargo on oil and gas exports, which the IIF seems to think might be coming. FT Alphaville’s emphasis below: Western sanctions have largely focused on the financial sector so far, even if some sanctions have de facto become trade sanctions, partially due to self-sanctioning by international companies. However, as Russia’s economy and financial sector adapt to a new equilibrium of capital controls, managed prices, and economic autarky, it is not surprising that some of the domestic markets stabilise. Furthermore, due to the policy response and likely large current account surplus, sanctions have become a moving target and will require adjustments over time to remain effective. We believe that the likely next steps will be a further tightening of financial sector sanctions, potentially the disconnecting of additional Russian institutions from SWIFT. Finally, while resistance to an energy embargo remains substantial in many European countries, including but not limited to Germany, it is increasingly unlikely that this position can be upheld for much longer should more evidence of Russian war crimes emerge.</p><!--
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<p>Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of <a href="https://www.ft.com">FT.com</a> <a href="https://help.ft.com/help/legal-privacy/terms-conditions/">T&Cs</a> and <a href="https://help.ft.com/help/legal-privacy/copyright/copyright-policy/">Copyright Policy</a>. Email <a href="mailto:licensing@ft.com">licensing@ft.com</a> to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be <a href="https://www.ft.com/tour">found here</a>. <br><a href="https://www.ft.com/content/6b90c9ae-1435-4c53-88ce-f2de7e93f1df">https://www.ft.com/content/6b90c9ae-1435-4c53-88ce-f2de7e93f1df</a><br><br>Sharif will have to contend with intense stress on Pakistan’s economy. With global commodity prices soaring, Pakistanis have endured months of double-digit inflation. Food prices increased 13 per cent year on year in March, according to Pakistan’s Bureau of Statistics. Khan had tussled with the IMF over a $6bn loan programme, which had involved imposing unpopular measures such as increasing fuel tariffs. “Our economy faces extreme difficulties. It is a very grave situation but it must and it will change for the better,” Sharif told parliament. Nasir Ali Shah Bukhari, who heads brokerage KASB, said Sharif’s experience working in his family’s metals business before he went into politics would reassure the business community. “He himself is a businessman and has a thorough understanding of the challenges faced by businessmen,” Bukhari said. Sharif and his brother Nawaz have been dogged by corruption allegations, which they say are politically motivated. Nawaz was serving a seven-year jail sentence for corruption when he got special permission to visit the UK for medical treatment in 2019. He has remained in the UK since. Much may depend on whether the Sharifs and Bhuttos can maintain their alliance. Asfandyar Mir, an expert at the US Institute of Peace, said the two families found common cause as Pakistan’s powerful military sought to reduce their influence. “The military have deep disdain for both of these political parties,” Mir said. “So I suspect they’ll work together . . . they realise Khan is the common rival they have, and that he can make a comeback.”</p><!--
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<p>sure way to cause shudders in Italian economic-policy circles is to talk up the prospect of higher inflation. For years subdued price pressures were the rationale for the European Central Bank’s super-lax monetary-policy stance. They provided necessary cover for an array of ecb bond-buying schemes that covertly but effectively bailed out Italy’s huge public debts.</p><p></p><p>Enjoy more audio and podcasts on <a href="https://apps.apple.com/app/apple-store/id1239397626?pt=344884&ct=article%20audio%20player&mt=8">iOS</a> or <a href="https://play.google.com/store/apps/details?id=com.economist.lamarr&referrer=utm_source%3Darticle%2520audio%2520player">Android</a>.</p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" target="_blank" href="https://substackcdn.com/image/fetch/$s_!n2Xk!,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F1d99ab20-c7ad-429f-aee0-e52eb0542bfa_608x685.png" data-component-name="Image2ToDOM"><div class="image2-inset"><picture><source type="image/webp" srcset="https://substackcdn.com/image/fetch/$s_!n2Xk!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F1d99ab20-c7ad-429f-aee0-e52eb0542bfa_608x685.png 424w, https://substackcdn.com/image/fetch/$s_!n2Xk!,w_848,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F1d99ab20-c7ad-429f-aee0-e52eb0542bfa_608x685.png 848w, https://substackcdn.com/image/fetch/$s_!n2Xk!,w_1272,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F1d99ab20-c7ad-429f-aee0-e52eb0542bfa_608x685.png 1272w, https://substackcdn.com/image/fetch/$s_!n2Xk!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F1d99ab20-c7ad-429f-aee0-e52eb0542bfa_608x685.png 1456w" sizes="100vw"><img src="https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/1d99ab20-c7ad-429f-aee0-e52eb0542bfa_608x685.png" width="608" height="685" data-attrs="{"src":"https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F1d99ab20-c7ad-429f-aee0-e52eb0542bfa_608x685.png","srcNoWatermark":null,"fullscreen":null,"imageSize":null,"height":685,"width":608,"resizeWidth":null,"bytes":null,"alt":"","title":null,"type":null,"href":null,"belowTheFold":false,"topImage":true,"internalRedirect":null,"isProcessing":false,"align":null,"offset":false}" class="sizing-normal" alt="" title="" srcset="https://substackcdn.com/image/fetch/$s_!n2Xk!,w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F1d99ab20-c7ad-429f-aee0-e52eb0542bfa_608x685.png 424w, https://substackcdn.com/image/fetch/$s_!n2Xk!,w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F1d99ab20-c7ad-429f-aee0-e52eb0542bfa_608x685.png 848w, https://substackcdn.com/image/fetch/$s_!n2Xk!,w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F1d99ab20-c7ad-429f-aee0-e52eb0542bfa_608x685.png 1272w, https://substackcdn.com/image/fetch/$s_!n2Xk!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F1d99ab20-c7ad-429f-aee0-e52eb0542bfa_608x685.png 1456w" sizes="100vw" fetchpriority="high"></picture><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-refresh-cw"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-maximize2 lucide-maximize-2"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p>Just now nerves in Rome are a little jangled. Annual inflation across the euro zone rose to 7.5% in April. ecb officials have been warming up markets for a possible interest-rate rise as soon as July. That would first require an end to the central bank’s main bond-buying programme. The yield on ten-year German bunds has surged in anticipation. So has the excess yield between riskier sorts of government bonds, notably Italy’s btps, and bunds. Italian bond spreads rose above two percentage points earlier this month (see chart).</p><p>Looked at one way, this rise is eye-catching, though not yet alarming. Italy’s spreads are not obviously out of line with those of corporate bonds of a similar credit rating, allowing for differences in maturity. Looked at another way, it is disappointing. After all the efforts over the past decade to make the euro zone crisis-proof, a btp behaves not like a bund but like an investment-grade corporate bond—with spreads narrowing in calmer times but blowing out at the whiff of trouble.</p><p>Italy has long been the weakest big link in the euro-zone chain. It has emerged from the pandemic with government debt of 151% of gdp, the highest of any large economy bar Japan (where inflation is still quiescent). In the right conditions, such debts are manageable. Indeed, if Italy’s nominal gdp growth rate can stay ahead of the interest rate it pays, the debt burden would fall—as it did last year, when the economy bounced back from recession. Mario Draghi, the former ecb chief who is now Italy’s prime minister, has been following what might be called a “denominator” strategy with regard to the debt-to- gdp ratio. He has tapped the eu’s recovery fund, a €750bn ($790bn) pot financed by common bonds, to finance an investment splurge with the intention of lifting Italy’s gdp. These funds are conditional on reforms, which Mr Draghi has set in motion.</p><p>Inflation has upset this strategy in two ways. First, it puts a big dent in real output. The sharp rise in energy prices following the invasion of Ukraine makes Italians poorer and less able to spend on other things. Italy’s gdp shrank in the first quarter. Growth forecasts have been slashed. Second, the inflation shock has prompted a global rethink of monetary policy and widespread risk aversion in financial markets. The widening in Italian spreads is a consequence. With interest rates rising and central banks ceasing bond-buying, capital is being rationed more carefully. The safest credits get first call. Riskier borrowers get what’s left.</p><p>If sustained, higher yields will over time raise the cost to Italy of servicing its debts. Borrowing costs of 3% are not ideal. But Italy has locked in low interest rates on the stock of its existing debt, which has an average maturity of seven years. Over the longer haul Italy should be able to manage nominal gdp growth of at least that 3% rate—1% real gdp plus 2% inflation, say. Indeed, the current surge in prices, while deadly to real output, is adding to the inflation part of nominal gdp.</p><p>A big worry is that spread-widening gains momentum. Andrew Balls of pimco, an asset manager, detects a “cuspiness” to btp yields—meaning that when they rise beyond a certain threshold, they tend to attract more panicky sellers than bargain-hunting buyers, leading to even higher yields. Anxieties about Italy’s politics are never far from the surface. Mr Draghi is trusted in Berlin and Brussels, but he is due to stand down before elections next spring. He may not last even that long, since cracks are emerging in his coalition over the war in Ukraine.</p><p>In those circumstances, the instinct is to look to the ecb to check the widening in spreads. But with inflation where it is, the central bank’s continued use of tools such as negative interest rates and asset purchases looks improper—hence the scramble to “normalise” monetary policy. Yet inflation seems less entrenched in the euro area than in, say, America. Wage growth is still fairly modest, for instance. The ecb, therefore, may not have to raise interest rates quite as much as financial markets are pricing in. Nervous technocrats in Rome will be keeping their fingers crossed.Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of <a href="https://www.ft.com">FT.com</a> <a href="https://help.ft.com/help/legal-privacy/terms-conditions/">T&Cs</a> and <a href="https://help.ft.com/help/legal-privacy/copyright/copyright-policy/">Copyright Policy</a>. Email <a href="mailto:licensing@ft.com">licensing@ft.com</a> to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be <a href="https://www.ft.com/tour">found here</a>. <br><a href="https://www.ft.com/content/6c888a08-9506-4476-882c-25cdb4e437d7">https://www.ft.com76-882c-25cdb4e437d7</a><br><br>The writer, former head of the IMF’s European department, is chief economic adviser at Morgan Stanley After yet another nasty inflation surprise last month, and with European Central Bank president Christine Lagarde no longer ruling out interest rate hikes in 2022, financial markets have got the message that policy tightening is afoot. Long-term rates have started rising across the eurozone, especially in Italy and Greece, where risk spreads have risen to their highest since the outbreak of the pandemic (165 and 230 basis points, respectively). While it is right that interest rates should rise to cool demand and prevent high inflation from becoming entrenched in expectations, the process may prove to be messy. This is because the ECB, which meets this week, has repeatedly said it will not raise policy rates until it has ended its sovereign asset purchase programme. Officially, there is no terminal date for the programme. In practice, however, the ECB began tapering purchases this month, and markets have been given the sense that the programme underpinning low and stable bond spreads since 2015 will end by early summer. Given the current low levels, there is certainly room for interest rates and spreads to rise. But it is also important that spreads be bounded in some way — not least because spiking and volatility in them impede the transmission of monetary policy across the eurozone. As things stand, there are three paths to monetary tightening. First, the ECB could quickly conclude asset purchases and accept higher long-term interest rates and spreads, and tighter financial conditions; near-term policy rates could be raised shortly thereafter. This strategy could work — but only so long as that other anchor of European stability, head of Italy’s national unity government Mario Draghi, remains in place. A change in the circumstances could easily lead to a spike in spreads in many periphery countries. Second, the ECB could ditch its self-imposed constraint that quantitative easing must end before rates rise. The rationale for this sequencing is that higher rates contract demand, while continued asset purchases stimulate it — so pursuing both at once sends conflicting economic and market signals, akin to driving with one foot on the brake and the other on the accelerator. The concern over mixed signals and uncertain macroeconomic effects is exaggerated. For one, the ECB would be raising policy rates from negative levels, which — on account of banks’ traditional reluctance to pass on these rates to retail depositors — would probably have only limited effect, and so should not be very disruptive at the start. Thereafter, nothing would prevent the ECB from calibrating rate hikes and asset purchases such that the net effect is contractionary. Moderate asset purchases, of say €20bn-€30bn a month, may suffice to maintain stability in bond markets, while allowing a net tightening in monetary conditions. It is not unheard of for central banks to engage in opposing transactions in near-term and long-term assets: the US Federal Reserve has done so more than once with its Operation Twist. Third, eurozone governments could relieve the ECB of the burden of keeping a lid on sovereign spreads. The most straightforward way of doing so would be to create a centralised fiscal facility, like the EU’s coronavirus recovery fund, providing loans and grants to member states facing temporary difficulties. Although the ECB is credited with having kept sovereign spreads low and stable during the pandemic, much of the credit is due to the recovery fund, which is a more tangible signal of European political and economic solidarity than emergency ECB action can ever be. Access to such a facility must come with some safeguards. But the conditions should not be as onerous as the adjustment programmes required by, say, the ECB’s Outright Monetary Transactions facility, which is a political non-starter in countries such as Italy. This option would be the most sensible economically, both facilitating the near-term need for monetary tightening and addressing the long-term gap in the eurozone’s financial architecture. It would also have the benefit of separating monetary considerations from financial stability concerns, allowing the ECB to focus on its core inflation mandate. The upcoming reform of the Stability and Growth Pact is an opportunity to make a centralised fiscal facility a reality, possibly with a more rigorous standard of fiscal probity if member countries so choose. While the case for monetary tightening is becoming urgent, the best solution economically is for now not politically realistic. That being the case, the ECB should drop its current guidance on the sequencing of monetary tightening. The worst thing it could do would be to ignore political and economic realities and simply proceed full speed ahead with the termination of asset purchases and the raising of ECB policy rates.</p><p></p><p>Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of <a href="https://www.ft.com">FT.com</a> <a href="https://help.ft.com/help/legal-privacy/terms-conditions/">T&Cs</a> and <a href="https://help.ft.com/help/legal-privacy/copyright/copyright-policy/">Copyright Policy</a>. Email <a href="mailto:licensing@ft.com">licensing@ft.com</a> to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be <a href="https://www.ft.com/tour">found here</a>. <br><a href="https://www.ft.com/content/3c74174f-138d-4903-8ecf-5f4c2d7af9a8#myft:my-news:page">https://www.ft.com/content/3c74174f-138d-4903-8ecf-5f4c2d7af9a8#myft:my-news:page</a><br><br>Martin Arnold in Frankfurt and Tommy Stubbington in London YESTERDAY 121 Print this page The war in Ukraine is driving inflation higher and hitting the economy harder in the eurozone than most other regions, European Central Bank president Christine Lagarde said on Thursday, as it stuck to its gradual timetable for removing monetary stimulus. Some investors had expected the ECB to go further by bringing forward its plan for ending net bond purchases and raising interest rates. When it announced a continuation of its plans, the euro fell to its lowest level against the dollar since May 2020. Policymakers on the central bank’s governing council, who met this week in Frankfurt, are grappling with how drastically to tighten monetary policy to tackle record inflation while assessing the risk of a sharp economic downturn caused by Russia’s invasion of Ukraine. “The upside risks surrounding the inflation outlook have also intensified, especially in the near term,” said Lagarde, who joined the meeting by video link after testing positive last week for Covid-19. Lagarde pointed out that after eurozone inflation hit a new record of 7.5 per cent in March, some financial market analysts and experts had revised their longer-term price growth expectations above the ECB’s 2 per cent target. “The last thing that we want to see is the risk of a de-anchoring of inflation expectations [from the target],” she added. She also said the “downside risks to the growth outlook have increased substantially as a result of the war in Ukraine”. The “euro area is probably going to be more exposed and will suffer more consequences from the war in Ukraine” than the US or other regions, she said. Athanasios Vamvakidis, head of foreign exchange strategy at Bank of America, said investors had hoped for “something more specific” on when ECB would stop buying more bonds and start raising rates. “On both counts there was nothing new,” he said. “It’s not that Lagarde was dovish exactly, she just wasn’t as hawkish as the market — particularly the forex market — was expecting.” Analysts trimmed their bets on the chances of a July rate rise when the ECB president declined to be drawn on timing. The single currency fell more than 1 per cent to $1.076 against the US dollar, the lowest for two years. “With the ECB more concerned with the inflation outlook than growth, it will continue to use the current window of opportunity to normalise monetary policy,” said Konstantin Veit, portfolio manager at asset manager Pimco, predicting it would stop net asset purchases in July and raise rates by 0.25 per cent in September. “We’ll deal with interest rates when we get there,” Lagarde said, emphasising that increasing price pressures had “reinforced” the council’s expectation that net bond buying would stop in the third quarter. Her comments set up the ECB’s next meeting in June as being a key moment when it will decide exactly when to stop adding to its €4.9tn portfolio of bonds and issue new forecasts showing how it expects the fallout from the war in Ukraine to impact inflation and growth. Katharine Neiss, chief European economist at PGIM Fixed Income, said the announcement “suggests the door is now wide open to rate rises later this year” but, given the risk to growth from the Ukraine war, “the debate among the governing council will likely shift away from when to start raising rates, to when to stop”. Markets are pricing in an increase in the ECB’s deposit rate back above zero by the end of the year and to almost 1.5 per cent by the end of next year. But the central bank said any rate rise would be “gradual” and would only take place “some time” after it stops net bond purchases. Lagarde was asked whether the ECB was working on a “new instrument” to counter a potential sell-off in the bonds of certain countries. But she only stressed the importance of flexibility and said it had shown the ability to build new tools “in short order”, such as in response to the pandemic. Recommended InterviewEurozone economy ‘Living in a fantasy’: euro’s founding father rebukes ECB over inflation response Many other central banks have stopped buying bonds and started raising rates. This week, the Reserve Bank of New Zealand and the Bank of Canada both raised rates by half a percentage point, while monetary authorities in South Korea and Singapore also tightened policy. The US Federal Reserve is expected to raise rates by as much as a half a percentage point at its May policy meeting, while the Bank of England has increased its main rate three times since December and is expected to do so again at its meeting next month.</p><p></p><p>Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of <a href="https://www.ft.com">FT.com</a> <a href="https://help.ft.com/help/legal-privacy/terms-conditions/">T&Cs</a> and <a href="https://help.ft.com/help/legal-privacy/copyright/copyright-policy/">Copyright Policy</a>. Email <a href="mailto:licensing@ft.com">licensing@ft.com</a> to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be <a href="https://www.ft.com/tour">found here</a>. <br><a href="https://www.ft.com/content/fdace694-4aa8-4671-8b94-e67cc7ab9ce2#myft:my-news:page">https://www.ft.com/content/fdace694-4aa8-4671-8b94-e67cc7ab9ce2#myft:my-news:page</a><br><br>Europe’s largest asset manager is betting that the euro will fall to parity with the US dollar this year as the mounting threat of recession prevents the European Central Bank from lifting interest rates above zero. Vincent Mortier, chief investment officer at Amundi, said he expected the ECB to prioritise keeping a lid on government borrowing costs over fighting inflation. Such a decision would leave the eurozone central bank even further behind the US Federal Reserve in fighting inflation and knock the euro to $1 for the first time since 2002, Mortier said in an interview with the Financial Times. “We are facing lower growth or probably a recession in the eurozone,” Mortier said. “We see the euro at parity [with the dollar] in the next six months.” The French asset manager, which oversees more than €2tn of assets, is sticking with wagers in its portfolios that profit from a weaker euro even after the common currency has slumped 10 per cent against the dollar over the past six months, according to Mortier. The euro has steadied near the five-year low of $1.047 reached in late April after a fall that came as markets geared up for a series of aggressive interest rate rises from the Fed. The ECB is expected to follow suit, albeit more slowly, with opposition among some members of the central bank’s governing council to a July rate increase — the first since 2011 — softening in recent weeks amid soaring inflation. However, markets are overestimating how far the ECB will be able to lift interest rates before it is stymied by a faltering economy and concerns about rising borrowing costs for some of the eurozone’s more indebted member states, Mortier said. He expects just two quarter-point rises later this year from the current record low of minus 0.5 per cent before the ECB stops. Money markets are currently pricing in at least three such increases in 2022 and a further rise to roughly 1.5 per cent by mid-2024. The Fed, in comparison, has already lifted its policy rate by 0.75 percentage points so far this year to a range of 0.75 to 1 per cent. It is expected to continue tightening policy aggressively in the months to come. “We think they’ll get to zero on the [ECB] deposit rate and that’s it,” Mortier said. “In the meantime the Fed will have done much more. If the ECB were focused only on inflation, then 1.5 per cent would be very likely. But it’s not.” According to Mortier, the ECB’s official mandate — to keep inflation close to 2 per cent — has in effect become its third priority behind preserving “the integrity of the eurozone” by limiting the gaps in borrowing costs between member states, and supporting economic growth while the bloc reels from the fallout from Russia’s invasion of Ukraine. Recommended News in-depthGlobal Economy Soaring dollar raises spectre of ‘reverse currency wars’ The central bank is focused on “the level of debt, sovereign financing needs to pay for the energy transition and for defence”, Mortier said. “The ECB has no choice but to be pulled into this political project.” The ECB has said it could introduce a “new instrument” to keep a lid on the borrowing costs of weaker eurozone states, as the prospect of an end to central bank purchases drives a sharp increase in bond yields for Italy and Greece. But such a plan is unlikely to garner the necessary support from northern European members who worry about the use of monetary policy to finance government spending, Mortier said. In the absence of such a tool, the ECB will have little choice other than to slow the pace of interest rate rises, he added. A return to parity with the dollar would complete a long round trip for the euro, which sank below $1 shortly after its creation in 1999, but rose above the greenback in 2002 as its international usage grew rapidly. A weaker currency will exacerbate inflation in the euro area, which hit a record annual rate of 7.5 per cent last month, adding to the squeeze on the cost of living, according to Mortier. “Losing sight of the euro-dollar exchange rate is a big mistake when your inflation is mainly coming from imported goods,” he said.</p>No children (leaf entity)