All Conjoncture
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    30 April 2019
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    The economic convergence of member states lies at the heart of thjavascript:void('Automatique')e initial project to create the eurozone, but it has followed a jagged path over the past twenty years. Convergence is a multifaceted concept that covers not only the criteria stipulated in the Maastricht Treaty but also growth dynamics and income dispersion. In the period before the Great Financial Crisis, nominal convergence was relatively complete, but progress towards real convergence was much more mixed. There are several major obstacles to a sustainable convergence within the European Monetary Union, including the lack of eurozone’s optimality, possibility of currency devaluations and macroeconomic stabilisation mechanisms.
    Through economic consolidation measures implemented since 2016, Egypt has corrected its macroeconomic imbalances and regained the confidence of international investors. Foreign currency liquidity has returned to satisfying levels, the public account deficit is narrowing, although debt service is maintaining the fiscal deficit at a high level. Inflation is still relatively high but easing. Economic prospects are favourable. So far, the macroeconomic recovery has failed to trigger new momentum capable of accelerating growth and creating jobs. The weight of public sector and a large informal sector reduce the economy’s responsiveness to positive macroeconomic signals. Structural reforms are necessary to preserve the achievements of ongoing reforms.
    04 April 2019
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    Brexit started as a surprise, with the majority Leave vote in the UK referendum on June 23, 2016. In the financial sphere, more specifically, Brexit implies a loss of European passporting rights for the UK and thus less integration between the European Union and the leading financial centre of London. The trade in financial services between the two zones will now have to meet the requirements of two separate sets of regulatory and supervisory authorities, rather than just the requirements of a single regulatory framework as at present. At the very least, this will hold operational uncertainty for some time to come. This edition of Conjoncture aims to sketch out the main lines of the changes to the regulatory framework that financial institutions will have to address because of Brexit, and to identify the main challenges.
    Narendra Modi’s term as India’s prime minister has been broadly positive economically. In the last five years, he has pushed through some important reforms, taking advantage of his majority in the lower house of Parliament. However, to achieve a significant increase in GDP per-capita and reduce India’s vulnerability to external shocks, it is necessary to carry out further reforms in order to create a more conducive environment for domestic and foreign investment. The latest polls suggest that no party could win a majority in the lower house of Parliament in the general election scheduled for April and May. Mr Modi’s party still looks likely to win the most seats, but could be forced to govern alongside the Congress Party. That could make it harder to implement reform and weaken the public finances.
    28 February 2019
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    In recent years, Germany has posted substantial current account surpluses, well above the level justified by economic fundamentals. This can be attributed to a substantial increase in savings of the government and the corporate sector. Many observers consider Germany’s current account surplus as a threat to the eurozone economy and urge the German authorities to reduce it by boosting wages and investing in infrastructure. These demands have largely been ignored. Supported by model simulations, the German authorities argue that these measures would be detrimental to the German economy, while having hardly any effect on the other eurozone countries. They call for more structural reforms in the European Union, such as a further opening of the services sector.
    The first year in office of the new president Joao Lourenço’s reveals a rather positive shift in economic policies, given his determination to clean up politics and the scope of the economic reforms engaged so far. The abandon of the currency peg has eased some pressures on the fx market though they still remain important. The financing package recently signed with the IMF will help to implement structural reforms aimed at diversifying the economy by fostering the development of the private sector. Nevertheless, the overall near-term economic outlook remains embedded in international oil price developments due to the lack of economic diversification. Additionally, the still ailing banking system keeps on straining the private sector. Therefore, the recovery is bound to be very gradual at best due to the persistence of major macroeconomic imbalances.
    07 February 2019
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    The Paris climate deal, concluded at the COP21 in 2015, pleads for keeping global warming below 1.5°C above pre-industrial levels. However, in its latest report, the IPCC (Intergovernmental Panel on Climate Change) warns that current mitigation policies are insufficient to obtain this objective. Investments in renewable energy and electricity infrastructure have to be stepped up. The power sector has to be decarbonised, the use of electricity increased, and energy efficiency improved. Low carbon policies are difficult to implement because of commercial interests and social impact, in particular concerning the increase in carbon prices. Nevertheless, to achieve substantial reductions in greenhouse gas emissions, a different approach is needed, including carbon pricing and trade sanctions.
    The election of Mexico’s new president, Andres Manuel Lopez Obrador, raises numerous questions. Although the new president and his team enjoy strong popular support, investors are worried about the policies he is proposing for the next six years. Some of the proposals do not seem to be compatible with his promise to maintain fiscal discipline, central bank independence and economic pragmatism in general. Several existing reforms are being called into question, notably in the energy sector. Given Mexico’s strong economic fundamentals, these contradictions are unlikely to have much of a short-term impact. In the medium term, in contrast, the big risk is that they could jeopardise the government’s capacity to maintain fiscal discipline, keep the energy sector afloat and preserve investor confidence.
    21 December 2018
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    Over the past four years, the US Federal Reserve has reduced the surplus central bank reserves that it had built up under its quantitative easing programme. Over the same period, the Basel 3 banking regulations have, however, significantly increased banks’ demand for central bank liquidity. Before Basel 3, all reserves in excess of “required reserves”, in the monetary policy sense of the term, were, justifiably, treated as excess reserves. Since the new liquidity rules have come into force, only those reserves in excess of the regulatory constraint may be so treated. Although US banks have so far limited the initial effects of the reduction in reserves on their liquidity ratios, notably at the cost of increased dependence on the Federal Home Loan Banks, it would appear that the first signs of tension in liquidity are beginning to show.
    03 December 2018
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    The adoption of IFRS 9 on 1 January 2018 has changed the impairment model for financial assets, which is now based on the recognition of expected credit losses. A more granular analysis of the quality of performing assets, specifically the introduction of an intermediate category, has resulted in significant additional provisioning, curtailing bank equity. Given the already high level of provisions and the mediocre quality of their lending books (although this has since improved), the cost of transition to IFRS 9 raised further questions for southern European banks. Our analysis shows that the costs can be covered, but that they will be proportionately higher for Italian banks than for their Spanish and Portuguese peers. Such differentials suggest that a discrepancy exists between the processes of cleaning up of bank balance sheets.
    30 October 2018
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    The debate on risk sharing in the eurozone has intensified significantly in recent years. It is an acknowledgment that the eurozone “house” needs to be made more solid but also reflects the concern about limited policy leeway to address future economic downturns. Risk sharing can be public or private sector based and, within each channel, either domestic or cross-border. Public cross-border risk sharing will have an important role to play in strengthening the functioning of the eurozone. However, the challenge is considerable because it raises questions of pre-commitment, conditionality, moral hazard and governance. Finally, risk sharing needs to be considered together with risk prevention, risk management and boosting resilience.
    11 September 2018
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    Mauricio Macri’s government has pulled Argentina’s economy out of isolation. His policies enabled it to swing back into growth in 2017 and to consolidate the central bank’s foreign reserves thanks to the inflow of portfolio investment. Yet these policies also widened the current account deficit, increased the USD-denominated public debt and indirectly generated inflationary pressures. The Argentine government has had to call on the IMF to stabilise the exchange rate. The stabilisation policy will plunge the economy back into stagnation, with an economic cost for the local population due to a very restrictive monetary policy and more demanding fiscal consolidation efforts than the government initially envisioned in late 2017. Considering Argentina’s high foreign currency debt burden, the government faces a classic dilemma of needing to stabilise both the public debt and the external debt.
    05 July 2018
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    Major supply-side constraints and hiring difficulties emerged in late 2017. Though normal during phases of accelerating growth, they nonetheless caught our attention because other indicators are not showing the same degree of pressure. The output gap is a key cyclical indicator. As estimated today, it had not completely closed in 2017, and the low level of core inflation suggests it might have been even more negative. These trends raise the question of France’s position within the economic cycle. Based on our analysis, the French economy has moved out of the recovery phase and growth has peaked, although it is not showing the signs of overheating that typically mark the end-of-cycle period. The economy seems to be in the intermediary growth phase, during which the economy slows but continues to grow at a faster pace than the potential growth rate.
    03 April 2018
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    Participants at the Paris Climate Conference COP21 agreed that global warming should be limited to 2°C. This would be the case if carbon concentrations could be stabilised at below 450 parts per million (ppm). However, simulations with climate models show that even at this level the risk of overshooting the 2°C limit is not negligible. From an economic point of view, it would be optimal to take early measures to reduce tail risks. To overcome public reluctance to make small sacrifices now to avoid substantial future damages, climate policies should be appropriately framed.
    None of the legislative proposals to reform the US mortgage market has yet come into force. Most of them start from the same position: although government guarantees are essential in ensuring a liquid and stable mortgage market, the Federal government should not be the sole party exposed to payment default risk, especially as this is transmitted through two agencies, Fannie Mae and Freddie Mac, that are in financial difficulties. In the absence of legislation, the regulator of the two agencies has sketched out the foundations of a reform, by developing a program to transfer “non-extreme” credit risk to the market.
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