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OECD Report Is Optimistic, but Warnings Persist

Chris Kuehl, Ph.D.

An economist will nearly always be able to find the dark cloud behind the silver lining. After all, this is the profession that is tasked with telling the emperor that his clothes are not all they are cracked up to be.

The latest offering from the Organization for Economic Cooperation and Development (OECD) is chockfull of good news and observations regarding the growth of the economy globally. It also has some typically stern warnings to global leaders. If they are not preparing now, the growth period will be short lived.

The forecast for global growth this year is 3.6%, significantly better than the 3.1% notched in 2016. Even better days are expected in 2018 with growth at or above 3.7%. The reason for all of this optimism is that all of the world’s major economies are doing well—at least better than they have in recent years.

The Japanese are sporting seven straight quarters of growth and have actually started to worry about inflation rather than deflation for the first time in well over a decade. The U.S. has notched two straight quarters of more than 3% growth; China is flirting with 7% and 8% growth again; and even Europe is stable—reaching 1.5% to 2%. Only one member of the OECD is not going to see better growth this year than in 2016—Great Britain. The Brexit decision has come back to haunt the country and has finally started to beget the economic downturn that everyone expected to take place last summer.

That is the good news. Now here are the cautionary notes. The OECD assessment holds that some critical pieces are missing if this is to be a sustainable pattern. The top three worries include the fact that none of the G-7 countries have seen net investment rates recover to where they were prior to the recession; there has been a general slowdown in terms of labor productivity; and there is that small and consistent problem of debt (sarcasm intended). In fact, there has been less attention paid to these issues than at any time in the last decade. It is almost as if there is a belief that by ignoring something, it will go away.

The lack of investment has been baffling for years. Central banks continue to be perplexed. They have been throwing as much as they can at the whole idea of stimulus and growth. It is worth reminding ourselves that central banks can’t directly stimulate anything—they are not like legislatures that can pour money into programs that result in more hiring and growth. All they can do is make money available through the banking system. Interest rates can be lowered, and reserve ratios cut. There can be attempts at quantitative easing, but none of this can be forced. Banks have to find willing and acceptable borrowers, and there has to be desire on the part of business to borrow. That part has been largely missing. There are some signs that investment is picking up a little, but it needs to accelerate even faster.

Labor productivity has been an issue for several years. This has been baffling as well. Generally, when there is a recession, the levels of productivity go up as many companies reduce their payrolls to save money. Those who remain generally do the same work as was done prior to the layoffs. So by definition, there is more output per person. For a variety of reasons, this did not happen this time and productivity gains have been missing. The lack of investment has played a role as well due to the lack of investment in new equipment and technology.

Then, there is the big issue of debt. The recovery of the global economy provides a golden opportunity to go after these twin evils of debt and deficit, but as usual, nobody wants to end the party. The only conversation has been over spending more and cutting taxes. To deal with the debt issue requires a firm hand and recognition that making this issue worse is not the proper response. The political party in the U.S. that was supposedly so fearful of more debt has decided to increase the load by over $1.5 trillion and to take no steps toward dealing with a debt that is 110% of the U.S. GDP.

European Commission Finalizes PSD2 Authentication Rules for Corporate Cards

With Europe’s PSD2 fast-approaching implementation, there are still key questions surrounding the new payments regulations. Among them: whether or not PSD2’s Strong Customer Authentication (SCA) requirements will apply to corporate payments.

According to reports in Business Travel News on Wednesday (Dec. 6), the European Commission (EC) has finalized its ruling on the matter and has exempted corporate payments from its payment security authentication rules.

Strong Customer Authentication rules require an additional level of authentication when a payment is made; in the consumer payments space, that could mean a requirement that a cardholder is texted a four-digit PIN number to verify their identity at card-not-present transactions.

The European Banking Authority has opposed calls for the EC to omit corporate card payments from SCA rules.

As Business Travel News explained, some travel industry players argue that these rules could not reasonably be applied to corporate payments when using products like lodge and commercial cards because these cards are not used by just one person. Other industry players also argue that because fraud rates are lower in corporate payments compared to consumer payments, there is no need for additional verification measures.

According to reports, the European Commission’s decision exempts virtual corporate cards, lodge cards and corporate pay cards from Strong Customer Authentication requirements under PSD2.

In an interview with the publication, Sari Viljamaa, managing director of Finland’s Business Travel Association, said the decision is a win for the corporate payments industry, but concerns remain.

“It’s good news this won’t be extended to B2B transactions, but I am still a little worried that there will be room for national legislators to make their own interpretations,” the executive said. The publication noted that the Nordic region’s four travel management groups have estimated as much as 97% of their clients’ airline bookings are made through travel management companies via lodge cards.

Patrick Diemer, CEO of corporate payments firm AirPlus International, also noted that individual pay cards used by corporate travelers may still fall under SCA rules.

“Lodge cards, virtual cardsand corporate cards with corporate pay are fine, but SCA still is required for plastic cards [that] don’t fall under the exemption,” he said. Reports added that some business travelers may be using individual corporate cards or may have their own personal cards on file with their travel management companies, which would still fall under SCA rules.

Paul Raymond, director of Strategic Relationships at corporate payments firm Conferma, added that the EC’s ruling doesn’t mean corporate payment players in Europe can ignore SCA rules altogether.

“We need to prepare for SCA anyway, so we are looking to see if there is a secure, easy way to do this,” he told the publication.

Reprinted with permission from PYMNTS.com.

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Problem of Cryptocurrency: History Lessons from the U.S. Department of Treasury

Tim Bastian, ICCE

Efforts are being made to legitimize blockchain currencies by bringing out futures trades on the commodity exchanges. This baffles me. To refresh my memory on the topic, I looked at the history of the U.S. Treasury in the 1800s, First Bank of the U.S., the Second Bank of the U.S., bank notes of the day, confederate currency, Texas currency and the creation of a separate treasury away from the banking ties.

Americans were not unique in the era of moving toward national currencies and a central banking system; this was happening in Europe, and it spread around the globe. If for no other reason, the drama that surrounded establishing a U.S. treasury, including the burning of buildings, duels and wars, keeps it from being a dry economic read.

Why is the history lesson relevant to the cryptocurrency discussion? In many countries, there are laws creating a single legal currency (tender). The government issuing the currency often backs up the currency to some degree. The political will to increase or decrease the valuations of local currency impacts exports and what citizens pay for imports. This makes politicians accountable for the value of the currency; and yes, if a government collapses, then the currency often does as well. The inverse is also generally true: The currency collapses and the government often fails soon after. 

Cryptocurrency is like the bank notes from the old days; while blockchain technology will clearly have a usage, there is no political tie to support cryptocurrency or direct accountability to wild swings.

This is exactly like the 1800s where one bank may not honor another bank’s note. Even then, there was some level of accountability in that most people knew the owner of the bank within a town and whether there should be trust and the financial wherewithal to support the banking operation along with its note valuations. The difference today is that you cannot see the man behind the curtain; there is no guarantee of assets to back valuations. There are no means to audit the flow of funds across country borders or from bank to bank.

This is a very important issue for anyone who cares about protecting themselves from compliance issues with money laundering or bribes. Look at how many times during the 1800s there were runs on the banks that wiped out value on bank notes and created depressions within the economies affecting economic trade and stability.

History has very few examples of shared currencies working without some sort of political tie such as Nazi Germany and South Africa. To a lesser degree, the euro started without many political ties, but those ties have been developing and in some cases breaking down in the last couple of years. The fear of other countries orchestrating a currency collapse is one of the reasons currencies with a shared political tie work best.

What about futures markets for Bitcoin as a commodity? To “mine” a Bitcoin, you utilize huge amounts of electricity, which is why miners are often in countries with subsidized power sources like Venezuela. The energy creates nothing tangible; it is not backed by a government, and no one is responsible for the entire operation. If your “coins” disappear, you cannot prove a loss to your insurer. If you are audited, you cannot produce audit records to support that you are not breaking the laws or laundering money.

There have already been calls by China, Russia and Saudi Arabia banning cryptocurrency transactions in part to stem the tide of moving money out of the countries despite the government controls. The U.S. has made some soft condemnations of the crypto-currency topic.

The time has come for U.S. politicians to address the issue once and for all, and to again remind everyone that only U.S. dollars are considered legal tender in the U.S. and to ban the use of cryptocurrency. While some may lose valuations, the numbers of those exposed now is far less than what it could be in the coming months and years if the current path is followed.

Global Roundup

World growth to remain strong in 2018; reality checks await beyond. Global growth momentum remains strong and is likely to be sustained by an increasingly positive outlook for investment, says Fitch Ratings in its latest Global Economic Outlook (GEO). World growth is now estimated at 3.2% this year, and indications are that 2018 will be equally robust with growth to edge up to 3.3% next year. (Fitch Ratings)

EU, Japan reach finishing line on trade deal. After five years of talks, the EU and Japan finalized negotiations on a comprehensive trade deal on Dec. 8, leaving out investment protection. The deal will open up the EU market to Japanese cars and auto parts and Japan to European dairy and agricultural products. (EurActiv)

U.K., European Union reach deal on Brexit divorce terms. The U.K. and the European Union reached an agreement Dec. 8 on Brexit divorce terms after six months of tense talks, opening the way for negotiations to advance on a trade deal. U.K. Prime Minister Theresa May and European Commission President Jean-Claude Juncker made the announcement after an early morning meeting on Dec. 8 in Brussels. (HSN)

Mexico sees EU trade deal by end of month. Mexico and the European Union are working to wrap up negotiations on a new version of their 17-year-old trade deal by the end of the month, the Mexican economy ministry said last Dec. 5. (EurActiv)

Venezuela’s inflation could surpass 2,000% this year. Venezuela’s inflation rate could surpass 2,000% by year’s end—worse than war-ravaged economies like South Sudan and Libya—as the once-wealthy nation continues to be mired in a deep economic crisis. (Miami Herald)
Post-Mugabe, can Zimbabwe rebuild? With a shortage of capital and currency, bloated stock market and many other problems left by the prior administration, Zimbabwe's new leaders face an uphill battle. (Global Finance)

China's ballooning debt is a major threat to global financial stability, IMF warns. China's ballooning levels of debt and dependency on credit to fuel growth continue to pose a major financial stability threat to the global economy, and could be the catalyst for the next crisis, according to the International Monetary Fund. (Business Insider)

China mounts fresh defense of globalization at economic forum. China “unequivocally rejects protectionism” and will seek to safeguard the global trading system, a top Communist Party official told visiting executives at an economic development forum. “History shows that no one will benefit from a protectionist approach,” Vice Premier Wang Yang told the Fortune Global Forum in the southern Chinese city of Guangzhou on Dec. 6. (Business Mirror)

Will the U.S.-Japan alliance endure under a Trump presidency? U.S. President Donald Trump and Japanese Prime Minister Shinzo Abe have developed a seemingly close relationship. On the surface, all appears well between the U.S. and Japan. However, the two countries remain far apart, especially on matters related to trade and security. Japan may need to assert itself more aggressively, if trade in the Asia-Pacific is to remain free and open. (Global Risk Insights)

U.S. tax cuts seen giving modest growth boost, survey shows. Fiscal stimulus, including large Republican-backed tax cuts, will deliver a modest boost to the U.S. economy in the next two years, although many economists also expect a recession to start during that time, according to a new survey. (Bloomberg)

U.S. Tax Reform, Part 1: Implications for U.S. manufacturers with foreign subsidiaries. The House of Representatives’ tax reform bill, the Tax Cuts and Jobs Act (TCJA), makes fundamental changes to the tax treatment of U.S. manufacturing companies with operations abroad. The House’s changes to the tax code are complex and sophisticated. Beginning Dec. 4, Global Trade Magazine will be in the process of digesting the Senate’s tax bill text as well its amendments. (Global Trade Magazine)

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations