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Italy: Europe’s Real Challenge?

Brexit and high-profile elections in France and Germany are not the European Union’s most pressing concerns, according to Axel Weber, chairman of Swiss bank UBS.

The market will be in a wait-and-see mode regarding those potential risks, Weber said in an interview with CNBC at the International Monetary Fund’s annual spring meeting last week.

The real challenges in the EU will come from the “re-emergence of Greek troubles and the Italian situation,” Weber noted.

“Although Italy is the world's eighth-largest economy, it is often seen as one of Europe's weakest (economic) links: high unemployment rates, high debt, low growth, a financial sector in trouble due to nonperforming loans, etc.,” according to an April 21 Seeking Alpha article.

The Euromoney country risk survey continues to show Italy as the riskiest G10 member state. Italy placed 51st in its global rankings, out of the 186 countries the magazine surveys. The survey is updated at the end of each quarter based on the opinions of more than 400 experts. In April, Fitch Ratings downgraded the country from BBB+ to a BBB (stable).

Italy, however, continues to be one of Europe’s most important markets. It is consists of a large number of small- and medium-sized business entities, which can represent challenges for credit professionals. On May 11, two attorneys who specialize in collections in Italy, Eva Knickenberg-Giardina and Irene Grassi, of CLG Italia, Studio Legale e Tributario, will present a webinar for FCIB, Doing Business in Italy. The presenters will focus on various issues that can require special attention when doing business in the country, including judicial collection procedures and strategies.


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No Change in Central Bank Policies

Chris Kuehl, Ph.D.

The European Central Bank (ECB) and the Bank of Japan met this week. If there were to be an opportunity to change course, this would have been it.

The ECB has decided to stand pat and leave rates right where they are. This does not come as a shock because there has not been much growth in the EU—at least not enough to abandon all stimulus efforts.

The part that was a bit shocking was the reiteration that the ECB would continue with the quantitative easing plan and would continue to buy bonds. This was something the Germans wanted to stop, and the comments by ECB chief Mario Draghi suggested that there might be a rethink. Most analysts assert that some of the reticence to move from stimulus is related to the French election and the desire on the part of the ECB to stay out of it.

The Bank of Japan also decided that it would continue to engage in stimulus with continued low rates and its own version of quantitative easing. This decision also was not a surprise because the Japanese economy is far from robust and continues to need all the help it can get.

The Federal Reserve remains the only major central bank that is tilting toward higher interest rates. The expectation is that there will be two or possibly three more hikes this year. The Fed is also likely to start shedding part of its bond holdings toward the end of the year because there is a desire to reduce a balance sheet that is more than $6 trillion. The ECB may be the next one to start pulling back on stimulus, but not right away.


A Word on Special Risks in Japan

Dr. Hans Belcsák

Prime Minister ShinzōAbe was the first foreign head of state to meet with President Donald Trump after his remarkable election victory. Looking back at the footage television photographers shot at the time, one sees him emerging from the meeting with a beaming face. This may seem odd, considering that the U.S. president during the campaign had cited Japan specifically (along with China) as a country enjoying unfair trade advantages vis-à-vis the United States, one with which relations would have to be corrected.

As recently as February, he complained that China and Japan “play the devaluation market and we sit there like a bunch of dummies.” It would be more than a bit surprising if Mr. Trump had not raised this issue during the talk with Prime Minister Shinzō Abe. The notion certainly rattled many Japanese business leaders amid (highly premature) talk that a trade war may be brewing.

Actually, Japan had been running foreign trade deficits for several years until it produced a surplus in 2016. But that black entry, of USD 36 billion overall, was based on a bilateral surplus with the U.S. of USD 60 billion. As for the charges of currency manipulation, the yen has been taking a dive against the dollar, but this has had more to do with the Bank of Japan’s super-easy monetary policy than with a targeted effort to lower the exchange rate in order to make exports more competitive.

Of course, one finds it hard to argue that lowering the dollar value of the yen has not been at least a secondary objective of Nippon’s money managers. And the Bank of Japan (BoJ) is clearly determined to keep monetary policy loose. It will not raise short-term interest rates out of negative territory anytime soon, is likely to keep the cap on 10-year bond yields at roughly zero, and will continue its purchases of government bonds at a pace of YPY 80 trillion annually.

These policies have helped to sustain at least meager economic growth. But monetary stimulus alone cannot propel the country to a solid recovery. On present trends, wages will continue to stagnate although the labor market is tight. Consumption and investment will stay weak. For a sustained run of better results the nation’s labor laws would have to be made more flexible, retail laws and regulations would have to be changed to allow more competition and encourage investment in more efficient distribution, agriculture needs land reforms, and ways have to be found to lower trade barriers to help break up domestic cartels.

Above all, the government would need to stop propping up many of the zombie companies that have been insolvent and have generated losses for years, able to keep going only with the help of easy financing terms. The problem, at least in part, dates back to the global economic crisis toward the end of the last decade, when then-Financial Services Minister Shizuka Kamei pushed through a law forcing banks and other financial institutions to be as flexible as possible in their responses to pleas from small businesses that their loans be rescheduled. The law has expired, but the government to this day has been pressing banks to continue with the policy. The upside is that the number of bankruptcies has declined for seven straight years, to 8,164 in 2016 from more than 13,000 in 2009. In addition, 25,000 businesses shut their doors voluntarily last year, but if the nonviable enterprises were counted that are hanging on by their fingernails, total bankruptcies might have been up to 35,000 (according to Teikoku Databank).

The downside is that the zombie companies not only fail to repay loan principal and often also interest, but two-thirds of Japan’s companies do not make enough profit to pay taxes. By keeping nonviable enterprises afloat, the government has been badly skewing resource allocation and has helped to limit access to finance by viable companies. It has been encouraging excess production that leads to downward pressures on prices, which, in turn, persuades consumers and businesses to hold off with purchases on the expectation that they will get a cheaper deal later on.

The government will not end its push for an easy-loan policy anytime soon. After all, about 70% of all Japanese workers are employed by small firms, including the troubled ones. As for the Bank of Japan and its slack monetary reins, it remains more worried about deflation than about inflation. While the government has run up an enormous balance sheet since the global financial crisis, it, looking at a debt load that at 250% of GDP is the heaviest of any major economy, has a monopoly on printing money. So it and the Central Bank cannot go belly up in the sense that private entities can. Still, from a credit-management point of view, it would seem to be a good idea, when dealing with smaller companies, to look beyond the financials that are being offered and try to gauge the underlying strength of a business.

Election Calendar

May 4 – Algeria, Algerian National People’s Assembly
May 6 – Niue, Niuean Assembly
May 7 – France, President
May 9 – South Korea, President
May 19 – Iran, President
May 24 – Cayman Islands, Cayman Legislative Assembly
June 11 – France, National Assembly of France
June 18 – France, National Assembly of France (second round, if needed)
June 24 – Papua New Guinea, National Parliament of Papua New Guinea
June 26 – Mongolia, President
July 2 – Senegal, Senegalese National Assembly
Aug. 4 – Rwanda, President

Sep. 11 – Norway, Norwegian Parliament
Sep. 23 – New Zealand, New Zealand House of Representatives
Sep. 24 – Germany, German Federal Diet
Oct. 10 – Liberia, President
Oct. 10 – Liberia, Liberian House of Representatives
Nov. 19 – Chile, Chilean Chamber of Deputies
Nov. 19 – Kyrgyzstan, President
Nov. 19 – Chile, Chilean Senate
Nov. 19 – Chile, President
Nov. 26 – Honduras, Honduran National Congress
Nov. 26 – Honduras, President

Global Roundup

Brexit risks opening Pandora’s box of trade disputes for Britain. The British ambassador to the World Trade Organization (WTO), until now a job more in name than practice, has been tasked with something that’s never been done before: navigate a seamless move from EU member at the WTO to an independent state. The trick will be to hammer out terms without triggering a vast chain of disputes among the organization’s other 163 members. (Business Mirror)

U.K. economy slows sharply in first quarter as inflation hits home. Britain's economy slowed sharply in the first three months of 2017 as higher inflation, boosted by last year's Brexit vote, hurt retailers and other consumer-focused businesses. Gross domestic product growth slowed to a one-year low of 0.3% from 0.7% in the last three months of 2016, the Office for National Statistics said on Friday. (CNBC)

Merkel encouraged U.S. will consider EU free-trade deal. German Chancellor Angela Merkel fueled expectations of a future EU-U.S. trade deal on April 23, saying she was “very encouraged” that talks were being considered after her recent trip to Washington. (EurActiv)

Brazilian cities paralyzed by nationwide strike against austerity. Nationwide strikes led by Brazilian unions to protest President Michel Temer's austerity measures crippled public transport in several major cities early on Friday across this continent-sized nation, while factories, businesses and schools closed. In the economic hub of Sao Paulo, in the main tourist draw, Rio de Janeiro, and several other metropolitan areas, protesters used barricades of burning tires and other materials to block highways and access to major airports. (Reuters)

Trump will renegotiate–not dump–NAFTA. Hours after the White House signaled that President Donald Trump was considering an executive order that would withdraw the United States from the North American Free Trade Agreement (NAFTA), the president tweeted that he would renegotiate, not withdraw. On April 26, The New York Times and other news outlets reported that a draft executive order dumping NAFTA was circulating in the White House. Some thought that news came to create leverage against Canada and Mexico to bring them to the bargaining table. (Global Trade Magazine)

SE Asia prioritizes trade pact including China as U.S. rethinks policy. Southeast Asian countries will prioritize creating an Asia-focused trade pact this year that includes China, India and Japan, while trade issues with the United States will be put on the back burner, the Philippine trade minister said. The U.S. withdrawal from the Trans-Pacific Partnership has spurred Asian countries to push ahead with the Regional Comprehensive Economic Partnership, Trade and Industry Secretary Ramon Lopez told Reuters late on April 25. (HSN)

French election: First-round results positive for Asia trade. Although the direct impact of this week’s French election results on trade in Asia are minimal, the long-term implications may be far reaching, if it proves to be a vote of confidence in the European Union. The perceived political risk in the EU and the euro has fallen sharply after the centrist candidate Emmanuel Macron topped the poll. He will now enter into a run-off against the far-right and anti-globalist candidate Marine Le Pen. (Global Trade Review)

Despite economic progress, Sierra Leone’s political future remains murky. Despite the progress Ernest Koroma has made in the face of Ebola and other adversities, there is strong opposition to his party for the 2018 elections. Sierra Leone vied for the title of poorest nation on earth for many years at the end of the 20th Century, in spite of the country’s vast mineral wealth. Sierra Leoneans are preparing to head to the polls early next year. (Global Risk Insights)

France’s Pacific territories are watching the election too. The results of the first round of the French presidential elections create new uncertainties for the French Pacific, particularly for Australia’s close neighbor, New Caledonia, which is facing a critical independence referendum by the end of 2018. As in past presidential elections, in the two largest French Pacific territories of New Caledonia and French Polynesia, participation rates were low. (Interpreter)

What is reflation and is Australia experiencing it? Since the 2007 global financial crisis, policy makers have been fighting deflationary (falling prices) and disinflationary (prices rising at a slow rate) pressures. But the global economy finally appears to be entering reflation–a period of higher prices together with stronger growth. This is good news for households, businesses and governments around the world. Reflation means the end of below trend growth, and this has widespread benefits. (EconoTimes)


Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations