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Reacting to Wirecard, EM outlook is marred, climate risk is hard


Each week, Keeping Tabs brings you the very best of what we in the GlobalCapital newsroom have found most useful, interesting and informative from around the web. This week: supervising financial reporting, a discordant health and financial picture in emerging markets, and managing climate risk.

The fallout from Wirecard’s collapse is still playing out, and Nicolas Véron writes for the Peterson Institute for International Economics on what it should mean for EU financial supervision. He argues that having financial reporting oversight at the national level, in an integrated EU market, creates “perverse incentives”.

“On the basis of publicly available information, it appears that this system failure to prevent Wirecard’s accounting malpractice was at least partly the result of a consensus among… various players to defend the company as Germany’s foremost financial technology success,” he says.

While in a closed national market, authorities are incentivised to present lax standards, once that country’s companies are competing with others, national rule makers and enforcers are more likely to ease the regulatory burden.

Véron links the recent episode to other regulatory failings on the prudential supervision of banks and anti-money laundering, which he says involved a similar mismatch between supranational markets and national supervision.

In each of these cases, there has since been a push towards centralised EU supervision, and Véron calls for something similar for financial reporting. He proposes that the European Securities and Markets Authority (ESMA) takes over audit oversight and accounting enforcement, or that a new entity takes in on, perhaps placed under ESMA’s watch.

“It would also help in bringing the reality of EU financial supervision closer to the bloc’s proclaimed vision of a capital markets union,” Véron says.

On to emerging markets, where two pieces illustrated to Keeping Tabsa stark contrast between borrowing conditions and the public health picture.

Historian Adam Tooze writes in the Guardianthat it is up to Europe and Asia to prevent coronavirus becoming an even worse humanitarian crisis. Talking about a global “second” wave is off the mark: many parts of the world, including parts of the US, are still on the first.

As for developing countries, “in the spring there was a flurry of activity among institutions such as the IMF and the World Bank,” Tooze writes. “But this was followed by a sense of anti-climax as the disease seemed to slow. The global pandemic is now in full flood.”

He continues: “With the US hamstrung by its isolationist president, the question of Covid-19, as on other global challenges such as climate breakdown, is whether Asia and Europe can combine to deliver the necessary leadership.”

But the health crisis is not matched by a continued funding squeeze for national governments. Elina Ribakova, Emre Tiftik, Jonathan Fortun and Khadija Mahmood write for the Institute of International Finance, a trade body, on how sovereign bond issuance conditions in emerging and frontier markets have recovered dramatically from the March madness.

Most new issuance is priced at equivalent or lower coupons versus comparable maturing debt, and high yield issuers have issued at maturities close to the average of recent years.

However, while the Middle East and North Africa region has been a hotbed of activity, no issuance has come from sub-Saharan Africa.

The reason does not appear to be a fundamental re-assessment of credit quality. “This upswing in activity has been in line with a gradual recovery in non-resident EM portfolio flows as the expectation of short-term rates remaining low for longer supports fresh demand for EM sovereign debt,” the authors say.

They note that unlike in the 2007-08 global financial crisis, investors did differentiate in March, as high yield spreads widened further than investment grade ones.

“Looking ahead, liquidity measures by major central banks should continue to support demand for EM sovereign bonds,” the authors say. “While many sovereigns appear set to use domestic bond markets to fund the anticipated sharp increase in budget deficits amid the Covid-19 shock, improving global investor sentiment should allow an increasing number of lower-rated borrowers to return to international markets.”

But they warn that investors will keep on differentiating.

Finally, developing countries must also deal with evolving environmental threats. On this topic, Schroders interviews Hector Ibarra for a podcast. Ibarra is chief executive of Global Parametrics, an organisation that has been backed by the UK government and KfW. It aims to boost access to risk management products that protect against natural disasters in the developing world (some background on the organisation here).

It looks at “parametric products”: a type of insurance or hedge where the payout is triggered upon a certain event happening (such as an earthquake reaching a predefined magnitude) independent of actual financial loss incurred. This can have the benefit of quick disbursement in developing countries.

The conversation moves beyond the organisation’s work to the concept of climate risk. This is incredibly hard to measure, given the lack of data and the constantly changing natural and human world, and we also have misguided perceptions of it.

The podcast format allows the presenter to discuss Ibarra’s ideas, which are rooted more in insurance than in investment, in the context of Schroders’ work. With almost all capital market participants trying to get their heads around climate risk, the interview is worth a listen.

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