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Keeping Tabs — from the Franco-German to the frankly outrageous

By Jasper Cox
22 May 2020

There is a huge amount of information to take in at the best of times in the capital markets. During a crisis, it can be overwhelming. So, 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.

France and Germany finally reached an agreement on a plan for a European rescue fund, to be financed through the EU issuing debt. It remains to be seen whether the Frugal Four of Austria, Denmark, the Netherlands and Sweden, which have made objections to the proposal, will come on board. 

But Germany getting behind what amounts to common borrowing for the purpose of redistributing resources to those who need them most is a big deal.

Economist Anatole Kaletsky writes in Project Syndicate that the agreement is indeed transformative. The EU is issuing bonds itself, guaranteed by its own revenue, rather than using funds raised at the national level. This means in turn that the bloc will require more tax revenue.

“A broad consensus seems to be emerging that pan-European taxes should be based on economic activities that transcend national boundaries, such as carbon dioxide emissions, financial transactions, and digital transactions,” says Kaletsky.

And once the EU starts leveraging up to spend, where will it stop?

“If the EU borrows €500bn this year for a European recovery fund, then it could easily borrow another €1tr next year for a digital inclusion fund, and then maybe €2tr for a vehicle electrification fund or €3tr for a comprehensive climate change fund.”

On the theme of public sector borrowing, Darren Williams at AllianceBernstein discusses a topic Keeping Tabs focused on last week — the changing role of central banks.

His firm has calculated the average cost of funding needed to keep the debt-to-GDP ratio stable for different countries, based on the level of government debt, the size of the primary budget balance and projected nominal GDP growth.

While Germany’s is 1.7%, the UK, the US and France all require negative rates: minus 1.1%, minus 1.3% and minus 1.5% respectively.

“Central banks now talk much more openly about the link between their purchases and government financing costs,” says Williams. “Very few central bankers would be willing to admit that they are monetising government deficits. But that’s exactly what they are doing and, more importantly, it’s precisely what they should be doing in current circumstances”

Meanwhile, New Financial has published a report on UK capital markets, with lots of stats on how UK plc interacts with wholesale finance. In the wake of the coronavirus crisis, nearly 100 companies have raised £5bn on the stock market while more than 25 companies have raised £25bn on the corporate bond market.

In terms of how large capital markets are relative to other economic metrics, as you might expect, the UK sits in between the US and Europe. 46% of corporate debt is in the form of bonds in the UK, versus 23% in the EU and 74% in the US. And the valuation of the stock market, excluding financials, as a percentage of GDP is 93% in the UK, versus 52% in the EU and 134% in the US.

Finally, onto pizza. When Ranjan Roy found out that a delivery start-up was offering pizzas from his friend’s restaurant, without having consulted the restaurant, at a very low price, he spotted an arbitrage opportunity. Roy’s blog is a gripping read of the crazy “Softbankian” economics of this particular line of business.

“You have insanely large pools of capital creating an incredibly inefficient money-losing business model," he says. "It’s used to subsidise an untenable customer expectation. You leverage a broken workforce to minimise your genuine labour expenses.” 

“Third-party delivery platforms, as they’ve been built, just seem like the wrong model, but instead of testing, failing, and evolving, they’ve been subsidised into market dominance.”

By Jasper Cox
22 May 2020