By David Lawder

WASHINGTON (Reuters) – Some G20 creditor countries are reluctant to broaden and extend another year of coronavirus debt service relief to the world’s poorest countries, so a six-month compromise may emerge this week, World Bank President David Malpass said on Monday.

Malpass, speaking to reporters as the World Bank’s and International Monetary Fund’s virtual annual meetings get under way, said G20 debt working groups have not reached agreement on the two institutions’ push for a year-long extension of the G20 Debt Service Suspension Initiative (DSSI).

“I think there may be compromise language that may be a six-month extension (and) that it can be renewed depending on debt sustainability,” Malpass said.

Finance ministers and central bank governors from the G20 major economies are scheduled to meet by videoconference on Wednesday. In May, they launched an initiative to allow poor countries to suspend payments on official bilateral debt owed to G20 creditor countries until the end of 2020, which Malpass said has freed up $5 billion to bolster coronavirus responses so far.

Malpass and IMF Managing Director Kristalina Georgieva have been warning that far more debt relief is needed for poor and middle-income countries, including principal reduction, to avoid a “lost decade” as the pandemic destroys economic activity.

Malpass said the two institutions would propose a joint action plan to reduce the debt stock for poor countries with unsustainable debts.

But he said debtor nations were too “deferential” to creditor countries and needed to more forcefully demand a smaller debt burden. “That dialogue hasn’t been as robust yet as I think is necessary to move this process along.”

A new World Bank debt study published on Monday showed that among countries eligible for the G20 debt relief program, external debt climbed 9.5% in 2019 to $744 billion before the

G20 countries may only approve a six-month debt relief extension amid lagging committment to the pact meant to help poor nations weather the pandemic, World Bank President David Malpass said on Monday.

The G20 group of largest economies is set to meet Wednesday after they pledged in April to suspend debt service from the world’s poorest countries through the end of the year as they faced a sharp economic contraction caused by Covid-19.

However, Malpass said relief has been weaker than expected because “not all of the creditors are participating fully,” with only $5 billion granted under the expected $8 to $11 billion, and China among the countries that holding back.

Even with the pandemic still raging, he said another full year of debt suspension is unlikely.

“I think there will be compromise language (on) maybe a six-month extension that can be renewed depending on debt sustainability,” he told reporters.

The Washington-based development lender on Monday said the debt of the world’s 73 poorest countries grew 9.5 percent last year to a record $744 billion, which shows “an urgent need for creditors and borrowers alike to collaborate to stave off the growing risk of sovereign-debt crises triggered by the COVID-19 pandemic.”

World Bank President David Malpass said both private creditors and major economies needed to step up debt relief efforts for poor countries World Bank President David Malpass said both private creditors and major economies needed to step up debt relief efforts for poor countries Photo: AFP / Brendan Smialowski

The countries’ debt burden owed to government creditors, most of whom are G20 states, reached $178 billion last year, according to the report released as the World Bank begins its annual meetings along with the IMF.

China is the largest of those creditors, seeing its share of the debt owed to all G20 countries rise to 63 percent by the end of last year from 45 percent in 2013.

Malpass decried what

The yield on Italian 10-year
TMBMKIT-10Y,
0.680%

and 30-year
TMBMKIT-30Y,
1.529%

debt fell to record lows on Monday.

As this chart from Deutsche Bank shows, the yield on the Italian 10-year is lower than it was even before Italy became a country. Deutsche Bank strategist Jim Reid attached proxies for Italian debt, such as from Naples, to chart pre-1861 data. (There is also a gap in the data series for the 1700s.)

He also charted debt-to-gross-domestic-product, which shows the Italian economy with an all-time low capability to service that debt.

The move on Monday came after the European Central Bank’s chief economist gave an interview suggesting the central bank may take further action. Among the ECB’s actions stimulus so far is the purchase of government debt from countries including Italy, through what’s called the pandemic emergency purchase program.

“Has the ECB permanently suppressed yields and spreads or are there many more twists and turns to this story over the years ahead? I would lean towards the latter but for now Italian politics and their control of the second wave are acting as strengths and not weaknesses,” Reid said.

David Stockman, the former Reagan-era budget director and acerbic critic, looked at the same chart and issued this brief but withering analysis: “when central banks crush rates, politicians bury their governments in debts.”

The current explosion in debt-to-GDP has been because the latter dropped, precipitously. The Italian economy shrank by 18% year-over-year in the second quarter.

Italy also has been issuing more debt. According to Italian bank Intesa Sanpaolo, Italy is forecast to issue a net €177 billion in new debt in 2020, compared with €54 billion in 2019.

Source Article

Key Takeaways:

  • Recent uptick in rates might spell better times ahead for banks
  • Credit loss provisions still expected to weigh, but cost-cutting has likely helped
  • Housing market seen aiding Wells, while Citigroup’s
    C
    credit card business stays in focus

A lethal combination of ultra-low interest rates, credit worries, a steep economic slowdown, and tough government regulations ganged up on big banks this year. Despite that, expectations for the group’s Q3 earnings performance are on the rise.

Granted, the numbers don’t look like something to throw a party over, with research firm FactSet predicting cumulative Financial earnings to fall 19.4% from a year ago. The good news is that those expectations look a lot sunnier than where analysts were back in June, when they predicted a Financials Q3 earnings cratering of 34.4%.

Why the improvement? For one thing, many banks benefit from the energetic capital markets and the trading revenue they provide. Second, low rates have their good side, encouraging more loan activity.

Some of the big banks leading the upward earnings expectations meter include JP Morgan Chase
JPM
(JPM) and Wells Fargo
WFC
(WFC), FactSet reported. It appears likely they both could have relatively positive Q3 results despite all the headwinds they’ve faced and continue to face in this rough 2020.

The same goes for Citigroup (C), which, like JPM, is expected to report Q3 earnings early tomorrow. Those will be followed Wednesday morning by WFC.

Before zeroing in on individual banks, let’s scroll back for a broader view. Big banks haven’t performed well in the market this year, but they’ve generally done a great job setting aside money for possible credit losses and cutting costs. This could position most of them pretty nicely for any economic rebound once the pandemic passes.

That said, the credit

SHANGHAI (Reuters) – China’s move to cool a rising yuan stands little chance of stopping further gains, international banks say, as the strength of the world’s number two economy and a near-record yield advantage drive big and steady inflows.

Over the weekend, the People’s Bank of China (PBOC) scrapped a requirement for banks to hold a reserve of yuan forward contracts, removing a guard against depreciation and sending the currency down 1% for its steepest drop since March.

Yet an identical move three years ago ultimately proved ineffective, and investors say this time the conditions are even more likely to buoy the yuan, perhaps as far as 6.5 per dollar.

“In all previous instances, the impact of the regulatory change was temporary,” said Eugenia Victorino, head of Asia strategy at Swedish bank SEB in Singapore.

“We continue to expect the yuan to remain on an appreciation trend, with USD/CNY approaching 6.60 by end-2021,” she said.

Goldman Sachs forecasts yuan, last quoted at 6.7436

, will hit 6.5 per dollar in 12 months.
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Much as in 2017, the PBOC’s move follows a long spell of appreciation. The yuan has strengthened more than 6% since late May and just closed its best quarter in a dozen years as China leads the world out of the coronavirus pandemic and soaks up capital flows.

Foreign holdings of Chinese government debt rose at the fastest pace in more than two years last month, with the spread between Chinese

and U.S. 10-year

government bond yields holding near record highs scaled in July. In another nudge for the yuan to weaken, Beijing granted $3.4 billion in outbound investment quotas last month, the first fresh permission for such flows since April 2019.
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Yet analysts say China’s economy, projected to keep growing as the rest of