By Jasper Cox, Lewis McLellan
29 May 2020
Each week, the very best of what our newsroom have found most useful, interesting and informative from around the web. This week: what being in charge of a leading reserve currency actually means, how business travel might return, and a power play from Warrington Borough Council.
One of the first weaknesses in the global economy that the coronavirus pandemic exposed was its reliance on international supply chains. Lockdowns disrupt them instantly and now policy makers are wondering how to bring it all back home and repatriate production, while also offering jobs to one’s compatriots. But do domesticated supply chains really shield jobs and economic activity?
Four academicsÂ have looked into the matterÂ at VoxEU and they don’t think it will help. The reason? Well, lockdowns still apply nationally meaning wherever they happen, economic activity grinds to a halt. Of course, countries that imposed less strict lockdowns could have benefitted from greater domestication of their supply chains. But the reverse is true too: a country with a particularly harsh lockdown suffers if it has domesticated supply chains.
Meanwhile, one monetary policy discussion in the UK relates to the possibility of the Bank of England introducing negative interest rates. Danae Kyriakopoulou, chief economist and director of research at think-tank OMFIF, argues that these should only be a last resort for the country.
She says that their effectiveness could be weakened by a reluctance to pass the rates onto depositors, in turn harming the banking sector. She also says that any resulting sterling depreciation may struggle to boost the export sector amid protectionism and broken supply chains.
However, if the Bank of England is going to end up going negative, the timing is important. â€śMaking sure that banks have had enough support to weather the negative side-effects is one crucial element of preparation,â€ť she says.
Elsewhere, Brad Setser at the Council on Foreign Relations questions what the dollarâ€™s much heralded role as a leading reserve currency actually means. He makes the point that during March, this status made it a lot harder for the Federal Reserve to keep rates down, because reserve managers had to sell US Treasuries.
â€śDistress in emerging markets led to a massive liquidation of reserves by emerging markets â€” and thus large Treasury sales. Setting China aside, I get around $150bn in sales by the major emerging markets,â€ť he writes
Away from the markets, Eric Rosen has an interesting piece in CondĂ© Nast Traveler on how and when business travel will return. The upshot is that it will come back, albeit with a focus on safety.
Rosen writes: â€śSeveral frequent corporate travelers from various industries including retail, finance, and entertainment â€” all of whom asked to speak anonymously â€” say business travel will eventually resume because virtual options such as Zoom and teleconferencing are not sufficient for some of their needs.
â€śOne individual suggested mergers and acquisitions will spike in the coming quarter, and that deals worth hundreds of millions of dollars often require an in-person handshake (or at least, an elbow bump).â€ť
Finally, we discussed â€śBuy Now, Visit Laterâ€ť hotel bonds a few weeks ago. But now thereâ€™s another retail bond out there. Warrington Borough Council in the UK is planning to offer a Community Municipal Bond (CMB), allowing people not just in the region but across the UK to invest as little as ÂŁ5 in a solar farm.
What is unusual is that the farm in question is nowhere near Warrington, which is in the north west of England. The farm is in Cirencester, about 140 miles away in the south-west. The council suggested to Keeping Tabs that the location did not stop it being a good investment opportunity.
According to Abundance, the company administering the bond sale, the power generated from the solar farm will be used to meet the Warrington Councilâ€™s energy needs, with any surplus energy generated sold.
Warrington says that the plans are part of a â€śnationwide pilotâ€ť to use these CMBs to finance infrastructure for local authorities.
Probably not unrelated, councils face significant budget pressures right now, as Anoosh Chakelian writes in the New Statesman. While the UK government has sought to distance itself from austerity policies, and the crisis response has involved widening out the deficit, local council funding (a major casualty of austerity) still looks to be facing a huge funding gap.
This has implications for capital markets. A few months ago, Lancashire County Council became the first to raise money through an organisation called the UK Municipal Bonds Agency.
By Jasper Cox, Lewis McLellan
29 May 2020