Interest rate rise: turning point looms for US debt binge


With a $4tn mountain of debt maturing over the next five years, corporate America’s reliance on cheap cash is about to get tested.

With the prospect of steadily higher interest rates in the coming years as the Federal Reserve gradually tightens policy, US companies that tapped global markets for inexpensive finance over the past four years will soon face a different environment.

US corporate treasurers have rushed to lock in cheap borrowing costs in advance of the expected rate rise, refinancing more than $1tn each year between 2012 and 2014, according to Standard & Poor’s.

Tighter borrowing conditions will mark a turning point in the recent debt binge. Companies have had easy access to cash to write cheques for multibillion-dollar takeovers, to fund buybacks and dividend strategies — all welcomed by investors as share prices rallied off 2009 lows.

But as rates turn higher, investors may see the flip side of cheap financing. Analysts warn companies will begin defaulting in greater numbers, particularly in the energy sector, which has found itself in the line of fire as commodity prices languish.

In the first half of 2015, the pace of capital raisings accelerated, with bond issuance from blue-chip companies — those rated “investment grade” by one of the leading credit agencies, such as Apple, Comcast, Exxon and Boeing — jumping nearly 50 per cent from a year earlier. Bond issuance by non-investment grade companies, often called “junk”, is up 21 per cent in the first six months of the year from the same point in 2014.
But this hearty bond borrowing binge could be challenged this year. Traders are betting that the Fed will lift interest rates in December, while many economists and analysts are leaning towards a hike as early as this month. “It has become clear we are close to the point when the Fed starts to raise rates,” says Hans Mikkelsen, a strategist with Bank of America Merrill Lynch.

That prospect worries some analysts. The increase in corporate debt — often spurred by cheap financing to fund acquisitions or shareholder-friendly measures such as stock buybacks and dividend increases — has led to a deterioration in the health of US companies. The debt burden of US high grade companies has now climbed to 2.62 times trailing 12 month earnings — the highest level since 2002, according to BofA.

Even when excluding sectors rattled by the fall in commodity prices, and adjusting for climbing cash levels, leverage has touched the highest point since 2008 when the financial crisis roiled markets.
Moody’s and S&P warn that defaults are likely to increase in the coming years as interest rates rise, a concern echoed by bond funds such as Pimco. Analysts with S&P expect defaults among junk-rated US companies to hit 2.9 per cent by June 2016, nearly twice the rate in 2013. Moody’s list of companies rated B3 with a negative outlook or lower — its lowest rating rungs in the “speculative” space — eclipsed 200 for the first time since 2010 in July

“Credit quality has been deteriorating by and large over the last three years,” says Bill Wolfe, an analyst at Moody’s. “Speculative grade companies, they’ve taken advantage of very buoyant market conditions over the last few years. The number of weakly rated companies we rate is much greater than it used to be.”

US corporate debt maturing each year, by rating
Given the oil price crash the list is naturally dominated by the energy companies — including Goodrich Petroleum, Midstates Petroleum Company, and SandRidge Energy. But they are joined by well-known US companies such as Weight Watchers, Toys R Us, Sears, and Advanced Micro Devices, a chipmaker.
Investor focus has centred on energy and materials groups that have struggled with a drop in commodity prices and higher borrowing costs. “Sectors like drillers, metals [and] mining can continue to remain under pressure given weaker growth in emerging markets, particularly China,” says Mohit Mittal, a fund manager at Pimco.
While most strategists and investors still take a relatively sanguine view on the overall corporate debt market — expecting the rise in defaults to remain well below the rate seen during the financial crisis — the ability for companies to issue new debt has been flagged as a concern.

US speculative-grade default rate

“There’s reason to believe that primary markets on the debt side become less robust once the Fed starts hiking rates, both in terms of the size of deals that can reasonably be priced in markets and also the kind of interest rates companies will have to pay on that debt,” Mr Mikkelsen says.

But not all companies will be affected equally, with indebted energy companies likely to be the biggest victims. Eric Gross, a strategist with Barclays, points out that the concern for lowly rated energy companies is not if they pay 7 per cent or 9 per cent interest rates, but whether “they can get financing at all”.

For the vast majority of solid investment grade companies, the ability to tap debt markets as rates rise has not come into question. Investors have instead wondered what the impact will be on buyback and dividend policies, as well as what obstacles mergers and acquisitions activity will face — important bulwarks for frothy US stock market valuations in recent years.

Marc Zenner, a senior JPMorgan banker, says that higher rates should not be an issue for most companies, particularly if the US economy is improving and sales are healthy. “If rates rise because the economy is doing well and firms are bullish, you could see more buybacks because they’ll be generating more cash flow,” he predicts.

High yield index

Analysts say the pharmaceuticals and healthcare industry, which has been engaged in a wave of debt-fuelled dealmaking, could be one of the hardest hit sectors when rates rise.

Fitch downgraded its outlook on the sector from stable to negative at the start of the year, though it did little to dampen investor appetite for chunky debt offerings.

In March, Valeant raised $10bn to fund its purchase of Salix in one of the largest junk bond offerings on record, demonstrating significant investor demand.
But Fitch warns that the relative ease with which companies can tap the debt markets has pushed up M&A valuations, and that the sector could be “exposed to rising rates, a more volatile business risk profile and elevated leverage, which could undermine credit quality”.

Outstanding US corporate debt by ratings category

Monica Erickson, a portfolio manager with DoubleLine, a bond fund management group, argues that increasing interest rates could spark more responsible behaviour from corporate treasurers that have grown comfortable with cheap and abundant funding.

“It may be better off if rates are rising and companies behave a little better,” Ms Erickson said. “Maybe share buybacks and dividends will decrease, maybe M&A will decrease and perhaps we’ll see less debt issuance.”

Additional reporting by David Crow.

Britain's Status as a Trading Nation Ties It to Europe

By Mark Fleming-Williams

At some point in the next two years, British voters will decide whether to remain a part of the European Union. This will be the first time Britons have been consulted on the subject since 1975, when 67 percent voted to stay in. If it does decide to leave, the United Kingdom will become the first country to leave the European Union since it was created as the European Community in 1957. The repercussions would be felt not just in Britain, but also across the Continent and indeed across the world. To predict the eventual result of the vote, it is first important to understand the factors that have kept the United Kingdom in the union this long.

The story starts with geography. Britain is a relatively small island situated off a large but historically divided continent. It is narrow, with navigable rivers, natural resources and fertile land. These factors have various implications for the country's development. As an island with narrow dimensions, the coast is always nearby, making a large portion of the population maritime. Add an ample supply of wood, and conditions are ripe for the construction of a strong navy. The fertile soil allows for a stable population, while resources such as coal, metals and sheep (for wool), along with navigable rivers, provide propitious circumstances for international trade. From the United Kingdom's perspective, the divisions in the Continent both reduced its threats — limiting Continental powers' ability to build a navy strong enough to invade — and increased its opportunities as British traders found ways to insert themselves between countries that were often at war. Thus, once the island's basic needs of safety and nourishment were satisfied, Britain's geography enabled it to flourish as a maritime trading power.

Changing British Fortunes

The 19th-century historian John Seeley described Britain as having acquired its empire in a "fit of absence of mind." Britain's merchants led it to conquer the world. Thriving wool trade was eventually superseded by the arrival of cotton, and it became important for Britain's textiles industry to have sources of the material in warmer climes. This need, along with the promise of other exotic trade goods, drove it to establish trading posts and colonies in the Caribbean and North America. The ever-strengthening navy provided more opportunities further afield, and trading stations in India and Asia also grew, feeding an ever more rapacious British consumer. The British had to counter threats from local groups or competing European powers, and ultimately it became more economically viable for Britain to just take control of whole countries to protect trade. This expansion repeated again and again, and by the start of the 20th century the British Empire covered 22 percent of the world's land mass. Control, of course, also enabled the United Kingdom to keep trade weighted in its favor — a factor that undermined its industrial competitiveness. But the twin requirements inherent in Britain's geography led to the empire's ultimate demise; when Germany threatened to unite the European continent and develop an empire of its own, British interests were endangered both at home and abroad. The result was two world wars that exhausted the trading empire and effectively ceded global domination to the up-and-coming United States.

The United Kingdom that emerged in 1945 was a shadow of its former self. The remains of its empire dropped off in the following decades, and it found it was unable to keep up its former trading prowess. In fact, the amount of sterling held around the world by its former colonies was a great burden on the faded British economy, depreciating the currency strongly. The United Kingdom had to institute exchange controls in 1947. Manufacturing in northern England was now exposed as uncompetitive in the global market, as were the great shipbuilding cities on the coasts. Moreover, the population had grown so much in the previous 150 years that the island now needed to import half of its food. Doing so was affordable in the days of empire, but now the United Kingdom struggled to pay with its depleted finances.

Meanwhile, Europe was suppressing its divisions and uniting under Franco-German leadership, with the only consolation for the United Kingdom being that the new bloc did not appear hostile. Confronted with the danger of losing all influence on the Continent, and with abundant French and Italian food supplies offering an answer to many problems, Britain joined up in 1973, in the process erecting trade barriers against the rest of the world, including all of its former colonies. London's slow realization of its new circumstances and France's veto of two British applications in the 1960s — mainly because of uncertainty over whether the United Kingdom would be a productive member — delayed Britain from joining sooner.

The Financial Advantages of Membership

Being a part of the European Union (originally the European Community) was always a challenge for the United Kingdom. Not having joined at the bloc's creation, London found the rules weighted against it. French and Italian agriculture benefitted from the subsidies of the Common Agricultural Policy, and Germany's industrial efficiency challenged Britain's waning manufacturing industries. It was not until the 1980s, when Britain traded in its veto power for the creation of a single market in financial services, and achieved a rebate for its excess payments, that the economic advantages truly emerged.

London, the epicenter of British finance, had been suffering like the rest of the country after the war.

It fell far behind New York on the global stage with the U.S. dollar's ascension as the global reserve currency at the expense of the British pound. But a massive liberalization program in the 1980s, partly touched off by the removal of exchange controls in 1979, complemented investment access to the European market. It allowed London to reclaim its place as the home of international finance in the following decades (a large portion of New York's transactions are domestic), even after the United Kingdom chose to stay out of the eurozone in 1992.   

London currently generates 22 percent of the United Kingdom's gross domestic product with just 13 percent of the country's population. In the services trade, of which financial and business services make up 55 percent, the United Kingdom is now second only to the United States, and with its goods trade so depleted, the entire country now relies on the sector as its source of foreign capital. The British navy is no longer an influential force in the world, but the country's trading instincts persist, facilitating transactions from the comfort of its own home.


The Benefits of Remaining an EU Member

The financial services sector, then, is the life raft that emerged from the sinking empire. These are the interests that the United Kingdom must protect if it is to preserve any semblance of its great power status. Knowing this, it is now possible to approach the broader question of whether the United Kingdom's interests are better served by staying in the European Union or by leaving it

A recent episode provides a clue. In March, the United Kingdom won a court case against the European Central Bank at the European Court of Justice. The ECB had been attempting to move the clearing function for eurozone transactions within the monetary union itself. The move would have excluded London and made Paris and Frankfurt significantly more attractive as financial centers, endangering London's position in Europe's financial services sector. The court case victory was an example of the benefits of retaining influence in the European Union.

In 2013, 41 percent of Britain's financial services exports went to EU countries. If the United Kingdom were to leave the European Union, it seems likely that tariffs would be raised and actions taken to encourage this trade to move back into the bloc.

Of course, opportunities do exist outside the European Union. London has been pursuing the nascent Islamic finance market, in which it is the number one Western trading location, and it also plays host to two-thirds of all yuan transactions that take place outside Hong Kong and China. Historical links, similar legal systems and language similarities will all play their part in creating opportunities for the United Kingdom in former colonies — many of which are projected to be among the world's fastest-growing economies — in the decades to come.

However, in Asia, British inevitably will confront the strong hubs of Hong Kong and Singapore, while in the Americas, New York will continue to be a strong adversary. Europe represents a domestic market, which gives the United Kingdom global clout — and not only in financial services. Thus the risks of departure are stark, and the opportunities do not outweigh them.

In the coming months, British Prime Minister David Cameron will attempt to negotiate more favorable terms for the United Kingdom in Europe. His wish list will include restrictions of future immigration, attempts to regain some of the sovereignty Britain has given up, exemptions from the trajectory leading toward the United Kingdom losing its independence and assurances over Britain's continuing access to the single market in financial services.

Europe does not want to see Britain leave either. Britain gives Europe military depth and direct access to the United States, and serves as a balance between Germany and France. So Cameron will have some bargaining power and may be able to make some progress in achieving these goals, or he may return with cosmetic results as did Prime Minister Harold Wilson in 1975. The British public could welcome any gains that are achieved, or disapprove of a perceived lack of results, but it will not affect the United Kingdom's final decision. Britain is a trading nation that has always been led by its economic considerations, and right now, remaining in the European Union fits with Britain's interests.

Why a Stronger Housing Sector Isn’t Boosting the U.S. Economy That Much

Construction of single-family homes, which packs an outsize economic punch, has stalled as new households rent and building costs have risen

By Kris Hudson And Nick Timiraos

A house under construction in Livermore, Calif., in August. New construction of single-family homes is stuck near levels hit during the early 1990s recession.

A house under construction in Livermore, Calif., in August. New construction of single-family homes is stuck near levels hit during the early 1990s recession. Photo: David Paul Morris/Bloomberg News

The U.S. housing market dragged the economy into a deep recession nearly eight years ago.

Could it now insulate the domestic expansion during a fragile period of global growth?

Recent numbers look promising, but several obstacles—including shifts in where young households want to live, their capacity to take on debt and rising costs for home builders—suggest the sector won’t soon offer breakout growth.

First, the good news: New foreclosures have dropped to precrisis levels and sales of previously owned homes—the bulk of the market—have climbed to the pace of the early 2000s. Rising housing prices have made homeowners feel better about spending on their homes.

The problem: Housing still isn’t contributing much to overall economic growth because new construction of single-family homes, which packs an outsize economic punch, is stuck near levels hit during the early 1990s recession.

Initially, construction collapsed due to falling demand. Now, it faces a second headwind: Supply constraints have emerged as more people want to live in cities and construction costs have risen, while demand remains stubbornly weak at the entry level.

The forces hindering home building matter a lot. New single-family homes give the economy a bigger boost than existing-home sales or the construction of new apartments, which is booming as more people rent. The National Association of Home Builders estimates that building a single-family home supports three full-time jobs for a year in construction and ancillary services. In comparison, it estimates that construction of a condo or apartment unit supports one full-time job.

During the past year, single-family construction added up to just 1% of gross domestic product, roughly half the contribution during the 1990s. Even though new-home sales are running more than 20% ahead of last year’s pace, that pace is still well below almost every year of the 1990s.

Contracted sales of newly built, single-family homes accounted for 16% of the annual unit volume of all single-family home sales in the 1990s, on average. Last year, that ratio was 9.2%.

With homes for sale in short supply, price gains are outstripping income growth. Inflationary pressures are modest throughout the economy, save housing. The consumer-price index’s measure of core inflation, which excludes the volatile food and energy categories, is up 1.8% over the past year.

It would be half that if shelter costs were excluded.

So if prices are rising, and resales thriving, why does home construction remain so weak?

First, blame soft entry-level demand. New-home sales are more closely tied to household formation than existing home sales, which depend more on churn. To support new construction, the total number of households generally needs to expand, increasing the pool of potential buyers.

“Demand has been exceptionally low in aggregate because household-formation rates have been unusually low,” said Brad Hunter, chief economist for construction research firm Metrostudy.

While household formation is picking up, most of those new households are renters. The boost in rental households explains why the homeownership rate has fallen to a 48-year low. Rental vacancy rates, meanwhile, are at their lowest level in 30 years.

Households also need to qualify for a mortgage. Before the bust, builders relied on no-money-down programs to put new buyers into homes. Now, those programs are gone. Even though lending standards aren’t as tight as commonly assumed, perceptions of tight credit can also dissuade would-be buyers from looking.

Meantime, living preferences have shifted. In the past, builders put up entry-level homes in far-flung suburbs where land is cheapest, but many buyers today aren’t willing to commute to get a better deal.

Instead, many are opting for apartments closer to where they work and socialize, places that also happen to be more crowded and where land is more expensive. Home building is low because “the places where people want to live are not that buildable,” said Hui Shan, an economist at Goldman Sachs. GS -2.53 % 
Rising supply bottlenecks magnify the demand problem if builders don’t see a reason to reliably produce starter homes. For example, PulteGroup Inc., PHM -2.46 % which builds in 29 states, often must sell three to four move-up homes each month in a given community to meet its desired return on capital. To build less-expensive starter homes, that hurdle is six to eight sales a month, because profit margins are lower. Many builders and analysts say demand for starter homes isn’t that robust yet.

Labor costs have increased because many construction workers left the industry after the bust.

Ms. Shan ran an analysis on nationwide data that found just 54% of a sample of 637 construction workers from 2007 were still in the industry by 2013. Related industries such as city permitting and inspection also have struggled to rebuild their ranks.

Even more daunting: Builders’ largest raw material—land—shot up in price. To the extent there’s a substantial gap between prices of new and existing homes, “that’s land prices,” said John Burns, who runs a builder consulting firm in Irvine, Calif. “If these guys could build homes at $220,000, they’d be doing that. They can’t. Their costs are too high.”

In recent years, policy makers have focused on boosting demand by maintaining low interest rates and easing credit standards. Some industry analysts say other approaches will need to focus on supply bottlenecks by, for example, improving the permitting process.

“We are on the cusp of a serious housing shortage,” said Aaron Edelheit, an investor who earlier this year sold his company that had amassed some 2,500 rental homes in Atlanta beginning in 2009.

“Everyone keeps focusing on rates or qualifying for loans. They need to pay attention to supply.”

The good news is that, with construction still low, housing has plenty of room to run. But if incomes don’t rise, higher housing costs will continue to squeeze budgets and slow new household formation.

In that regard, housing’s recovery looks more like a long-distance race than a sprint.

A Fed Raise Conundrum, Part 2 - Would There Be Pain?

Discussion of August 27th Q2 GDP estimate and ECB M1 measures.
Analysis of long term Fed employment and inflation targeting; and economic growth since 1998 by Fed inflation measures.
Discussion of current contractionary monetary policy and Keynesian equilibrium rate doctrine.
Discussion of the Fed toolkit; FFR (Fed Funds Rate), IOER (Interest On Excess Reserves and RRP (Reverse Repo).
In Part 1 we concluded:
  • 75% chance of a Fed raise before the end of the year.
  • 25% chance of a Fed raise on Sept 17th, 2015.
  • 25% chance of no Fed raise in 2015.
  • All TBD
But there are mitigating circumstances... Aside from media narrative, the word on main street is, what we have is something less than a meaningful recovery and still suffering from the affect of very tight or contractionary monetary policy.
In fact, markets aren't just saying that tightening policy is a bad idea; they are saying that policy is tight now and getting tighter. That's what falling interest rates and a rising dollar - falling commodity prices - mean. If monetary policy was sufficiently loose, those things would be going in the opposite direction. - Joseph Y. Calhoun
With the advance Q2 GDP number +3.7% released on Aug 27th, this was probably the discussion going on in Jackson Hole. Many Fed members skipped the conference, perhaps to avoid discussing this very sensitive matter with other attendees.

The Aug 27th US Q2 GDP est. at +3.7. Upon further review, +3.1 was +85B in gasoline savings spent as PCE by cash starved (wages are not rising) consumers on automotive and durable goods one off repairs and purchases. Clothing and eating out also got a nod. The Fed would raise?

AEP at Telegraph, "Reflation threat to bonds as money supply catches fire in Europe... growth is going to take off and crash the bond markets."

Upon further review, the Aug 27th ECB M1 release YOY% delta increase in monetary supply showed no increase over its average. However, it appears that ECB QE is having the same contractionary side effect on Euroland as it did on the US. Transaction turnover took a 2nd consecutive major MoM hit, declining from 92B to 65B to 37B. The Fed would raise?

And now, along with Mr. Peabody and Sherman, we step into the WABAC machine and set the dials for Dec 12, 2012, destination the Eccles Building, Washington D.C....
"The Federal Reserve on Wednesday agreed to keep a key short-term rate near zero until the 7.7% unemployment rate is 6.5% or lower. The short-term rate will also stay unchanged at 0.25%, the Fed said, until the current 2.2% inflation pace hits 2.5%. Tying the one rate it controls to unemployment and inflation targets is unprecedented, economists said." - USA Today
Note this economic projections release from that day, with FED expectations that the 6.5% unemployment mark and the core PCE 2.2% inflation marks would not be breached until mid to late 2015.

(click to enlarge)

Back to the future... above note, current advertised unemployment just hit 5.1% and breached 6.5% in April 2014.
"Over time, a higher inflation rate would reduce the public's ability to make accurate longer-term economic and financial decisions. On the other hand, a lower inflation rate would be associated with an elevated probability of falling into deflation, which means prices and perhaps wages, on average, are falling--a phenomenon associated with very weak economic conditions."
The above FED statement is in regard to the annual Yoy % Roc (rate of change or delta) in PCE inflation annually INDEXED excluding food and energy. Below, note as measured by the Fed...

(click to enlarge)

So it would appear that according to the FED, we have had very weak economic conditions since at least 1998. Below, note as measured by the Yoy % Roc in PCE expenditure excluding food the energy....

(click to enlarge)

Since 1998, not exactly a model of economic growth with the Yoy % Roc being well over 2.5% since Jan 2010. Below note, concomitant since 1998, real household income has declined 9%.

Painful coincidence? We think not.

(click to enlarge)
Why does the economy refuse to improve? Whats all this secular stagnation of media narrative? Why has US real household income declined 8% since 1999? The banks are no longer in the lending business, they are in the saving business. Fed paid IOER induced disintermediation for non banks. Prior to Oct 2008 non banks (financial intermediaries, MSB, S&L, CU), comprised 82% of credit market lending, with the introduction of monetary policy paying them not to lend, this destroyed non bank lending and investing. 
In QE, when a CB (central bank) buys their own bonds, they reduce the supply (float), raising the price, lowering the yields, and driving down rates. The money "created" electronically or money from circulation, to buy the bonds is parked on the sidelines.
Concomitant, when real rates are made negative via ZIRP, this creates a self reinforcing loop. In a flight to safety and search for yield, more money which was in circulation and could be invested as capital in productive economic enterprise, becomes subverted and sequestered in risk free assets (UST's), artificially suppressing rates and the rate of turnover or velocity of the monetary supply. 
What do QE, ZIRP and IOER have in common? They are monetary policies which siphon off market liquidity (cash and assets with moneyness); artificially suppress interest rates and monetary flows (the pulse of the economy); subvert the flow of capital (the life blood of the system) to non productive (non PCE & non GDP) activity; and contrary to Keynesian dogma based upon false doctrine; are contractionary in nature to the economy. - Random Nattering
Three decades ago, Stephen Hawking declared that a "theory of everything", one eloquent equation transcending all scientific disciplines and explaining all the mysteries of life and the universe, was on the horizon with a 50% chance of its completion by 2000. Now it is 2015, and Hawking has given up.

On the same note, for decades Keynesian doctrine has insisted in the existence of an equilibrium interest rate over a whole economy. Much like Hawking's "theory of everything", this theory has yet to be realized in practice and perhaps should be given up.
Using the FFR as a guide in executing monetary policy is based on the absurd belief that there is at any given time, a policy rate which is consonant with the proper level and rate of growth of bank credit and the money supply. This false Keynesian premise (that interest is the price of money, not the price of loan-funds), combined with the lagged method of calculating bank legal reserves enables bankers to act on the valid premise that they can make, and keep, any loan commitment, knowing that their legal reserve requirements will be accommodated by the Fed. - Salmo Trutta
FFR (fed funds rate) is a tool for anchoring public and market expectations, not necessarily realizing mandate potentials. To wit, IOER (interest on excess reserves) and RRP (reverse repo) are far more potent tools for raising rates.

Raising FFR will not reverse the contractionary economic affect or effects of IOER (bank disintermediation, interest rate and monetary transactions velocity suppression) and RRP (the overnight price of all collateral parked at the Fed, dwarfing FFR in dollar volume at 10 to 1 on average).

All three tools will have to be utilized in the Fed's unwinding of multiple doses of QE. To counter QEZIRPIOER effects, the main goals should be an overall yield curve increase, steepening, and a reincentivizing of banks being in the lending business, rather than the savings business, through a reduction in the IOER and RRP arbitrage or carry trade. And yes, whether the Fed raises FFR or not, there would be pain. How much pain?

A conundrum of sorts, wouldn't you say? More to come, as in all the ugly and gory details, in the final act of, A Fed Raise Conundrum, How Much Pain? Stay tuned, no flippin.

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Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of an investment vehicle. This and other important information is contained in the prospectus and summary prospectus, which can be obtained from the principal or a financial advisor. Prospective investors should read the prospectus carefully before investing.

The Crisis of Our Crises

Jeremy Adelman, Anne-Laure Delatte

hungary serbia barbed wire fence

PRINCETON – At first glance, today’s major international crises seem to have little in common. Some, such as Greece’s debt drama, are economic disasters; others, like Syria’s implosion, are characterized by brutality and political chaos; and still others, most notably Ukraine’s predicament, fall somewhere in between. But, despite what policymakers might like to believe, these events are not unrelated. On the contrary, they reflect a deeper crisis of international integration and cooperation.
Over the last 60 years, the world experienced unprecedented peace and prosperity for a simple reason: countries voluntarily integrated themselves into an international community underpinned by shared rules and norms. But this trend has given way to piecemeal crisis responses, whether austerity or localized damage control, that are based on the unreasonable assumption that problems like those in Greece, Syria, and Ukraine will eventually correct themselves.
In relying on stopgap measures to address crises, global leaders seem to have forgotten how interdependent the world has become. Upheaval or stagnation in one part of a complex system can have outsize consequences elsewhere, in the form of, say, a refugee crisis or an uptick in inequality.
For example, Europe’s malaise – which has persisted partly because its leaders have insisted on muddling through, rather than seeking comprehensive solutions – has had serious consequences for Ukraine, a country teetering on the edge of a meltdown. By the end of this year, Ukraine’s economy is expected to be 15% smaller than it was 2013, and its debt-to-GDP ratio may be near 200%, exceeding Greece’s at its worst. And the security situation in the eastern part of the country is deteriorating.
Creditors cannot be expected to be any more lenient with Ukraine than they have been with Greece, a member of the eurozone. But a hard stance on Ukraine while it fights a war with Russia could threaten Europe’s strategic buffer from the Baltic to the Balkans.
The economist Albert O. Hirschman once said that a crisis can be either disintegrative or integrative. Individuals and organizations, confronted with adversity and lacking faith in policymakers, can either “exit” from the institutions and societies that bind them, or rally together to revitalize them.
Unfortunately, today’s crises so far have seemed largely disintegrative. Consider capital flight, which forced Greece to impose controls. Of course, exit mechanisms like capital flight can have a positive impact. In the eighteenth century, capital flight kept predatory rulers in check. Adam Smith viewed the rise of movable capital as a force that would encourage enlightened public policies that serve the general interest.
But, in today’s interconnected world, capital can move much more quickly and to many more destinations, crossing borders with the click of a mouse. Moreover, the global financial industry is largely autonomous, driven by self-interest, rather than a desire to advance the common good.
As we have seen in Europe since 2010, as well as in Ukraine and Puerto Rico more recently, the ability to rush for the exit at any time removes investors’ incentive to compromise. As policymakers struggle to create a consensus around a reform agenda, the prospects of rejuvenating the pacts and policies underlying integration and cooperation deteriorate.
But the world order is by no means fated to devolve into chaos. Today’s crisis of international integration can become the catalyst for the creation of a new or revitalized global system.
This has happened before. Indeed, the current world order arose from the major crises of the Great Depression and World War II, with countries building the social pacts and economic institutions that would underpin peace and prosperity for the next several decades.
To ensure that a crisis produces such a constructive integrative response, policymakers must change their mindset. Instead of seeing only problems that need to be contained, they should view crises as an opportunity for progress.
Today, some important integrative policies lie within reach. On the economic front, policymakers should stop pouring public money into bailouts that benefit private creditors at the expense of taxpayers, and they should end austerity programs that kill growth prospects and do not address debt overhang. They must also reform tax systems and improve cooperation to reduce tax evasion, using the added revenues to invest in physical infrastructure and education. Such measures will create jobs today, and secure prosperity for tomorrow.
Political measures are also needed. Europe needs a more democratic framework that keeps financiers at the negotiating table. Similarly, with the possibility of admitting Ukraine to NATO a dead letter, the West should take steps to ease tensions with Russia, in order to ensure its continued participation in international efforts to address key threats (as it did when negotiating the recent agreement to rein in Iran’s nuclear program).
Muddling through can lead to only one outcome: disintegration. Only when world leaders recognize the common source and the interconnectedness of current international crises will they be in a position to address them effectively.

China will stumble if Xi stalls on reform

If Beijing relies on state enterprises it will be favouring special interests, writes Robert Zoellick
China's president, Xi Jinping©Bloomberg
China's president, Xi Jinping: market turbulance has shaken confidence in China’s commitment to economic reforms
President Xi Jinping’s visit to Washington this month could be as consequential for the world economy as then-vice premier Deng Xiaoping’s American tour of 1979.
This summer’s events have shaken global confidence in China’s commitment to structural economic reforms. What was a high growth economy fuelled by exports, investment and saving needs to shift to growth led by domestic demand and consumption. This adjustment was always going to require skilled steering. The Communist party’s Third Plenum of November 2013 charted that journey with a 326-point road map; reformers explained it would take seven to 10 years. When China’s economy slowed earlier this year, the government cheered a surge in stock prices as a signal of confidence.

But when markets tumbled, its haphazard reactions appeared counterproductive. The party seemed determined to rule markets as well as people. Some wondered what these interventions — with their reliance on state-owned enterprises, regulatory diktats, and massive government financing — meant for China’s future reforms. The imposition of controls seemed to conflictwith plans to open financial markets in order to better allocate capital, to rely on market prices to allocate resources, and to expand the private sector, which has been the engine of China’s growth.

In 1979, China’s economic reforms offered the promise of a vastly expanded world economy.

Today, China’s economic performance drives supply and demand around the globe. Indeed, last year China accounted for about 40 per cent of global growth.

Now China is stumbling while the world economy is struggling. For seven years developed economies have been relying on extraordinary monetary policies to boost asset prices, subdue interest rates and douse dangers with liquidity. The Group of Seven leading economies are straining to hand off from government stimulus to sustained, private sector-led growth. Many emerging markets have been pummeled by collapsing commodity prices and falling demand from China. The rising value of the US dollar, and the prospect of an increase in US interest rates is creating a “dollar squeeze” for some developing country debtors.
China’s travails do not, however, pose a risk of a global plunge. The government has a number of tools to stimulate the economy — and it is backed by huge reserves. The key question for Mr Xi is: what does the party plan to do to get China’s structural economic reform plan back on track? Particulars matter. The new exchange rate policy could be a step towards opening capital markets to help shift investment to more productive uses, or a competitive devaluation to boost exports.

If its government retreats to reliance on state-owned enterprises for “stability”, China will be favouring special interests that are less efficient, less transparent, and less disciplined by markets.

Deng, and former premier Zhu Rongji, used foreign competition to drive Chinese companies and workers to world class performance. If the party now protects national favourites and shelters indigenous innovators — while blaming problems on foreign interference — China’s market will lag, not lead.
The bold reform ideas of the party conclave in 2013 recognised the interconnection of diverse activities (such as tax reform, market pricing, labour market adaptation through changes in the household registration system, environmental charges and clean-ups, and expansion of the service sector) — all of which are connected to China’s urbanisation. But what is next?

Mr Xi has competing priorities. His anti-corruption campaign is supposed to rejuvenate the party — and enhance the president’s power to select the next standing committee in 2017. In foreign ventures Deng’s caution has been abandoned in favour of an assertion of great power prerogatives, which worries states that fall under China’s shadow.

President Barack Obama should explain US plans for structural economic reforms — for taxes, entitlement expenditures, immigration and trade. But Mr Xi is likely to have to wait to
hear about US growth plans from Mr Obama’s successor. In the meantime, the dynamism of the US private sector — in energy, software, use of Big Data, bioengineering and robotics — offers America’s contribution to growth. 

The leaders of the world’s largest economies now need to explain their growth strategies. And they need to be explicit about the risks — economic, security and cyber — that might impede co-operation. Today’s policy drift places the world economy in danger of being swamped by hazardous currents.

The writer is a former president of the World Bank and US trade representative

Europe Under Siege?

Daniel Gros

BRUSSELS – Many Europeans feel like their countries are under assault, as huge numbers of migrants flow across their borders. Whether they are being exposed to refugees firsthand, or just seeing images of them splashed across newspaper pages, Europeans are well aware of the vast numbers of desperate people trying to enter European Union territory by any means possible. But this awareness has yet to translate into a unified response. 

Tensions among member states seem to be rising, perhaps because the problem differs so greatly across countries. On a per capita basis, Sweden receives 15 times more asylum applications than the United Kingdom, where official policy toward refugees remains the most hostile. Germany has now become the main destination overall, receiving nearly 40% of the EU total; even on a per capita basis, this is several times more than the EU average.
Of course, there are clear rules about how responsibility for refugees is delineated: according to the so-called Dublin Regulation, the first EU member state into which a refugee crosses is responsible for that person’s asylum application. But this is clearly problematic, as it puts the entire burden of refugees on the EU’s frontier countries. Though this may not have been a huge problem in the 1990s, when EU countries received, in all, only 300,000 asylum applications annually, it cannot work in a year when the total is expected to be triple that number.
Smaller border countries like Hungary and Greece simply do not have the capacity to register and house hundreds of thousands of asylum-seekers. And larger countries like Italy have an incentive to overlook the large numbers of refugees landing on their shores, knowing that, if nothing is done, those refugees will likely head elsewhere (mainly to northern Europe).
Germany, recognizing that the Dublin system is untenable, has now decided to process all asylum applications from Syrians, regardless of where they crossed into the EU. The decision was likely driven, at least partly, by how difficult it is, given the EU’s porous internal borders, to determine where a refugee first entered. A 2013 ruling by the European Court of Justice that Germany could not return an Iranian refugee to Greece (where the applicant was found “to face a real risk of being subjected to inhuman or degrading treatment”) probably heightened Germany’s sense of responsibility on this issue.
Germany is the largest EU member country in terms of population and GDP; so, to some extent, it does make sense for it to take the lead. But Germany still accounts for less than one-fifth of the EU’s population, and less than one-quarter of its economy. In other words, not even Germany can handle all of Europe’s refugees today.
A few months ago, the European Commission tried its hand at resolving this problem with a courageous proposal to distribute refugees across member states according to a simple equation that accounts for population and GDP. But the plan was rejected, with member states – particularly those with the fewest refugees – claiming that it represented an undue interference in domestic affairs.
This has put the EU in its usual quandary: everybody recognizes that there is a problem, but a solution requires unanimity, which cannot be achieved, because each country defends only its own interests. The only way forward is to leave out the countries that are most averse to accepting immigrants, at least temporarily, and create a solution involving just those that are willing to share the burden. This may not seem “fair,” but, with more refugees landing on Europe’s borders every day, EU leaders cannot afford to delay action.
But there is another dimension to the crisis that makes addressing it all the more complicated.

The migrants are not all from conflict areas like Syria, and thus do not, according to international law, have a “right to asylum.” There are also plenty of economic migrants from, say, the poorer parts of the Balkans, hoping to escape poverty at home – and willing to misuse the asylum system in the process.
Lodging an application, even one without any chance of being accepted, is appealing, because until it is rejected, the applicant receives basic housing, social services (including health care), and pocket money in an amount that may well exceed wages in his or her home country.
Spending a few months in northern Europe while an asylum application is processed is far more attractive than going home to a job that pays a barely livable wage, or to no job at all.
As the number of asylum-seekers increases, so does the time it takes to process their applications, making the system all the more tempting for economic migrants. And, indeed, close to half of all asylum-seekers in Germany now come from safe countries, like Serbia, Albania, or Macedonia. As Europe’s populists use such cases of “welfare tourism” to sow fear and anger among the European public, reaching an agreement to accommodate actual refugees becomes increasingly difficult.
Against this background, the EU needs to take action on two fronts. First, member countries must urgently boost their capacity to deal with asylum applications, so that they can quickly identify those who deserve protection. Second, the EU needs to improve burden sharing – ideally among all countries, but perhaps among a smaller group at first – in providing shelter for those who gain asylum. International law – and basic morality – demands nothing less.

China’s Forex Reserves Fall by Record $93.9 Billion on Yuan Intervention

PBOC has been selling its dollar holdings to prevent the yuan from sliding further

By Lingling Wei And Anjani Trivedi

A 100 yuan banknote sits beside a $100 banknote. China’s foreign-exchange reserves fell $93.9 billion in August from July.
A 100 yuan banknote sits beside a $100 banknote. China’s foreign-exchange reserves fell $93.9 billion in August from July. Photo: Reuters

BEIJING—One of the world’s largest piles of cash is rapidly shrinking.

In another sign of a new normal for the Chinese economy, and the world, China’s central bank on Monday said its foreign-currency reserves fell a record $93.9 billion in August, a month when it intervened intensely in the currency market to prop up the yuan.
The drop underlined the shifting role for a stockpile of money that had steadily accumulated since the mid-1990s as China bought dollars and other currencies from its exporters and one that had turned China into a gargantuan investor in U.S. Treasurys.

At $3.56 trillion as of the end of August, the currency reserves held by the People’s Bank of China still account for nearly a third of all holdings by central banks world-wide, but the reserves have declined since a peak of nearly $4 trillion in June 2014 as more money leaves the country.

The outflows have speeded up since China devalued the yuan in mid-August, a move that has prompted the central bank to dip deep into the pile to defend the yuan from a free fall and too much money from leaving Chinese shores.

“It’s a new normal for China’s capital flows,” said Larry Hu, an economist at Macquarie Group Ltd., a Sydney-based investment bank.

For years, companies and investors poured money into yuan assets in China, hoping to gain not only from investing in a rapidly growing economy, but also from a currency that was set for appreciation—rising over 30% in the last decade. Those bets have been upended both by China’s yuan devaluation and signs of a deepening economic slowdown.

China on Monday revised its 2014 growth rate to 7.3% from 7.4% due to a weaker-than-reported contribution from the service sector, a relatively small change but one that suggests that China’s effort to meet its official growth target of about 7.5% last year was tougher than it seemed.

The implications for the rest of the world of a shrinking Chinese reserve pile could be profound.

China’s selling of U.S. Treasury debt as it has bought yuan has led to concerns that bond yields in the U.S. and Americans’ borrowing costs in general could be pushed up.

So far, though, that hasn’t occurred, as other investors—such as U.S. bond funds—have stepped into what Beijing has sold. Yields on the 10-year U.S. Treasury note have been falling from this year’s peak of 2.5% set in June. Bond yields fall as prices rise.

But the continued declines in China’s reserves contributed to a drop in central-bank holdings world-wide in the first quarter of this year to $11.43 trillion, according to the International Monetary Fund, from a peak of $11.98 trillion in mid-2014. In a report issued last week, analysts at Deutsche Bank AG likened the fall in global reserves to “quantitative tightening,” saying shrinking reserves could result in higher bond yields, drive up market borrowing costs, and challenge some central banks’ ability to exit easy-money policies.

It represents “an additional source of uncertainty in the global economy,” the bank’s analysts wrote.

China’s capital outflows over the past three to four quarters “are unprecedented and have no comparison to any period in the past, ”said Nikolaos Panigirtzoglou, global market strategist at J.P. Morgan in London. And, he says, “there could potentially be even more over the coming year, as the market tries to gauge the extent of the devaluation of the Chinese currency.”

However, he said a fall in China’s reserves shouldn’t necessarily affect U.S. interest rates as money leaving China “doesn’t disappear.” He says as companies sell their yuan, they typically put their dollars in a bank, and the banks often buy U.S. government bonds with the money.

The strengthening dollar has also drawn more investors into Treasurys.

Another reason Chinese reserves have fallen is a push by Chinese companies and foreign companies operating in China to pay down dollar debt. China’s reserves, which include a basket of global currencies and other assets, have also lost an estimated $20 billion on the changing value of currencies, with the euro, for instance, rising 2.3% in August against the dollar.

Emerging-market countries, especially in Asia, rapidly accumulated foreign reserves in a bid to protect their economies from volatile capital flows after the 1990s, outpacing most industrialized countries. In smaller economies like Thailand, reserves account for a little over 40% of the GDP.

China is the largest holder globally, with reserves that account for about 35% of its GDP.

That ratio has been falling over the past years. By other measures too, China’s reserves give the country a sufficient cushion. It has sufficient reserves to pay for 22 months of imports.

But currency reserves have dwindled by 10% since their peak last year and are down more than 7% this year. Investors say as China turns away from an export-oriented economy to one led by consumption, its foreign-exchange reserves that have long been an economic buffer, are bound to come under further pressure.

“Capital outflow is a big concern,” said an official close to the central bank. That’s despite the fact that Beijing still has a big war chest of reserves to defend the yuan. At stake is China’s glut of savings—deposits currently stand at $21 trillion, or nearly twice the economy --which could stream out of the country if the yuan continues to weaken and authorities loosen their grip over cross-border capital flows.

Based on central-bank data, the drop in the reserves was the largest single monthly drop in absolute terms, and the biggest fall on a percentage basis since May 2012, during another period of rapid capital exodus.

Economists had estimated the drop in China’s reserves in August at between $70 billion and $100 billion. Some analysts had expected outflows of as much as $150 billion.

“Today’s data on China’s foreign exchange reserves suggest that the People’s Bank is not burning through its reserves as quickly as many had believed,” said Julian Evans-Prichard, China economist at Capital Economics.

Mr. Evans-Prichard calculates that around $130 billion worth of funds were moved out of China in August, up from his estimate of $75 billion in outflows in July.

The outflows, while large, aren't flighty capital, some analysts say. As Chinese companies buy up foreign assets and amid programs by the central bank that make it easier for companies to repatriate profits, larger amount of cash are now leaving China’s borders. At the same time, foreign direct investment continues to trickle in but at a slower pace this year than in the past.

This year, the central bank has encouraged large, foreign institutional investors like central banks and sovereign-wealth funds to invest in the onshore Chinese market, removing stringent investment barriers to drive up inflows.

The latest depreciation pressure on the yuan is partly Beijing’s own doing. For most of the past year, the Chinese central bank kept the yuan largely pegged to the dollar, effectively pushing up its value against the currencies of China’s trading partners and, in effect, hurting exporters.

Then on Aug. 11, the central bank devalued the yuan by lowering its official reference rate—around which the currency is allowed to trade -- by nearly 2%, saying it intended to give market forces bigger sway in deciding its value. But the heavy selloff that followed -- triggered by concerns that Beijing would permit more weakening of the yuan to help spur growth -- caught officials at the central bank somewhat off guard, according to people close to the PBOC.

The central bank then resorted to two strategies to try to stem the yuan from falling further, according to the people. First, prior to the opening of daily trading, the central bank has been providing state-owned banks, who report yuan price levels to the central bank, with “window guidance” on a yuan price that meets the comfort levels of the PBOC.

Secondly, the central bank has been directly intervening in the currency market by buying the yuan and selling dollars to prevent the Chinese currency from falling too much. Analysts from Deutsche Bank estimated that the central bank spent up to $50 billion on interventions on Aug. 12, 26 and 28.

The interference also has had the effect of draining yuan funds out of the market—threatening to cause a shortage of funds at Chinese banks. As a result, the central bank in late August decided to release more than $100 billion in funds for banks to lend.

UN refugee chief : History will judge us harshly over Syria crisis

Peter Sutherland, the UN's special envoy for migrants and refugees, says this is not a temporary phenomenon

By Ambrose Evans-Pritchard, Como, Italy

12:24PM BST 07 Sep 2015

A Syrian refugee woman walks in Zattari Syrian refugee camp, Mafraq city, Jordan

A Syrian refugee woman walks in Zattari Syrian refugee camp, Mafraq city, Jordan Photo: JAMAL NASRALLAH/EPA
The flood of refugees into Europe from the Middle East and Africa has only just begun as states disintegrate in a maelstrom of religious war, the United Nations has warned.
"We cannot comfort ourselves that this is a temporary phenomenon," said Peter Sutherland, the UN's special envoy for migrants and refugees.
Quite apart from Syria, much of the Sahel across sub-Saharan Africa is hanging by a thread, and ISIS is expanding into every country of the Maghreb.
"It is very easy to be sanctimonious about this subject, and a lot of people are, but politicians have the hard task of dealing with it," he said, speaking at the Ambrosetti forum of world policy-makers on Lake Como.
Mr Sutherland is thankful - in a sense - that the pietistic picture of a drowned three year-old boy on the beaches of Bodrum should have goaded Europe into action at last, but is equally exasperated that policy is being driven by emotional spasms.

"There were at least 3,000 deaths in the Mediterannean last year and you don't need a photo to know that some of those too were children," he said.  

For some the photo is still not enough. "Angela Merkel is showing courageous leadership but in other parts of Europe, the reaction has been terrible. The Poles and Slovaks have said they will only accept Christians."

"This is a repudiation of everything the EU stands for. It is absolutely contrary to UN principles and international law. Is this really what we have come to? A refugee is a refugee," he said.

Mr Sutherland - a former European commissioner and one-time chairman of oil giant BP - declined to say whether Hungary in particular should face a suspension of its EU membership rights but said a rebuke of some sort is order.

Carl-Henric Svanberg, centre, flanked to his right by Tony Hayward and Peter Sutherland, BP's outgoing chairman, to his left
Peter Sutherland, left, shown here with Carl-Henric Svanberg, centre, who replaced him as chairman of BP, and former BP chief executive Tony Hayward, right

"The treaties allow for various levels of sanctions. The decibel count on Hungary's behaviour has reached a level that is really quite serious," he told The Telegraph.

He noted acidly that the world took in 200,000 Hungarian refugees after the Soviet invasion in 1956.

It will take the statecraft of the highest level by leaders across the world to tackle the roots of the crisis, and so far the response has been abysmal.

Britain's diplomatic antennae seem to have failed badly. David Cameron, the Prime Minister, was blind-sided by Germany's move to throw open the borders and take the lead on the crisis with France.

Mr Sutherland said Britain's response has become tangled with a separate controversy over the role of the EU and the powers of Brussels, poisoning the debate.

The result is that London appears churlish, and far too slow to separate the issue of conflict refugees from economic migrants.

"In the case of the UK, the issue has been complicated by the debate about Europe and the role of the EU. There has been a lot of finger-pointing at Brussels, and it is rubbish. The member states are the problem."

Romano Prodi, the former head of the European Commission, said this will backfire against Britain, making it even less likely that Mr Cameron will secure a new treaty dispensation from Europe on friendly terms.

Romano Prodi was president of the European Commission from 1999 to 2004

In the end, the UK is likely to take just as many refugees per capita as most other major countries in Western Europe, even though it is exempt from any vote on quotas due to its opt-out in the EU sphere of 'justice and home affairs'.

It has already pledged to take 15,000 refugees from Syria, transporting them directly from camps in Lebanon and the front line states. This is a wiser solution than the chaos and danger of the traffickers' routes, yet the UK has damaged its moral brand by reacting so defensively.

Mr Sutherland went on to say: "Britain has been the most welcoming country over centuries. If you walk down the street, it is the most harmonious multicultural society that exists".

The headlines across the Italian, French, and German press over recent days have been ablaze with criticisms of a "hard-nosed Britain", loosely lumped together with Hungary and the Visegrad Four in central Europe.

Mr Sutherland said the drama has been falsely presented as a European crisis. It is not. Every country has an equal responsibility under the UN code, he says.

"Proximity does not determine obligation. The fact that Lebanon is closer to Syria than the US or Finland is irrelevant under international law. The Gulf states have taken in nobody, and what about other countries?" he asked.

The world took in hundreds of thousands of Vietnamese boat people in the late 1970s. This time most outside Europe prefer to look the other way. "Historians will judge us very harshly when this is over," he concluded.

Migrant crisis - the last six months
19 April, 2015
650 migrants feared dead
Around 650 migrants were feared drowned as a boat carrying 700 capsized in the waters of the Italian island of Lampedusa. Roughly 30 were saved.
3 May, 2015
10 dead in the Mediterranean
5,800 plucked from the Mediterranean in Italian and French operations. 10 found dead.
30 June, 2015
Cameron describes migrant "swarm"
David Cameron described the thousands of migrants in Calais and around the Channel Tunnel as a “swarm of people”. Earlier in the day, UKIP’s Nigel Farage had used the same term on ITV’s Good Morning.
June, 2015
Nine Calais deaths
Throughout the month, nine migrants died near the Channel Tunnel in separate incidents. French police said they had so far this year detained more than 18,000 migrants in and around Calais this year.
9 July, 2015
Rubber dinghy tragedy
12 migrants drowned when their rubber dinghy sank off Libya, with a further 500 being rescued.
July, 2015
110,000 migrants enter the EU
Nearly 110,000 migrants were tracked entering the EU by irregular means. Nearly 50,000 of them arrived through the Aegean Sea route, landing on Lesbos, Chios, Kos, and other islands.
20 August, 2015
Macedonia declares state of emergency
The Former Yugoslav Republic of Macedonia declares a state of emergency, restricting its borders as roughly 2,000 refugees entered the country each day.
23 August, 2015
Thousands rescued from Mediterranean Sea
The Italian navy organised the rescue of 4,400 migrants in the waters off the Libyan coast. At this point it was thought that more than 2,300 had drowned in the Mediterranean Sea so far this year.
28 August, 2015
71 migrants found dead in Austria
200 bodies discovered off the coast of Zurawa – a port in western Libya which is a people-trafficking hub. The boat on which they’d been travelling was originally packed with 400 people when it began sinking. On the same day, Hungarian police arrested the driver of a van found abandoned on the side of an Austrian motorway filled with 71 dead migrants. A baby girl was among the dead.
31 August, 2015
Hungary completes razor-wire fence
Hungary finished building its razor-wire fence along the 175km border with Serbia. French Foreign Minister, Laurent Fabius describes the fence as “not fit for animals”.
2 September, 2015
Young migrants wash up on Turkish beach
A Turkish policeman carries Aylan's body from the beach (AP)
The bodies of three-year-old Aylan Kurdi and his five-year-old brother Galip are found washed up on a beach near Bodrum, Turkey, having drowned. Images are widely reproduced across the European media.
6 September, 2015
George Osborne: Britain’s foreign aid budget will be used to help councils resettle refugees
Millions of pounds of Britain’s foreign aid budget will be used to help councils resettle refugees from camps in the UK, George Osborne revealed. He added that the £250million spent on refugees is "not nearly enough" and suggested using "additional money" from the GDP increase to increase aid for refugees.