Global Lender of Last Resort

Doug Nolan



Understandably, attention remains focused on the dominant U.S. tech stocks, record highs in Nasdaq, sector rotation opportunities, and the Robinhood phenomenon. It’s a mania, after all.

There are as well stimulus negotiations and the administration’s determination to pound away at China – non-bullish developments too easily disregarded.

Crisis memories and concerns, meanwhile, fade with astonishing alacrity. These days, attention has shifted completely away from the global financial “plumbing” that became utterly clogged up in March. Did central banks successfully flush through the issue, or has the matter instead been left to swell into an only more problematic future blockage?

Fortunately, there are some determined financial journalists still pursuing one of the more significant stories of our lifetimes. There was Monday’s article from Bloomberg’s Rich Miller and Jesse Hamilton: “Fed Is Headed for a Clash With Hedge Funds, Other Shadow Banks.”

Also Monday, from The Wall Street Journal’s Serena Ng and Nick Timiraos: “Covid Supercharges Federal Reserve as Backup Lender to the World.”

August 3 – Bloomberg (Rich Miller and Jesse Hamilton): “The Federal Reserve and other central banks are heading for a collision with shadow lenders -- the firms with a sinister nickname that are increasingly dominating global finance. Even as policymakers struggle to reopen their economies in the midst of the coronavirus pandemic, they’ve launched a review of what went wrong with markets in March, when a worldwide dash for cash by investors nearly crashed the financial system and forced unprecedented rescue actions by central banks. Their focus is on loosely regulated money market and hedge funds, mortgage originators and other entities.

Already, some watchdogs have pointed to highly leveraged trades involving U.S. Treasuries as one source of the turmoil. ‘In many cases they have reached systemic importance,’ Bank for International Settlements General Manager Agustin Carstens said of the non-banks. He added that it’s time to move toward more regulation. There’s a lot at stake should the scrutiny lead to tougher oversight. The alternative financiers are major providers of credit to households and companies, making their smooth functioning critical to the health of financial markets and the economy.”


March’s financial dislocation – the “seizing up” of global markets – corroborated the global Bubble thesis. International data along with myriad anecdotes over recent years have pointed to an unprecedented post-crisis expansion of global leveraged speculation. March saw the powerful explosion of de-risking/deleveraging swiftly bring global finance to its knees.

It was integral to my analysis that the Fed’s restart of QE last September – so-called “insurance” stimulus – stoked “terminal phase” speculative excess at home and abroad. The above Bloomberg article references the Bank of International Settlements’ (BIS) 2020 Annual Economic Report. I’ve extracted below:

BIS: “As a precursor to this episode, dislocations in the US repo market in September 2019 involved much the same players, with dealer balance sheet constraints again being a contributing factor. Back then, repo demand from hedge funds to maintain arbitrage trades between bonds and derivatives contributed to a repo funding squeeze. With dealer banks holding already large US Treasury positions, reluctance to accommodate the higher demand for repo funding compounded the shortage and led to a sharp spike in the secured overnight financing rate (SOFR). The Federal Reserve had to step in to provide ample repo funding and absorb Treasury collateral from the market.”

BIS: “The severe [March] dislocation in one of the world’s most liquid and important markets was startling. It reflected a confluence of factors. A key driver was the rapid unwinding of so-called relative value trades, which involve buying Treasury securities funded using leverage through repos while at the same time selling the corresponding futures contract. Investors, typically hedge funds, employ such strategies to profit from differences in the yield between cash Treasuries and the corresponding futures. Given that these price discrepancies are typically small, relative value funds amplify the return (and, by extension, losses) using leverage.”

An even greater dislocation erupted in international markets for dollar-denominated bonds and dollar-related derivatives. This followed years of unprecedented growth in dollar debt globally, along with corresponding levered speculation in these instruments (and related derivatives).

BIS: “Over the past two decades, the use of the US dollar in global financial transactions has ballooned. US dollar liabilities of non-US banks outside the United States grew from about $3.5 trillion in 2000 to around $10.3 trillion by the end of 2019. For non-banks located outside the United States, they have grown even more rapidly and now stand at roughly $12 trillion, almost double what they were a mere decade ago. There is also a significant amount of off-balance sheet dollar borrowing via FX derivatives, primarily through FX swaps. Funding pressures therefore tend to show up in these markets.”

BIS: “A significant portion of the international use of major reserve currencies, such as the US dollar, takes place offshore. Dollar liabilities (ie loans and debt securities) on the balance sheets of banks and non-banks outside the United States amounted to over $22 trillion at end-2019. On top of this, off-balance sheet US dollar obligations incurred via derivatives such as FX swaps were even larger, with estimates ranging up to $40 trillion. An FX swap allows an agent to obtain US dollars on a hedged basis, which is functionally equivalent to collateralised borrowing.”

With “non-bank” dollar-denominated liabilities having doubled over the past decade to $12 TN – and FX swaps expanding to an estimated $40 TN – you’re talking massive proliferation of “offshore” dollar obligations. March’s “seizing up” confirmed that way too much speculative leverage had accumulated internationally.

This helps explain why massive ($3 TN) Federal Reserve liquidity injections were required to reverse de-risking/deleveraging dynamics. As the BIS stated: “With the GFC [great financial crisis] as precursor, the role of the Federal Reserve as a global lender of last resort has been further cemented.”

August 3 – Wall Street Journal (Serena Ng and Nick Timiraos): “When the coronavirus brought the world economy to a halt in March, it fell to the U.S. Federal Reserve to keep the wheels of finance turning for businesses across America. And when funds stopped flowing to many banks and companies outside America’s borders—from Japanese lenders making bets on U.S. corporate debt to Singapore traders needing U.S. dollars to pay for imports—the U.S. central bank stepped in again. The Fed has long resisted becoming the world’s backup lender. But it shed reservations after the pandemic went global. During two critical mid-March weeks, it bought a record $450 billion in Treasurys from investors desperate to raise dollars. By April, the Fed had lent another nearly half a trillion dollars to counterparts overseas, representing most of the emergency lending it had extended to fight the coronavirus at the time. The massive commitment was among the Fed’s most significant—and least noticed—expansions of power yet.”

The Fed’s interventionist leap into corporate bonds and ETFs clearly exerted profound market impact. Suddenly, the Fed was viewed as providing a direct liquidity backstop, boosting the attractiveness (and prices!) of corporate Credit and fixed-income ETFs in particular. Not generally as appreciated – yet arguably more momentous – the Fed’s aggressive liquidity measures and expansion of swap lines with the international central bank community were seen as creating a liquidity backstop for the massive offshore markets for dollar-denominated instruments (bonds and derivatives).

In both domestic corporate Credit and international finance, Fed and central bank measures reversed de-risking/deleveraging dynamics. At home and abroad, speculative flows resumed, financial conditions loosened, debt issuance mushroomed, and markets recovered. Global finance - markets and policymaking - became only more closely synchronized. As noted by the BIS: “It established the Fed as global guarantor of dollar funding, cementing the U.S. currency’s role as the global financial system’s underpinning.”

It is a central tenet of Bubble Analysis that “things get crazy at the end of cycles.” The confluence of late-cycle excess/fragility along with aggressive policy interventions (meant to hold crisis at bay) fosters a precarious dynamic of emboldened speculators operating in ultra-loose financial conditions. Especially after the Fed expanded its balance sheet by a few Trillion in not many weeks, confidence became stronger than ever in the central bank mantra of “whatever it takes” to sustain inflating market prices. Speculative Melt-Up.

There is today no doubt in the marketplace that the Fed, in the event of market instability, would quickly replay March’s crisis operations. Markets see nothing inhibiting Fed intervention measures. The sanguine view holds even for the Federal Reserve’s extraordinary international crisis operations. From the above WSJ article: “The risks to the Fed are minimal given that it is dealing with the most creditworthy nations and the most advanced central banks.”

Last week’s CBB attempted to explain how the unsound U.S. Bubble Economy structure ensured massive ongoing fiscal and monetary support. From an international financial markets perspective, Bubble Market Structure will also require unrelenting monetary stimulus – zero rates, open-ended QE, international swap arrangements, and other crisis-fighting tools.

Over the past two months, the Swiss franc has gained 5.5% versus the dollar. The euro is up 4.4%. The Dollar Index has sunk to a two-year low. Gold is up about $350, or 20%, in two months. Silver has surged almost 70%. And despite surging risk markets, safe haven 10-year Treasury yields have sunk 30 bps in two months to record lows.

Are the safe havens signaling acute fragility in this global Bubble of leveraged speculation and the inevitability of only more aggressive Federal Reserve balance sheet growth “as global guarantor of dollar funding”? Understandably, Fed officials must remain quite alarmed by the scope of March’s market dislocation – and even more so by the prospect of operating as lender of last resort for dysfunctional and chaotic global securities, funding and derivatives markets.

Bloomberg: “The tumult highlighted the vulnerabilities of non-banks, Fed Vice Chairman for Supervision Randal Quarles wrote in a July 14 letter to central bank chiefs and finance ministers of leading nations. As head of the Financial Stability Board, he’s promised to deliver a report on the mayhem to leaders of the Group of 20 nations by November.”

The Bloomberg article also quoted Janet Yellen calling for a new Dodd-Frank. I’ve pulled her more complete quote from a Brookings Institute event, “A Decade of Dodd-Frank” (quoted by doddfrankupdtate.com): “When we do recover, I think we should reflect on the lessons from the crisis. I personally think we need a new Dodd-Frank. We need to change the structure of FSOC (Financial Stability Oversight Council) and build up its powers to be able to deal more effectively with all of the problems that exist in the shadow banking sector. I think the structure is inherently flawed. I think the agencies need a definite financial stability mandate.”

Chair Yellen should have been more focused on the Fed’s financial stability mandate. The global “shadow bank” Bubble inflated tremendously during her watch, fueled by the Yellen Fed’s misguided postponement of policy normalization. Bubble fragilities then quashed Powell’s normalization plans. It was clear some years back that Dodd-Frank had worked to hasten the expansion of “off-shore” non-bank Credit and leveraged speculation.

And from Federal Reserve governor Lael Brainard: “I absolutely think the kinds of risk that Janet talked about in the nonbank financial sector were not only predictable but well-documented and can be subject to an expansion of the regulatory perimeter… I do think that very quickly, once we have come through this very challenging moment, it will be time to look back and make the necessary changes to those areas where the work of financial reform is incomplete. And to be fair, there will always be new areas.”

The Fed recognizes it has a huge problem. And much like President Trump’s calculated attacks on China, the markets believe the Fed might talk tough with respect to “shadow bank” excesses but would never risk measures that might destabilize fragile global markets. We’re now less than three months to election day. Ebullient markets can for now assume comfort with the possibility of a President Biden. But if the Democrats complete a full sweep, expect impetus for a new Dodd-Frank with a focus on reining in the hedge funds and “shadow banks” more generally.

For now, bubbling stocks and corporate Credit focus on short-term prospects for ongoing momentum. Safe havens, meanwhile, have become fixated on the inevitability of crisis and mayhem. And while most dollar-denominated EM bonds remain in speculative melt-up mode, Turkey is back in crisis. The Turkish lira dropped another 4.2% this week to an all-time low versus the dollar (down 18.3% y-t-d). Turkey’s 10-year dollar bond yields jumped 17 bps to a 10-week high 7.48%. Offshore lira borrowing rates surged to 1,000% annualized this week, as Turkey’s markets approach the breaking point (facing huge debt dollar debt maturities with rapidly depleting international reserves).

BIS: “The Fed’s aggressive overseas lending has injected it into the world of foreign policy: Not every country gets equal access to the Fed’s dollars. Turkey, for example, has appealed unsuccessfully for dollar loans from the Fed to support its sinking currency…”

The dollar has a long history as “the world’s reserve currency.” Over the past decade, it also became the prevailing currency for a historic Bubble in global leveraged speculation. I’m sticking with the view that the global Bubble has been pierced (analogous to subprime in Spring 2007).

The U.S. flooded the world with dollar balances – that could be used for leveraged speculation in higher-yielding dollar-denominated EM debt. EM central banks would then predictably “recycle” these Bubble Dollars right back into U.S. securities markets. It was miraculous, went to egregious excess, and is now winding down.

We saw in March that this process badly malfunctions in reverse. And while Trillions of central bank liquidity sparked a market rally, I expect the next phase of global deleveraging to commence in the coming months. There is a long list of vulnerable countries that accumulated too much debt – too much denominated in dollars. It's worth noting that the Brazilian real declined 4.0% this week, with the Chilean peso down 3.8%, the South African rand 3.2%, and the Colombian peso 1.1%.

It’s not difficult to envisage a scenario where the Fed finds itself stuck deep in geopolitical muck. Pressure to lend to our allies and avoid the others – a process that would seemingly accelerate the transformation to a more bi-polar world. I’ve for a while now pondered the relationship between the Fed and PBOC when things turn sour between Washington and Beijing. There are enormous amounts of dollar-denominated debt in China and Asia – too much held by leveraged speculators.

The bursting of the global dollar debt Bubble will likely coincide with a major deterioration in the dollar’s value as the world’s reserve currency. And this seems like a pretty good explanation for surging precious metals prices. Markets these days see nothing that could keep the Fed from aggressively employing endless QE necessary to sustain market Bubbles.

There are myriad complexities and challenges being ignored today by the risk markets.

Opinión

America Could Control the Pandemic by October. Let’s Get to It.

The solutions to combating the coronavirus are no mystery. It’s time to do this right.

By The Editorial Board


Nicholas Konrad/The New York Times


Six to eight weeks. That’s how long some of the nation’s leading public health experts say it would take to finally get the United States’ coronavirus epidemic under control.

If the country were to take the right steps, many thousands of people could be spared from the ravages of Covid-19. The economy could finally begin to repair itself, and Americans could start to enjoy something more like normal life.

Six to eight weeks. For proof, look at Germany. Or Thailand. Or France. Or nearly any other country in the world.

In the United States, after a brief period of multistate curve-flattening, case counts and death tolls are rising in so many places that Dr. Deborah Birx, the Trump administration’s coronavirus response coordinator, described the collective uptick as a sprawling “new phase” of the pandemic. Rural communities are as troubled as urban ones, and even clear victories over the virus, in places like New York and Massachusetts, feel imperiled.

At the same time, Americans are fatigued from spending months under semi-lockdown. Bars and restaurants are reopening in some places, for indoor service — and debates are underway over if and when and how to do the same for schools — even as the virus continues to spread unchecked.

Long delays in testing have become an accepted norm: It can still take up to two weeks to get results in some places. As the national death toll climbs above 160,000, mask wearing is still not universal.
It’s no mystery how America got here. The Trump administration’s response has been disjointed and often contradictory, indifferent to science, suffused with politics and eager to hand off responsibility to state leaders. Among the states, the response has also been wildly uneven.

It’s also no surprise where the country is headed. Unless something changes quickly, millions more people will be sickened by the virus, and well over a million may ultimately die from it.

The economy will contract further as new surges of viral spread overwhelm hospitals and force further shutdowns and compound suffering, especially in low-income communities and communities of color.

The path to avoiding those outcomes is as clear as the failures of the past several months.

Scientists have learned a lot about this coronavirus since the first cases were reported in the United States earlier this year. For instance, they know now that airborne transmission is a far greater risk than contaminated surfaces, that the virus spreads through singing and shouting as much as through coughing, and that while any infected person is a potential vector, superspreading events — as in nursing homes, meatpacking plants, churches and bars — are major drivers of the pandemic. By most estimates, just 10 to 20 percent of coronavirus infections account for 80 percent of transmissions.

Experts have also learned a lot about what it takes to get a coronavirus outbreak under control.

Most of the necessary steps are the same ones public health experts have been urging for months.
 Just because America has largely bungled these steps so far doesn’t mean it can’t turn things around. The nation can do better. It must.

Clear, Consistent Messaging

President Trump and his closest advisers have repeatedly contradicted the scientific evidence, and even themselves, on the severity of the pandemic and the best ways to respond to it.

They’ve sown confusion on the importance of mask wearing, the dangers of large gatherings, the potential of untested treatments, the availability of testing and the basic matter of who is in charge of what in the pandemic response.

That confusion seems to have bred a national apathy — and a dangerous partisanship over public health measures — that will be difficult to undo. But leaders at every level can improve the situation by coordinating their messaging: Masks are essential and will be required in all public places. Social distancing is a civic responsibility. The virus is not going away anytime soon, but we can get it under control quickly if we work together.

Such messaging works best when it comes from the very top, but state and local leaders don’t have to wait for federal leaders to step up.

Better Use of Data

As Dr. Tom Frieden, the former director of the Centers for Disease Control and Prevention, has noted: The United States has a glut of data and a dearth of information.

Data on who is getting sick and where is not being used to guide interventions, and crucial figures like test result times and the portion of new cases that were found through contact tracing are not consistently or routinely reported.

If scientists had better access to such figures, they could use it to forecast Covid-19 conditions the same way they forecast the weather: warning when a given outbreak is spreading and advising people to adjust their plans accordingly. State and local leaders can make all their data public, and the C.D.C. ought to help them get that data into a usable form.

Smarter Shutdowns

In places like Melbourne, Australia, and Harris County, Texas, health officials have created numerical and color-coded threat assessments that tell officials and citizens exactly what to do, based on how extensively the coronavirus is spreading in their communities. The highest alert levels call for full-on shelter in place, while the lowest call for careful monitoring of high-risk establishments.

It would behoove the C.D.C. to create a similar, evidence-based scale and work with state and local leaders to employ it in individual communities. In places where the virus is still rampant, that would mean much more aggressive shutdowns than have been carried out in the past. (The United States has not had a true national lockdown, shuttering only about half the country, compared with 90 percent in other countries with more successful outbreak control.)


Smarter shutdowns may also mean closing bars and indoor dining in many places so schools there can reopen more safely; closing meat processing plants until better protections are in place; and tightening state borders in a sensible, as-needed fashion.

Testing, Tracing, Isolation and Quarantine

The most consistent mantra of experts trying to get the coronavirus pandemic under control has been that the nation needs much better testing, tracing, isolation and quarantine protocols. Despite examples across the globe for how to achieve all four, the United States has largely failed on these fronts. Testing delays make contact tracing — not to mention isolation and quarantine — impossible to execute.

To resolve the crisis, federal officials need to commandeer the intellectual property of companies that have developed effective rapid diagnostics and utilize the Defense Production Act to make and distribute as many of those tests as possible. As testing is brought up to speed, officials also need to expand contact tracing and quarantine programs so that once outbreaks are brought under control, states are prepared to keep them in check.

The causes of America’s great pandemic failure run deep, exacerbated by innumerable longstanding problems, from a weak public health infrastructure to institutional racism to systemic inequality in health care, housing and employment.

If the pandemic forces the nation to meaningfully grapple with any of those issues, then perhaps all this suffering will not have been in vain. But that work can’t really begin until Americans solve the problem that’s right in front of them, with the tools that are already at their disposal.


The editorial board is a group of opinion journalists whose views are informed by expertise, research, debate and certain longstanding values. It is separate from the newsroom.

China’s tech juggernaut steams ahead

With a backlash growing in the US, India and parts of Europe, a bipolar world is emerging

James Kynge

Ingram Pinn illustration of James Kynge column
© Ingram Pinn/Financial Times


When the Notre-Dame cathedral in Paris caught fire last year, Chinese-made drones were deployed to fly close to the blaze. They relayed video to the firefighters, helping them to direct their hoses and ultimately save the cathedral’s structure. 

The deployment was hailed in China as a big success for homegrown technology. But there was another aspect to the story. Before the drones could fly, French authorities had to lift restrictions that in normal times prevent them from buzzing through Parisian skies.

This dichotomy between technology and permission is crucial. China’s tech these days is often world-class, but its leading companies remain largely peripheral outside their home market.

Now, as they embark upon global ambitions, the west is rapidly erecting a great wall of opposition. 

A bipolar world is starting to take shape, some analysts say. Around one pole are those countries that welcome Chinese technology and the multibillion-dollar investments of its corporations. Around the other is the US-led west that is closing its door, in varying degrees, to a lengthening list of what are regarded as sensitive Chinese technologies and investments.

The tit-for-tat closures of Chinese and US consulates this week mark the lowest point in bilateral ties since the 1970s. They are only likely to accentuate this polarisation. “We already have a bipolar world in parts of the tech stack, such as . . . social media, search and payments applications that are largely different in China and the US,” says Paul Triolo, a China tech expert at Eurasia Group, a consultancy.

To be sure, China’s nativist policies have done much to shape this reality. The Great Firewall it has installed in recent decades to sequester its domestic internet from the rest of the world has nurtured a “Galápagos kingdom” of distinct and hugely powerful tech players. 

Baidu, not Google, is the main search engine but is subject to heavy censorship. Alipay, which has 1.2bn users, is similar to its US counterpart, PayPal, but is part of a company that also runs the world’s largest money market fund, does credit ratings and owns an online bank. Similarly, China’s WeChat is different from WhatsApp in that it offers many more functions.

In recent years, such corporations have hopped over the firewall to seek their fortunes in the global arena. Some struggled to adapt but many have enjoyed significant success. They include Alibaba and Tencent, both of which are among the world’s top 10 largest companies, and the telecoms equipment giant Huawei. 

However, a backlash from politicians and regulators in the US, India and some European countries such as the UK is now playing havoc with the international ambitions of China Inc.

TikTok, a wildly popular video-streaming app with some 800m users worldwide, is a prime example. US officials told the Financial Times this month that Washington was considering blacklisting ByteDance, TikTok’s parent company, to prevent Beijing harvesting US personal data.

Underlining his objection, Mike Pompeo, US secretary of state, said that downloading the TikTok app would put “your private information in the hands of the Chinese Communist party”. TikTok has about 26.5m active monthly users in the US, most between the ages of 16 and 24.

Such charges are not without basis. One of Beijing’s laws, the 2017 National Intelligence Law, orders that “any organisation or citizen shall support, assist and co-operate with state intelligence work in accordance with the law”.

In addition, it is hard for companies such as TikTok, which denies it has handed over user data to the Chinese government, to prove the absence of such action.

Mr Triolo says a “watershed moment” has been reached. Scores of Chinese companies have been added to US blacklists over the past 18 months, and many are finding it difficult or impossible to source critical components such as semiconductors from US suppliers. 

But will all this be enough to bring China’s tech juggernaut to a shuddering halt? A quick glance at the big picture, says Michael Power, strategist at NinetyOne, an asset management firm, makes clear that the answer is no.

For one thing, Chinese tech companies are backed by ample financial resources. For instance, the Ant Group, which owns Alipay and is planning to list on the Hong Kong and Shanghai stock markets soon, is valued at around $200bn.

For another, says Mr Power, China is home to the world’s largest and most innovative technology supply chain. In many technologies, he adds, “China is winning fair and square”. 

Chinese companies are widely recognised as world leaders, or as being at the cutting edge, in 5G telecoms equipment, high-speed rail, high-voltage transmission lines, renewables, new energy vehicles, digital payments, areas of artificial intelligence and other fields.

The drones that helped save Notre-Dame also reveal a homegrown dynamism. DJI, the company that developed them, was started in a university dorm room by student entrepreneurs.

The "'Sputnik Moment"

Cutting Corners in the Race for a Vaccine

Russia, China and India are racing to find a coronavirus vaccine. But international standards are not always being respected. Some researchers have even tested their remedies on themselves.

By Alexander Chernyshev, Wu Dandan, Georg Fahrion, Christina Hebel, Laura Höflinger und Bernhard Zand

Doctors at a coronavirus testing site in Moscow: "Russia is violating internationally accepted rules."
Doctors at a coronavirus testing site in Moscow: "Russia is violating internationally accepted rules." Foto: Sofya Sandurskaya / Moscow News Agency / REUTERS



When Alexander Ginzburg injected himself with the vaccine he developed, he hadn't even begun testing the substance on monkeys. That was four months ago, and Ginzburg, a microbiologist and director of the state-owned Gamaleya Institute in Moscow, says he is still feeling just fine. One hundred institute employees also agreed to be vaccinated. And all are still healthy.

Ginzburg is working on what is called a vector vaccine, which involves introducing genetic material from the SARS-CoV-2 virus into a harmless carrier virus in order to trigger the human immune system to produce antibodies.

The 68-year-old Ginzburg isn't particularly interested in the risks associated with injecting a substance that is still in development. "I want to protect myself and my employees," he says, claiming that his vaccine is both safe and effective. After all, he says, he's already developed a vaccine on one other occasion.

The Russian government is hoping to approve Ginzburg's vaccine as rapidly as possible, with Health Ministry officials saying that a decision could be made in the next several days. And if it is approved, Russian doctors and teachers are to be injected first. It is unclear whether they will have a choice.

Russia, though, isn't alone. It's just one of many examples showing how the race for a COVID-19 vaccine continues to accelerate -- fueled in part by autocratic countries like Russia and China, which aren't always so fastidious when it comes to medical and ethical standards.

A research breakthrough would mean that Moscow and Beijing would be able to protect their populations more quickly and reopen their economies earlier than their rivals. A vaccine wouldn't just represent an advance in the fight against the virus, it would also translate into power, prestige and money, since the rest of the world would be clamoring to buy the remedy.

Laxer than Elsewhere

At the same time, the premature introduction of a vaccine that isn't ready for primetime can have grave consequences. Politicians must be aware that rapidly developing a vaccine isn't their only challenge, they must also convince the populace that the vaccine is safe, says Chandrakant Lahariya, an epidemiologist from India. Late-developing side effects could lead to a situation where "trust doesn't just sink in this vaccine, but in all others developed around the world."

According to the World Health Organization (WHO), laboratories in 12 countries have developed 27 vaccine candidates, which are now undergoing clinical testing. That includes teams in Britain, Japan, Germany, South Korea and the United States, but institutes in China, India and Russia have also begun the process of clinical evaluation – three ambitious emerging markets with nationalist leadership and regulatory authorities that tend to be laxer than elsewhere.


Vaccine test subject Lao Ji: "It's better if I do my part to help out." Foto: Bernhard Zand / DER SPIEGEL


With more than 865,000 coronavirus infections, Russia is currently the fourth-most affected country in this pandemic and President Vladimir Putin is pushing for a breakthrough in vaccine development.

The government says that more than 20 countries from Asia, Latin America, Africa and the Middle East have expressed interest in the vaccine. In Moscow, there is talk of a "Sputnik Moment," a reference to the Soviet Union's launch of the first ever satellite in 1957, ahead of the Americans.

Epidemiologists like Vasily Vlassov of the Higher School of Economics in Moscow, though, are warning against premature euphoria. The celebratory comments coming from the Kremlin, he says, are "like Soviet-era propaganda."

Vlassov is critical of the government having lowered the legal hurdles. Moscow intends to begin mass production of the vaccine in September or October even though the clinical studies haven't even yet advanced into the decisive Phase III of testing. "Russia is violating internationally accepted rules," he says.

According to WHO vaccine guidelines, every new substance must first be tested in the laboratory and on animals before it can be administered to humans. In the first phase of a clinical study, only very few test subjects receive the vaccine, with Phase II involving dozens or perhaps a couple hundred people.

In Phase III, tens of thousands of test subjects are often involved. Every phase is crucial to determining if the new vaccine is safe and whether it is effective.

A "Nice Bonus"

Furthermore, participation in the trials must be voluntary. Test subjects normally receive monetary compensation, but it tends not to be particularly generous. Also, all relevant data pertaining to the trials must be made public so that government agencies and other scientists can evaluate it.

The Gamaleya Institute is apparently violating these guidelines in several different ways. Thus far, hardly any scientific data has been published, while only 76 test subjects took part in the first and second testing phases, half of them soldiers in the army.

The other half were civilians, who received 100,000 rubles for their participation, the equivalent of around 1,200 euros or around three average monthly salaries in Russia. Anna Kutkina, one of the volunteers, calls it a "nice bonus" and intends to use the money to help buy the farmhouse she has long been dreaming of.

But it's not just the Russian efforts that appear to be guided by excessive zeal. Some in India are also exhibiting impatience. The country's pharmaceutical industry is the largest producer of vaccines in the world, though most of them are developed elsewhere due to a shortage of domestic innovation there.

Prime Minister Narendra Modi, though, would like to change that state of affairs. At least seven Indian pharmaceutical companies are currently seeking to develop a COVID-19 vaccine, with the company Bharat Biotech having made the most progress. They have named their candidate Covaxin.

In early June, a letter sent by the director of the state-owned Indian Council of Medical Research (ICMR) was leaked to the public. Test subjects, the letter instructed, were to be given Covaxin "no later than July 7" with the goal of making the vaccine available to the public by August 15. It was hardly a randomly chosen date: August 15 is India's Independence Day.

The Indian Academy of Sciences quickly released a statement calling the timeline both "unfeasible" and "unreasonable." Producer Bharat Biotech then noted that possible approval would take at least another five months and ICMR was forced to backpedal. For health expert Lahariya, the incident shows that oversight actually works in India. "Would such a debate also have been possible in Russia and China?" he wonders.

Still, the favorite in the race for a vaccine isn't India, but China. Three of the six candidates around the world that are currently in Phase III trials have been developed by Chinese scientists. The other three companies in the final stage of trials are the British-Swedish company AstraZeneca, the German firm Biontech and the American company Moderna.

The Chinese, though, are running into a problem that other countries would love to have: They don't have enough coronavirus cases. The efficacy of a vaccine can only really be adequately tested in places where test subjects face a certain risk of infection.

As a result of strict lockdown measures and surveillance measures in China, though, the virus has essentially been eradicated in the country. In response, Sinopharm is carrying out its Phase III trials in the United Arab Emirates, while Sinovac has headed to Brazil.

"A Diplomatic Fiasco"

Beijing has already promised these two countries and other pro-China nations access to the vaccine, says Yanzhong Huang, a health expert with the U.S.-based think tank Council on Foreign Relations. And that, he says, is a bit of a political risk: Given that China can't control the media in the recipient countries, there could be negative reports about possible side effects.

"That would be a diplomatic fiasco for China," Huang says.

In addition, the Chinese military has administered the vaccine to an unknown number of soldiers since the end of June, despite Phase III trials not yet having begun. That vaccine was developed by army scientists in cooperation with the Chinese company CanSino.

One participant in the Phase II clinical trial from CanSino makes it sound as though they have been a bit more stringent when it comes to testing guidelines than Moscow has. During the outbreak in Wuhan, Lao Ji delivered food and medicines on his moped. He recalls being horrified at the time when he read the Chinese translation of an article in the medical journal Lancet, which described how a coronavirus patient's immune system can spin out of control.

He learned via the Chinese microblogging site Weibo that volunteers were being sought for a study, Lao said during an April discussion in Wuhan held just two days after his injection. "I hope that a vaccine will be developed as soon as possible," he said. "So, it's better if I do my part to help out."

The scientists, he said, extensively informed him of the risks. One month prior to the injection, he was given a comprehensive health checkup and he provided details about his health history. He also committed to having his blood taken four times over a six-month period. When asked about the fee paid for his participation, he said he couldn't remember, but added: "It wasn't much. Perhaps half my monthly salary." He didn't volunteer for the money, though, he said.

Vaccine Espionage

Although China is ahead of the others in developing a vaccine, the country has also apparently turned to its intelligence service for help. In July, the U.S. Department of Justice indicted two Chinese hackers who were allegedly searching for weaknesses in the computer systems of networks of biotech firms and other companies conducting research into a COVID-19 vaccine.

The two are thought to have been operating under the auspices of an officer in the Chinese Ministry of State Security.

The biotech firm Moderna confirmed having been informed by the FBI of the attempted spying. The Trump administration has high hopes for the Massachusetts-based company and has provided its vaccine development project with almost $1 billion in funding. The company began Phase III trials in late January, becoming the first pharmaceutical firm in the U.S. to do so.

One of the three institutes that Moderna is cooperating with is the Baylor College of Medicine in Houston. The college's press office says they don't know if the Chinese hackers also targeted Baylor.

But it wouldn't come as a surprise: U.S. officials are currently pursuing several investigations into suspected Chinese medical espionage in the Houston area. Indeed, it was one of the reasons that the Trump administration ordered the closure of the Chinese consulate there in late July.

Dollar blues: why the pandemic is testing confidence in the US currency

After the greenback suffers its worst month in a decade on economic concerns, debate about its global role is stirring

Colby Smith in New York and Eva Szalay and Katie Martin in London




When coronavirus kicked off a historic economic crash and sent stock markets into freefall in March, investors and companies all over the world rushed in to the one currency they trusted above all others: the dollar.

Desperate for safety and in need of cash to keep businesses functioning through an economic crisis on an unprecedented scale, they snapped up the US currency wherever they could, sending it racing higher.

The scale of the rally — 9 per cent in as many days — was extreme, matching the scale of the crisis. But the move itself was predictable. When the going gets tough, the dollar jumps — a pattern familiar from the 2008-09 financial crisis and in every geopolitical flare-up of recent decades.

“If there is turmoil, you want safety,” says Eswar Prasad, a professor at Cornell University and a former senior IMF official. “And where do you go? The dollar.”

Just a few months later, however, the US currency has suffered its poorest monthly performance in 10 years, hitting its lowest point against a basket of peers since 2018. The 5 per cent drop in the value of the dollar in July might sound modest, but in the relatively stable foreign exchange market that counts as dramatic.


Line chart of US dollar index showing Dollar suffers biggest monthly drop in a decade


Such a sharp move in the dollar inevitably raises a series of questions that go to the heart of the global financial system and the unique role that the US currency plays.

In the short term, the decline in the dollar is reflecting the potential weakness of the US economy as the pandemic spreads in southern states.

While much of the world is slowly crawling out of lockdowns, the US has been an outlier among developed economies for its patchy management of the crisis and increasingly fractious political debate over how to suppress the virus. Fund managers are betting that its central bank will need to lavish yet more stimulus on the economy, weakening the dollar further along the way.

But there are also more fundamental worries playing out. Gold is soaring to record nominal highs as investors seek an alternative to the US currency. Some are openly asking, once again, whether US institutions are now too weak for the world to rely on the dollar. American politics is becoming even more polarised and potentially dysfunctional just at the moment when the EU is showing new signs of unity and purpose.

Fed chair Jay Powell warned that the trajectory of the US economy would ‘depend significantly on the course of the virus’
Fed chair Jay Powell warned that the trajectory of the US economy would ‘depend significantly on the course of the virus’ © Kevin Lamarque/Reuters


Brad Setser, a former US Treasury official now at the Council on Foreign Relations, says it is “far-fetched” to believe the euro will suddenly supplant the dollar. Instead, he says, “US mismanagement” is more likely to slowly chip away at the dollar’s standing. Given his controversial suggestion to delay November's presidential poll, Donald Trump’s willingness to accept the outcome of the election will be closely watched.

For the time being, however, academics broadly agree that the moment when the world decisively shifts away from the US currency has not yet arrived. “The events in March have, if anything, strengthened the international role of the dollar,” says Hyun Song Shin, head of research at the Bank for International Settlements.

Mark Sobel, a former senior US Treasury official and US chairman of Omfif, a financial think-tank, agrees: “It reminded the world about the indispensable role of the Federal Reserve in the global financial system.”


Dollar maintains dominant position


Stimulus weakens the greenback

These are confusing times in markets. A decline in the dollar’s value is typically a sign of global economic optimism. It generally shows that other countries have good growth prospects and that dollar-based investors are happy to put their money to work in riskier locations.

The outlook is different this time. The dollar’s decline has accelerated in the past week, while government bond prices have remained close to record highs, a reflection of expectations of low growth and a desire for safe assets. That suggests investors have identified a specific American problem.

“The US government bond market is reflecting the fact that the US outlook is weakening,” says David Riley, chief investment strategist at BlueBay Asset Management in London. “There’s going to have to be more stimulus. This is where the gold bug view comes in, where sooner or later this is a debasement of the global reserve currency. So you go into gold.”

Gold hit a record high of $1,983 a troy ounce this week. Even sterling, held down against other major currencies by the prospect of dropping out of EU trade structures without a safety net at the end of this year, has gained against the dollar, reaching over $1.30, a 7 per cent climb in July.

German chancellor Angela Merkel elbow bumps European Council president Charles Michel. Much of the dollar’s decline has been against the euro, which has appreciated 10 per cent since May
German chancellor Angela Merkel elbow bumps European Council president Charles Michel. Much of the dollar’s decline has been against the euro, which has appreciated 10 per cent since May © Thierry Monasse/Getty


The dollar has been dragged down by the sharp rise in coronavirus infections in the US, which have prompted fears of another round of economically damaging lockdowns.

“We’ve totally blown it in terms of controlling Covid,” says Stephen Roach, a professor at Yale University and a former chair of Morgan Stanley Asia.

At the most recent meeting on monetary policy this week, Fed chair Jay Powell warned that the trajectory of the US economy would “depend significantly on the course of the virus”. Taken together with his commitment to supporting the economy, investors anticipate additional stimulus in the coming months.

“The Fed is likely to be easier than most other central banks,” says Michael Swell, head of global fixed income portfolio management at Goldman Sachs Asset Management. Benchmark interest rates are likely to remain at or near zero for years, he says, “even in the event that you see significant improvements in growth and employment”.


Line chart of Amount outstanding, $bn showing Fed's emergency dollar swap lines quell panic


Rising euro

Much of the dollar’s decline has been against the euro, which has appreciated 10 per cent higher since May. In July, EU leaders agreed on a coronavirus rescue package for the bloc that hinges on pooling debt across member states for the first time with a large series of new collective bonds.

This solidarity stands in sharp contrast to the political paralysis in the US and opens up the possibility that, eight years after the peak of the eurozone debt crisis, the EU and euro area may be able to start offering a more institutionally robust and liquid currency to conservative long-term investors such as central banks.

But that will not happen overnight. “The euro has been missing a deep low-risk bond market and now there is a possibility that this will change. But even so, it will take a long time to develop and become as mature and liquid as US Treasuries,” says Jeffrey Frankel, a former economic adviser to the White House and a professor at Harvard University.

“There really are not sufficiently large alternatives to allow [reserve managers] to shift en masse out of dollars,” says Barry Eichengreen, economics professor at the University of California, Berkeley.

Donald Trump at a coronavirus briefing. The US has been an outlier among developed economies for its patchy management of the crisis
Donald Trump at a coronavirus briefing. The US has been an outlier among developed economies for its patchy management of the crisis © Yuri Gripas/Pool/EPA


Reserve currency status confers significant benefits to the host country. For the US government, it has not only meant additional income in the form of seigniorage — the profits made when issuing a currency — but also the capacity to borrow significant sums of capital very cheaply.

Further bolstering the dollar’s supremacy is the fact that it plays an outsized role in global trade and finance, with nearly a fifth of all trade deals outside the US invoiced in the currency.

The dollar is even more entrenched in global currency trading, with some 88 per cent of the deals in the $6.6tn daily market traded against the greenback, according to the Bank for International Settlements. This further limits the ability of central banks to diversify away from the dollar, according to Francesca Fornasari, head of currency solutions at Insight Investment.

As most currencies are, by default, traded against the dollar, euros would be of little use when, for example, an emerging market central bank needs to stop its currency from plummeting.

“Central banks hold reserves as a security blanket for when markets become dysfunctional. If you’re the central bank of Indonesia and your currency is measured against the dollar, you really need to have dollars to be able to intervene,” says Ms Fornasari.

Mark Sobel, a former senior US Treasury official and US chairman of Omfif: '[March] reminded the world about the dollar’s dominance as a reserve and financing currency'
Mark Sobel, a former senior US Treasury official and US chairman of Omfif: '[March] reminded the world about the dollar’s dominance as a reserve and financing currency' © OMFIF


But this is not the first time in recent years that the dollar’s dominance has been questioned.

In 2008, an academic study by Mr Frankel and Menzie Chinn, a professor at University of Wisconsin — Madison, predicted that by 2022 the euro would surpass the dollar as the world’s leading reserve currency. At the time, the euro was powering towards its all-time high, peaking close to $1.60 in April of that year to round off an 82 per cent rise against the dollar. In the same period, the dollar index shed 40 per cent of its value, hitting a record low in March that year.

The onslaught of the global financial crisis just a few months later, which unleashed demand for safe dollar assets, ended that bout of speculation about the euro supplanting the US currency.

The latest available data from central bank reserve managers shows that the US currency’s share of their stockpiles increased in the first quarter of the year, with nearly 62 per cent of the roughly $11tn of global foreign exchange holdings allocated to the dollar. This is just two percentage points lower than in 2008, according to data from the IMF. The euro’s share of reserves peaked in 2009 at 28 per cent; in the first quarter of the year it stood at 20 per cent.


Harvard professor Jeffrey Frankel: 'It will take a long time [for the euro] to develop and become as mature and liquid as US Treasuries' © Andrew Harrer/Bloomberg


Currency watchers once looked to China as the biggest threat to the dollar’s dominance. But, so long as its financial system remains subject to capital flow restrictions, the renminbi cannot play the part of a global reserve currency, analysts say. Its share of global central bank holdings has increased but still stands at only 2 per cent.

But regimes do change, posing a long-term rather than immediate danger to the dollar. “People assume that nothing the US does could turn into a situation where the dollar loses credibility.

But that’s wrong and you only have to look at Britain as a cautionary tale,” says Mr Frankel. “Sterling used to be the world’s reserve currency but it lost its status, which shows that you can lose that exorbitant privilege.”


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