Globalisation unwound

Has covid-19 killed globalisation?

The flow of people, trade and capital will be slowed





EVEN BEFORE the pandemic, globalisation was in trouble. The open system of trade that had dominated the world economy for decades had been damaged by the financial crash and the Sino-American trade war.

Now it is reeling from its third body-blow in a dozen years as lockdowns have sealed borders and disrupted commerce. The number of passengers at Heathrow has dropped by 97% year-on-year; Mexican car exports fell by 90% in April; 21% of transpacific container-sailings in May have been cancelled.

As economies reopen, activity will recover, but don’t expect a quick return to a carefree world of unfettered movement and free trade. The pandemic will politicise travel and migration and entrench a bias towards self-reliance. This inward-looking lurch will enfeeble the recovery, leave the economy vulnerable and spread geopolitical instability.

The world has had several epochs of integration, but the trading system that emerged in the 1990s went further than ever before. China became the world’s factory and borders opened to people, goods, capital and information. After Lehman Brothers collapsed in 2008 most banks and some multinational firms pulled back. Trade and foreign investment stagnated relative to GDP, a process this newspaper later called slowbalisation.

Then came President Donald Trump’s trade wars, which mixed worries about blue-collar jobs and China’s autocratic capitalism with a broader agenda of chauvinism and contempt for alliances. At the moment when the virus first started to spread in Wuhan last year, America’s tariff rate on imports was back to its highest level since 1993 and both America and China had begun to decouple their technology industries.

Since January a new wave of disruption has spread westward from Asia. Factory, shop and office closures have caused demand to tumble and prevented suppliers from reaching customers. The damage is not universal. Food is still getting through, Apple insists it can still make iPhones and China’s exports have held up so far, buoyed by sales of medical gear. But the overall effect is savage.

World goods trade may shrink by 10-30% this year. In the first ten days of May exports from South Korea, a trade powerhouse, fell by 46% year-on-year, probably the worst decline since records began in 1967.

The underlying anarchy of global governance is being exposed. France and Britain have squabbled over quarantine rules, China is threatening Australia with punitive tariffs for demanding an investigation into the virus’s origins and the White House remains on the warpath about trade. Despite some instances of co-operation during the pandemic, such as the Federal Reserve’s loans to other central banks, America has been reluctant to act as the world’s leader.

Chaos and division at home have damaged its prestige. China’s secrecy and bullying have confirmed that it is unwilling—and unfit—to pick up the mantle. Around the world, public opinion is shifting away from globalisation. People have been disturbed to find that their health depends on a brawl to import protective equipment and on the migrant workers who work in care homes and harvest crops.

This is just the start. Although the flow of information is largely free outside China, the movement of people, goods and capital is not. Consider people first. The Trump administration is proposing to curtail immigration further, arguing that jobs should go to Americans instead.

Other countries are likely to follow. Travel is restricted, limiting the scope to find work, inspect plants and drum up orders. Some 90% of people live in countries with largely closed borders.

Many governments will open up only to countries with similar health protocols: one such “travel bubble” is mooted to include Australia and New Zealand and, perhaps, Taiwan and Singapore.

The industry is signalling that the disruption to travel will be lasting. Airbus has cut production by a third and Emirates, a symbol of globalisation, expects no recovery until 2022.

Trade will suffer as countries abandon the idea that firms and goods are treated equally regardless of where they come from. Governments and central banks are asking taxpayers to underwrite national firms through their stimulus packages, creating a huge and ongoing incentive to favour them. And the push to bring supply chains back home in the name of resilience is accelerating.

On May 12th Narendra Modi, India’s prime minister, told the nation that a new era of economic self-reliance has begun. Japan’s covid-19 stimulus includes subsidies for firms that repatriate factories; European Union officials talk of “strategic autonomy” and are creating a fund to buy stakes in firms. America is urging Intel to build plants at home.

Digital trade is thriving but its scale is still modest. The sales abroad of Amazon, Apple, Facebook and Microsoft are equivalent to just 1.3% of world exports.

The flow of capital is also suffering, as long-term investment sinks. Chinese venture-capital investment in America dropped to $400m in the first quarter of this year, 60% below its level two years ago. Multinational firms may cut their cross-border investment by a third this year.

America has just instructed its main federal pension fund to stop buying Chinese shares, and so far this year countries representing 59% of world GDP have tightened their rules on foreign investment. As governments try to pay down their new debts by taxing firms and investors, some countries may be tempted to further restrict the flow of capital across borders.

It’s lonely out there

Don’t be fooled that a trading system with an unstable web of national controls will be more humane or safer. Poorer countries will find it harder to catch up and, in the rich world, life will be more expensive and less free.

The way to make supply chains more resilient is not to domesticate them, which concentrates risk and forfeits economies of scale, but to diversify them. Moreover, a fractured world will make solving global problems harder, including finding a vaccine and securing an economic recovery.

Tragically, this logic is no longer fashionable. Those three body-blows have so wounded the open system of trade that the powerful arguments in its favour are being neglected. Wave goodbye to the greatest era of globalisation—and worry about what is going to take its place.

Why the coming emerging markets debt crisis will be messy

Large investment funds could play hardball with developing countries that default

Colby Smith in New York and Robin Wigglesworth in Oslo


© Dolores Ochoa/AP | Ecuador. The country says it may have trouble repaying its debts


The Maldives’ coral-encrusted islands have long been irresistible to tourists. But today its secluded luxury resorts are deserted, except those converted into makeshift quarantine facilities for stranded coronavirus patients.

The virus has shattered global tourism and devastated the Maldivian economy. The IMF has gone from projecting a 6 per cent expansion in gross domestic product this year to an 8 per cent contraction. The risk is that this brutal, abrupt recession could translate into the Maldives becoming the latest country to sink into sovereign bankruptcy.

Zambia, Ecuador and Rwanda have all announced in recent weeks that they are struggling to repay their debts. Lebanon has already kicked off its restructuring process, while Argentina, which was battling its creditors even before the pandemic struck, appears to be heading for its ninth sovereign default since independence in 1816. Investors believe many other developing countries are not too far behind.

Chart showing that the frontier market debt climbs to fresh record high (excluding Venezuela). Left-hand scale shows Q3 of each year, $ billion, Households, Non-financial corporates, Government and Financial Corporates. Right-hand scale shows weighted average as a share of GDP (%)


The Maldives is hardly the biggest country likely to succumb, but given its debt burden to creditors such as China and the severity of its recession, it is the “poster child of how easily the dominoes will fall”, warns Mitu Gulati, a sovereign debt expert at Duke University. The IMF has already lent the country $29m to tide it over, but warned that the loss of tourism has “severely weakened” the economy and that additional financial support would be needed.

The country’s $250m bond due in 2022 has tumbled to trade at just 81 cents on the dollar, indicating that investors are increasingly concerned about the Maldives’ capacity to make good on its obligations. The kindling for another big emerging markets debt crisis has been accumulating for years. Investor demand for higher returns has allowed smaller, lesser-developed and more vulnerable “frontier” countries to tap bond markets at a record pace in the past decade.

Their debt burden has climbed from less than $1tn in 2005 to $3.2tn, according to the Institute of International Finance, equal to 114 per cent of GDP for frontier markets. Emerging markets as a whole owe a total of $71tn.


A boy crosses a street in a slum in Tripoli, northern Lebanon. Ashmore has built up a huge stake in Beirut’s debt that in practice gives it a veto over how the country will restructure some of its bonds
A boy crosses a street in a slum in northern Tripoli. Ashmore has built up a huge stake in Lebanon’s debt that in practice gives it a veto over how the country will restructure some of its bonds © Hassan Ammar/AP


“The challenge is enormous,” says Ramin Toloui, a former head of emerging market debt at bond manager Pimco and assistant secretary for international finance at the US Treasury, who now teaches at Stanford University. “The withdrawal of money [from EM funds] is greater and more sudden than in 2008, the economic shock is huge and the path to recovery more uncertain than it was after the last crisis.”

The G20 has agreed to temporarily freeze about $20bn worth of bilateral loan repayments for 76 poorer countries. It has urged private sector creditors to do the same, but few analysts believe that is feasible, and predict the result will probably instead be a series of ad hoc debt standstills and restructurings for swaths of the developing world.

Resolving the coming debt crises may be even tougher than in the past, however. Rather than the banks and governments — the primary creditors in the mammoth debt crisis that racked the developing world in the 1980s and 1990s — creditors are nowadays largely a multitude of bond funds. They are trickier to co-ordinate and corral into restructuring agreements.

Chart showing that Covid-19 slams emerging market bonds. Rebased (May 9, 2019 = 100). Hard currency bond ETF against Local currency bond ETF


Although the need for financial relief is stark in many cases, there are indications that some investment groups may break with the custom of reluctantly accepting financially painful compromises to achieve a restructuring, and instead fight for a better deal.

“Normally these guys would get out of Dodge City at the first sign of trouble in the debtor country. They're not set up to deal with prolonged debt restructurings and don't like the reputational risk that would result from an aggressive campaign against a country in deep economic and social distress,” says Lee Buchheit, a prominent lawyer in the field. “But having watched some holdout creditors extract rich payouts, even some of the traditional institutional investors appear to be reconsidering the virtues of passivity.”


Medical staff interview residents of Guayaquil, Ecuador, during the Covid-19 pandemic. Zambia, Ecuador and Rwanda have all announced in recent weeks that they are struggling to repay their debts
Medical staff interview residents of Guayaquil, Ecuador, during the Covid-19 pandemic. Ecuador, Rwanda and Zambia have all announced in recent weeks that they are struggling to repay their debts © Jose Sanchez/AFP/Getty


Holdout strategy

In the past, such aggression has been the preserve of what critics call “vulture funds” — investors who seek to profit from government debt crises through obstinacy and legal threats.

Their basic strategy is to act as a “holdout”. Sovereign debt restructurings amount to exchanging a country’s old bonds for new ones, often worth less, with a lower interest rate or longer repayment times. Holdouts refuse to join in, and instead threaten to sue for the full amount. As long as the number of holdouts is tiny, countries have often elected to simply pay them off rather than deal with the nuisance of a potentially lengthy courtroom battle.

For example, when Greece restructured most of its debts in 2012, it grudgingly chose to repay in full a smattering of overseas bonds where hedge funds had congregated. Others, like Argentina, have chosen to fight. The uncertainty of the outcome — and how hard it can be to compel a country to pay through legal means — long ensured a delicate but functional balance to the sovereign debt restructuring process.

However, in 2016 Elliott Management’s Jay Newman etched his name in the annals of big hedge fund hauls by extracting $2.4bn from Argentina for the firm after a decade-long legal battle.

Investors brace for next wave of sovereign defaults. Total sovereign debt in default by creditor ($bn)


“[Holding out] long seemed like a cat-and-mouse game that was costly and uncertain, but now it has shifted to a more promising strategy,” says Christoph Trebesch, an academic at the Kiel Institute for the World Economy in Germany.

Although still daunting, Elliott’s success could inspire more copycats and complicate the looming spate of EM debt crises, some experts fear.

Moreover, there are signs that traditional investment groups are also toughening up, which could turn a difficult process into a more protracted nightmare for government lenders and borrowers alike.

One lawyer who has worked with creditors points out that many investment funds have piled into EM bonds in recent years, and the prospect of deep and broad losses could be ruinous to some heavily-exposed funds. “Before, the holdouts were the main problem, but now it could be the traditional funds,” he says. “If your back is against the wall, you’re going to fight.”


Tourists kayak in the Koattey wetlands in the Maldives. The IMF has gone from projecting a 6% expansion for the nation's economy this year to an 8% contraction
Tourists sail kayaks in the Maldives. The IMF has gone from projecting a 6% expansion for the nation's economy this year to an 8% contraction © Carl Court/Getty


After the IMF’s failed attempt to set up a quasi-sovereign bankruptcy court in the early 2000s, the main response by governments has been to introduce “collective action clauses” into their bonds. These dictate that if a large majority of bondholders vote for a restructuring, typically 75 per cent, the agreement is imposed on all holders.

But investors have wised up, buying bigger chunks of specific bonds in an attempt to amass such a large position that they enjoy a de facto veto over the restructuring terms of the instruments. And some older bonds have no such clauses.

So far there are only a few examples of larger investment firms taking a tougher stance, but they are notable for how successful they have been. The first was Franklin Templeton, which managed to extract what some analysts say were surprisingly favourable terms in Ukraine’s 2015 debt restructuring, having snapped up enough bonds to become the country’s largest private creditor.

More recently, Ashmore has built up a huge stake in Lebanon’s debt that in practice gives it a veto over how the country will restructure some of its bonds. And this year, Fidelity successfully played hardball with Buenos Aires, calling the Argentine province’s bluff that it was unable to make a $250m payment due in January.

Buenos Aires ended up paying in full.

Fidelity is also part of a larger creditor group that has pushed back on Argentina’s plans to restructure its $65bn foreign debt burden. The group includes some of the world’s largest institutional investors, including BlackRock and T Rowe Price, and together with the two other main bondholder groups, wields enough power to make or break any deal.

Franklin Templeton and Ashmore declined to comment. Fidelity declined to comment on its Argentine bust-up, but said in a statement that its policies on sovereign restructurings had not changed.

“When it becomes necessary to negotiate with those who have borrowed our investors’ money, we do so in good faith and in a reasonable, professional manner,” the investment group said.

“The interests we represent are those of the millions of individuals, and thousands of financial advisers and institutions who have entrusted their money to us to invest on their behalf.”

Chart showing that China is now the largest official creditor to the developing world. Aggregate external public debt owed to different official creditors ($bn)


Debtor advantage

Fidelity’s nod to the fiduciary duty money managers owe clients is telling. Traditional asset managers are unlikely to be quite as stubborn or litigious as Elliott. But with a spate of examples that a tougher approach can be successful, more may feel compelled to follow suit — no matter how severe the coronavirus crisis proves for many countries.

“They don’t want to be Elliott, but they have a fiduciary duty and for some of them it will be existential, so they might as well fight to the death,” says the creditor lawyer. “It doesn’t take many of them to change their attitudes and this will become very difficult.”

Clinching a victory, however, is another story, says one holdout investor.

Amassing a blocking stake “gets you a seat at the table, but it doesn’t tell you when you will be eating”, the person adds.

People buy groceries in Buenos Aires. Argentina, which was already battling its creditors even before coronavirus struck, appears to be heading for its ninth sovereign default since independence in 1816
People buy groceries in Buenos Aires. Argentina, which was already battling its creditors even before coronavirus struck, appears to be heading for its ninth sovereign default since independence in 1816 © Marcelo Endelli/Getty


These dynamics are why many investors believe the G20’s call for private-sector creditors to copy their blanket debt “standstill” will probably prove futile. Absent some kind of extraordinary legal mechanism — such as the UN Security Council resolution that shielded Iraq’s assets from seizure from creditors after the US invasion in 2003 — investors warn that it will be challenging to come to a collective and voluntary agreement. Instead, they say the coming wave of debt crises will have to be handled on a case-by-case basis.

For the investment funds looking to take an aggressive stance in any default talks, the obstacle might not be the potentially bad PR but the perception among some governments that the pandemic gives them more leverage. Given that bond prices have plummeted to distressed levels, countries will probably harden their stance and seek more favourable terms in forthcoming restructurings.

Bill Rhodes, a former top Citi executive who was one of the key figures in the Latin American debt crisis of the 1980s, argues that the threat of fresh outbreaks of coronavirus will strengthen the hand of debtor countries when negotiating repayment terms.

“We are looking at just the first wave of Covid-19, so some of these finance ministers are going to feel like they really have to drive a tough bargain,” he says.

“The IMF will be very firm on pushing for the countries to get discounts.”



Ramin Toloui says “the withdrawal of money [from EM funds] is greater and more sudden than in 2008’, while Mitu Gulati says the Maldives is the 'poster child of how easily the [EM] dominoes will fall'
Ramin Toloui says ‘the withdrawal of money [from EM funds] is greater and more sudden than in 2008, while Mitu Gulati says the Maldives is the 'poster child of how easily the [EM] dominoes will fall' © Reuters/Duke



Institutional deal

A group of sovereign debt experts, including Mr Gulati and Mr Buchheit, has come up with a pandemic debt relief proposal. Countries should strike an agreement with creditors to funnel debt payments into credit facilities set up by the World Bank or a regional development bank, which would then be lent back to the countries to pay for essential spending.

Its backers hope this would avoid a technical default and impose a de facto debt standstill.

The carrot of the legal protection enjoyed by organisations such as the World Bank — which are considered “super-senior” in debt restructurings — might help sweeten the deal. Once the crisis has faded a decision can then be taken on whether a full but orderly debt restructuring is needed, and any money deposited in the facility would be protected.


Bill Rhodes: 'We are looking at just the first wave of Covid-19, so some of these [EM] finance ministers are going to feel like they really have to drive a tough bargain [in forthcoming restructurings]'
Bill Rhodes: 'We are looking at just the first wave of Covid-19 ... finance ministers are going to feel like they really have to drive a tough bargain [in forthcoming restructurings]' © Pete Marovich/Bloomberg


It is unclear whether the World Bank, which has not publicly commented on the idea, would go for this proposal, and some heavy-handed coercion from the likes of the US would probably be needed to get many creditors to agree.

But Mr Trebesch says the proposal may be acceptable to China, which has edged out the IMF and the World Bank as the largest official creditor to developing economies via its Belt and Road Initiative, according to data he compiled with Harvard’s Carmen Reinhart and economist Sebastian Horn. “If things really blow up, China might prefer this option to an outright default,” he says.

Whatever avenue is eventually taken, it is essential that policymakers start grappling more forcefully with emerging market travails, given the danger that their severity is likely to reverberate across the international financial system, according to Scott Minerd, chief investment officer at investment firm Guggenheim Partners.

“This pandemic will quickly escalate from a health crisis to a humanitarian crisis, and ultimately to a solvency crisis,” Mr Minerd wrote in a recent note to clients.

“Political stability will be the last domino to fall. But my biggest concern is that this crisis will be much deeper and more prolonged than people anticipate, which leaves a lot of space for another shoe to drop in the global financial crisis.”

Dragon strike

China has launched rule by fear in Hong Kong

The rest of the world should worry, too




THE PEOPLE of Hong Kong want two things: to choose how they are governed, and to be subject to the rule of law. The Chinese Communist Party finds both ideas so frightening that many expected it to send troops to crush last year’s vast protests in Hong Kong. Instead, it bided its time.

Now, with the world distracted by covid-19 and mass protests difficult because of social distancing, it has chosen a quieter way to show who’s boss. That threatens a broader reckoning with the world—and not just over Hong Kong, but also over the South China Sea and Taiwan.

On May 21st China declared, in effect, that Hong Kongers deemed to pose a threat to the party will become subject to the party’s wrath. A new security law, written in Beijing, will create still-to-be defined crimes of subversion and secession, terms used elsewhere in China to lock up dissidents, including Uighurs and Tibetans. Hong Kong will have no say in drafting the law, which will let China station its secret police there. The message is clear. Rule by fear is about to begin.
This is the most flagrant violation yet of the principle of “one country, two systems”. When the British colony was handed back to China in 1997, China agreed that Hong Kong would enjoy a “high degree of autonomy”, including impartial courts and free speech. Many Hong Kongers are outraged (see article). Some investors are scared, too. The territory’s stockmarket fell by 5.6% on May 22nd, its biggest drop in five years.

Hong Kong is a global commercial hub not only because it is situated next to the Chinese mainland, but also because it enjoys the rule of law. Business disputes are settled impartially, by rules that are known in advance. If China’s unaccountable enforcers are free to impose the party’s whims in Hong Kong, it will be a less attractive place for global firms to operate.

China’s move also has implications far beyond Hong Kong. “One country, two systems” was supposed to be a model for Taiwan, a democratic island of 24m that China also sees as its own. The aim was to show that reunification with the motherland need not mean losing one’s liberty. Under President Xi Jinping, China seems to have tired of this charade. Increasingly, it is making bare-knuckle threats instead.

The re-election in January of a China-sceptic Taiwanese president, Tsai Ing-wen, will have convinced China’s rulers that the chances of a peaceful reunification are vanishingly small. On May 22nd, at the opening of China’s rubber-stamp parliament, the prime minister, Li Keqiang, ominously cut the word “peaceful” from his ritual reference to reunification. China has stepped up war games around Taiwan and its nationalists have been braying online for an invasion.

China is at odds with other countries, too. In its building of island fortresses in the South China Sea, it ignores both international law and the claims of smaller neighbours. This week hundreds, perhaps thousands of Chinese troops crossed China’s disputed border with India in the Himalayas.

Minor scuffles along this frontier are common, but the latest incursion came as a state-owned Chinese paper asserted new claims to land that its nuclear-armed neighbour deems Indian.

And, as a sombre backdrop to all this, relations with the United States are worse than they have been in decades, poisoning everything from trade and investment to scientific collaboration.

However much all the regional muscle-flexing appals the world, it makes sense to the Chinese Communist Party. In Hong Kong the party wants to stop a “colour revolution”, which it thinks could bring democrats to power there despite China’s best efforts to rig the system.

If eroding Hong Kong’s freedoms causes economic damage, so be it, party bigwigs reason. The territory is still an important place for Chinese firms to raise international capital, especially since the Sino-American feud makes it harder and riskier for them to do so in New York.

But Hong Kong’s GDP is equivalent to only 3% of mainland China’s now, down from more than 18% in 1997, because the mainland’s economy has grown 15-fold since then. China’s rulers assume that multinational firms and banks will keep a base in Hong Kong, simply to be near the vast Chinese market. They are probably right.
 The simple picture that President Donald Trump paints of America and China locked in confrontation suits China’s rulers well. The party thinks that the balance of power is shifting in China’s favour. Mr Trump’s insults feed Chinese nationalist anger, which the party is delighted to exploit—just as it does any tensions between America and its allies.

It portrays the democracy movement in Hong Kong as an American plot. That is absurd, but it helps explain many mainlanders’ scorn for Hong Kong’s protesters.

The rest of the world should stand up to China’s bullying. On the Sino-Indian border, the two sides should talk more to avoid miscalculations, as their leaders promised to in 2018. China should realise that, if it tries the tactics it has used in the South China Sea, building structures on disputed ground and daring others to push back, it will be viewed with greater distrust by all its neighbours.

In the case of Taiwan China faces a powerful deterrent: a suggestion in American law that America might come to Taiwan’s aid were the island to be attacked. There is a growing risk that a cocksure China may decide to put that to the test. America should make clear that doing so would be extremely dangerous. America’s allies should echo that, loudly.

Hong Kong’s options are bleaker. The Hong Kong Policy Act requires America to certify annually that the territory should in trade and other matters be treated as separate from China. This week the secretary of state, Mike Pompeo, declared that “facts on the ground” show Hong Kong is no longer autonomous.

This allows America to slap tariffs on the territory’s exports, as it already does to those from the mainland. That is a powerful weapon, but the scope for miscalculation is vast, potentially harming Hong Kongers and driving out global firms and banks.

It would be better, as the law also proposes, to impose sanctions on officials who abuse human rights in Hong Kong. Also, Britain should grant full residency rights to the hundreds of thousands of Hong Kongers who hold a kind of second-class British passport—much as Ms Tsai this week opened Taiwan’s door to Hong Kong citizens.

None of this will stop China from imposing its will on Hong Kong. The party’s interests always trump the people’s.

BlackRock’s largest shareholder sells 22% stake

US bank PNC intends to offload $17bn holding in asset manager to raise cash for potential deals

Richard Henderson in Melbourne and Laura Noonan and James Fontanella-Khan in New York


Pittsburgh-based bank PNC has had its stake in BlackRock since 1995, during which time the asset manager — led by chief executive Larry Fink (above) — has risen to become the world’s largest © AFP via Getty Images


BlackRock’s top shareholder, PNC Financial, will sell its $17bn stake in the asset manager, freeing up the bank to pursue potential acquisitions.

PNC, a Pittsburgh-based bank, “intends to exit its full investment” in the world’s largest asset manager, BlackRock said on Monday.

PNC holds a 22 per cent stake in the company that it purchased in 1995, representing about 35m shares through common and convertible preferred stock.

PNC’s decision to sell comes as US banks set aside tens of billions of dollars to deal with potential losses, in the expectation that soaring unemployment and shuttered businesses will make it impossible for some borrowers to repay their debts.

PNC suffered a 28 per cent fall in net income for the first quarter, as loan-loss provisions increased almost fivefold to $914m.

“We feel the time is now right,” said Bill Demchak, PNC’s chief executive, of the sale.

He said PNC would realise “a substantial return on our investment, significantly enhancing our already strong balance sheet and liquidity".

Mr Demchak added that the deal would leave PNC "very well-positioned to take advantage of potential investment opportunities that history has shown can arise in disrupted markets”.

“There's going to be a lot of disruption this year and there's going to be stuff to buy,” said a person familiar with PNC’s deliberations, adding that while the bank does not have a particular target in mind, it will have dry powder for “organic and inorganic growth” in its core lending business.

Another person said the move would also bolster the bank’s capital ratio.

Banking sector mergers have been few and far between in recent years despite predictions of consolidation by some executives and investors.

Last year, BB&T and SunTrust combined in a $66bn all-stock deal that created a commercial banking giant in the south-east of the US, with more than $400bn in assets.

“PNC will now have a treasure chest of capital that will provide downside support in the current environment as well as (one that) adds to strategic flexibility,” analysts at Jefferies wrote in a note to clients, adding that PNC “would be able to look at a wide range of potential bank targets”.

The removal of the group’s biggest shareholder further consolidates power at the company under Larry Fink, who founded BlackRock three decades ago and holds the roles of chairman and chief executive. Mr Demchak will quit the BlackRock board when the sale is complete.

PNC acquired a stake in BlackRock after a falling-out between Mr Fink and Stephen Schwarzman, chairman of Blackstone.

When Mr Fink founded the fund manager in 1988 it was initially launched under the Blackstone umbrella as Blackstone Asset Management.

Mr Schwarzman has since described the sale of his stake in the company as a “heroic” mistake.

BlackRock shares were down less than 3 per cent in after-hours trading.

The asset manager said it would buy $1.1bn of shares from PNC, bringing its share buybacks this year to $1.5bn — roughly the amount it aimed to purchase in the whole of 2020.

BlackRock’s share price has outperformed its listed US fund management peers for years as the company has grown and diversified its revenues, in part by expanding into technology.

PNC’s stock price jumped 6 per cent after the announcement, as investors in the bank welcomed a move that has been long awaited.

Selling now also has tax advantages because “it's hard to imagine the tax rate getting any better” under a different US administration, said one of the people familiar with its thinking.

PNC was advised by Citigroup, Evercore and Morgan Stanley.

Navigating Deglobalization

Appeals to recommit to globalization are highly unlikely to gain traction in the wake of the COVID-19 pandemic. Those keen to preserve globalization would instead be better advised to focus on minimizing the disruption caused by the coming period of deglobalization and laying the groundwork for a more sustainable process thereafter.

Mohamed A. El-Erian

elerian125_dinnGetty Images_brokenglobedeglobalization


LAGUNA BEACH – Having already been buffeted by two big shocks in the last ten years, the global economy’s highly interconnected wiring is suffering a third because of the COVID-19 pandemic.

Globalization thus faces a three-strikes-and-out situation that could well result in a gradual but rather prolonged delinking of trade and investment, which would add to the secular headwinds already facing the global economy.

Appeals to recommit to the current globalization process are almost certain to fall on deaf ears – particularly because this latest shock will be driven simultaneously by governments, companies, and households in developed countries.

Those keen to preserve globalization in the longer term would instead be better advised to focus on minimizing the disruption caused by the coming period of deglobalization and laying the groundwork for a more sustainable process thereafter.

For starters, it is already clear that many firms will look to strike a more risk-averse balance between efficiency and resilience as they emerge from the damaging pandemic shock. The corporate world’s multi-decade romance with cost-effective global supply chains and just-in-time inventory management will give way to a more localized approach involving the reshoring of certain activities.

This inclination will be reinforced by government mandates to secure safer inputs for sectors deemed to be of national-security interest. We are already seeing such requirements in the United States for energy generation, telecommunications, health-care materials, and pharmaceuticals. It is only a matter of time until this trend spreads to other sectors and countries.

The aftermath of the current crisis-management phase is also likely to feature an intensified blame game, adding a geopolitical impetus to deglobalization. Already, the US is complaining that China didn’t do enough to contain the spread of the virus and inform other countries of its severity. Some US politicians have even called for China to pay reparations as a result. And many in America and elsewhere perceive China’s initial COVID-19 response as yet another example of the country failing to live up to its international responsibilities.

Moreover, the worsening geopolitical situation will likely intensify the weaponization of economic-policy tools that accelerated during the recent China-US trade war – the second recent blow to the globalization process. That in turn will confirm many multinational companies’ fears that they can no longer rely on two key operating assumptions: the ever closer integration and interconnectedness of global production, consumption, and investment flows; and the orderly and relatively predictable resolution of trade and investment conflicts through multilateral institutions applying the rule of law.

Today’s anti-China rhetoric will also give fresh momentum to the first pushback against globalization that emerged a decade ago. With some segments of the population feeling alienated and marginalized by the process, the anti-establishment backlash gave rise in some places to more extreme political movements that have scored some surprising successes, not least Brexit. Such developments greatly weakened global policy collaboration, as has been starkly evident in the world’s uncoordinated approach to containing COVID-19.

This is not an ideal time for the world economy to undergo secular deglobalization. Most countries, and virtually all segments of their economies (companies, governments, and households), will emerge from the crisis with higher levels of debt. Absent a major round of debt restructuring, developing countries in particular will find their ability to service this debt hampered by high levels of unemployment, lost income, more sluggish economic activity, and, perhaps, less dynamic consumption.

Against this background, those who appreciate the power of cross-border interconnectivity to unleash win-win economic opportunities and reduce the risk of major military conflicts will be inclined to defend the pre-pandemic status quo. But this approach is unlikely to gain traction at a time when governments have become more inward-looking as they battle the pandemic’s direct and indirect damage, companies are still reeling from disruptions to their global supply chains and markets, and households have a heightened sense of economic insecurity.

Rather than fight an unwinnable war of principle, advocates of globalization should adopt a more pragmatic approach that focuses on two priorities.

First, they should find ways to manage an orderly and gradual process of partial deglobalization, including avoiding a descent into self-feeding disruptions that result in unnecessary pain and suffering for many.

Second, they should start putting in place a firmer foundation to relaunch a more inclusive and sustainable process of globalization in which the private sector will inevitably play a bigger design and implementation role.1

To revert to the baseball analogy, this third strike against globalization has sent it back to the dugout for now. But, as in baseball, there will be another at-bat. The challenge now is to use the time on the bench to understand the situation better and come back stronger.


Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer, was Chairman of US President Barack Obama’s Global Development Council. He is President Elect of Queens’ College (Cambridge University), senior adviser at Gramercy, and Part-time Practice Professor at the Wharton School at the University of Pennsylvania. He previously served as CEO of the Harvard Management Company and Deputy Director at the International Monetary Fund. He was named one of Foreign Policy’s Top 100 Global Thinkers four years running. He is the author, most recently, of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.