Poverty and populism put Latin America at the centre of pandemic

With infections rising despite lockdowns, leaders fear another lost decade and a new debt crisis

Michael Stott in London and Andres Schipani in São Paulo

© Edgard Garrido/Reuters

Home to just 8 per cent of the global population, Latin America is now suffering half the world's new coronavirus deaths. Months of strict lockdowns have failed to succeed in flattening the curve of infections, as they did in Europe and east Asia, and the continent faces the worst of both worlds: a heavy human toll and crippling economic damage.

The example of Peru shows how an apparently model response failed to work as intended.

President Martín Vizcarra initially won international praise for a tough, quick response, ordering the army on to the streets less than two weeks after the first Covid-19 case was detected to enforce a national lockdown and threatening to jail violators. His government also announced a $32bn package to support the economy, including a $110 one-off payment to the poorest families to help them survive.

But nearly three months on, Peru is struggling to contain the virus. Its population of 32m has reported more than 200,000 infections, more than France or Germany, and the death rate continues to climb.

One of the key reasons the government's measures have failed to work, experts say, is the country's very large informal economy, covering around 70 per cent of the workforce.

Leonor Lavado, a chicken seller at one of the country’s big public food markets, is one of those workers. She knows she should be staying at home and abiding by the national lockdown.

When she turns on her mobile phone, a government text message reminds her. But staying at home means going hungry.

Latin America is still in the acceleration phase. Chart showing Seven-day rolling average of new Covid-19 deaths, by number of days since three average deaths first recorded

“I go out to work at the market with the fear that an infected person will make me sick,” says Ms Lavado, 46, breadwinner for five people. “But if I don't go to work, there are bills and things to pay and food to buy.”

Her dilemma — shared by millions of other informal workers making up about half of Latin America’s workforce — over whether to obey government rules has emerged as one of the key factors in the spread of the virus. “Our region has become the epicentre of the Covid-19 pandemic,” Carissa Etienne, World Health Organization director for the Americas, said on May 26.

“Now is not the time for countries to ease restrictions.”

Policymakers fear the pandemic — forecast to damage the region's economies more severely than those in other developing regions — could wipe out two decades of social progress, plunge tens of millions of people back into poverty and risks triggering a repeat of last year’s wave of violent social protests. It could also spark new debt defaults.

“It’s going to worsen the already unequal income distribution and poverty levels,” says Alejandro Werner, director of the IMF’s western hemisphere department.

“When the sense of emergency is gone, we may see a forceful return of social discontent throughout the region. It’s very important for the political system to focus on bringing people together and uniting their countries to implement a strong policy response to the pandemic.”

Poor overcrowded neighbourhoods are a challenge for Latin American countries during the pandemic
Poor overcrowded neighbourhoods are a challenge for Latin American countries during the pandemic © AFP/Getty

Covid-19 hit Latin America several weeks after Europe. The first case was reported in Brazil at the end of February, an elderly man returning from Italy. The delay in the virus’s arrival and an apparently slow initial spread prompted hopes that the region might be spared the worst, because of its younger population and mostly tropical weather.

Within three weeks, most Latin American governments had ordered lockdowns, bans on flights, border closures and the shutting of all non-essential services. But cases continued to multiply, leaving weak public health systems — stunted by years of underfunding — unable to cope.

“The adherence of the population to social distancing measures is very different to Europe, where they don’t have so many poor people and they don’t have big slums,” says Jarbas Barbosa, assistant director at the Pan American Health Organization. “It’s very difficult to sustain these measures for a long time.”

Global responses to the pandemic. Graphic showing composite score developed by researchers at Oxford university, to compare policy responses to the coronavirus pandemic

Pressure cooker countries 
The region’s politics have not helped. Populist leaders in Brazil and Mexico, Latin America’s two largest nations, played down the seriousness of the virus. Their leaders undermined with their own behaviour the medical advice of professionals to stay at home.

Brazil, is now the world’s second most infected country after the US, with more than 800,000 cases and over 40,000 deaths. It had the world’s highest death toll in the week to June 11, 6,898, and experts believe the pandemic may be at least four weeks from its peak in the country.

Far-right president Jair Bolsonaro has taken a particularly aggressive stance, dismissing coronavirus as “a little flu”, continuing to greet crowds of followers and telling his nation it was inevitable that most of them would catch the virus and they should “take it like a man” — a message enthusiastically embraced by his followers.

Global Covid-19 death toll: Latin America offsets decline in Europe and the US. Chart showing daily deaths of patients diagnosed with coronavirus (seven-day rolling average). Latin America and the Caribbean now accounts for 49 per cent of average global deaths

The banner at the entrance of a makeshift camp protesting against local lockdown restrictions in São Paulo, Brazil’s biggest city, just says: “Bolsonaro is Right.”

Mexicans have also received mixed messages. President Andrés Manuel López Obrador, a leftist nationalist, was still encouraging fellow citizens at the end of March to dine out in restaurants to boost the economy and was himself continuing to tour the country and hug supporters, violating health protocols on one trip to greet the mother of the country’s most notorious convicted drug trafficker.

Official data confirms more than 130,000 cases and 16,000 deaths, but at least three independent studies suggest Mexico is grossly under-reporting the toll. One found four times more deaths attributable to the virus in Mexico City than officially reported.

And levels of testing have been woeful, ranking among the lowest in the world.Despite the number of Covid-19 cases continuing to rise, the government has begun easing restrictions and Mr López Obrador insists that it has “tamed” the virus.

“I do understand it’s urgent to open up the economy — people need to eat,” says one senior hospital doctor in Mexico City. “But doing things inconsistently and based on flawed epidemiological forecasts makes this country a pressure cooker.”

A woman walks past graffiti depicting a cleaner spraying viruses with the face of President Bolsonaro in Estacio neighborhood in Rio de Janeiro
A woman walks past graffiti depicting a cleaner spraying viruses with the face of President Bolsonaro in Estacio neighbourhood in Rio de Janeiro © Bruno Prado/Getty ‘Never been a crisis like this’

While Latin America’s two biggest economies muddled their responses, most other nations in the region acted like Peru, locking down their populations quickly. But many of them found that the measures which had proved successful in containing the pandemic in developed nations were far less successful in a continent with a long history of weak law enforcement and scepticism of government measures.

Ecuador suffered a particularly horrific wave of infections in its business capital Guayaquil in April. As in other Latin American nations, the virus was introduced by wealthier citizens often coming home from trips to Spain and Italy.

Local hospitals and morgues were overwhelmed, bodies were left uncollected for days in the tropical heat and relatives had to resort to makeshift cardboard coffins to bury their loved ones.

A soldier walks in between people lining up to take the bus  in Quito, Ecuador. The country  suffered a particularly horrific wave of infections in April
A soldier walks in between people lining up to take the bus in Quito, Ecuador. The country suffered a particularly horrific wave of infections in April © Dolores Ochoa/AP

“We have had volcanic eruptions, we have had epidemics, we have had earthquakes,” a haggard-looking Lenin Moreno, Ecuador’s president, told the Financial Times in a video interview from Guayaquil. “But there has never been a crisis like this.”

The president says the budget deficit will be at least $12bn this year, around 12 per cent of GDP. To help fill the gap, his government has announced $4bn of spending cuts, including scrapping state-owned companies, liquidating the national airline and asking government employees and teachers to reduce their hours and pay.

There are much lower death rates in Argentina and Colombia, the region’s third and fourth biggest economies, but they still do not have the virus fully under control and have been forced to extend their lockdowns, increasing the economic damage.

Only in Uruguay and Costa Rica, two of the smallest nations, can the governments claim a high degree of success and very low rates of infection. Both have good state-funded health systems and Ernesto Talvi, Uruguay’s foreign minister, points to very high public compliance with the lockdown, and effective testing and tracking as other key factors.

Implicitly contrasting his country with bigger regional neighbours, he says that Uruguay’s strong democratic tradition meant citizens trusted their leaders’ instructions. “For me, that’s the big lesson of all this.

The trustworthiness of institutions,” says Mr Talvi.

Brazil’s President Jair Bolsonaro talks with interim Health Minister Eduardo Pazuello before a national flag hoisting ceremony last week
Brazil’s President Jair Bolsonaro talks with interim Health Minister Eduardo Pazuello before a national flag hoisting ceremony last week © Adriano Machado/Reuters

But these have been isolated exceptions in a continent which has otherwise struggled. Wall Street banks are forecasting falls in gross domestic product of between 6 per cent and 9 per cent this year across Latin America’s worst-affected economies, including Brazil, Mexico and Argentina, followed by a weak recovery next year.

By contrast China, Taiwan and Vietnam are still forecast to grow slightly this year with India and Indonesia predicted to suffer only moderate recessions. The pandemic has hit hardest, says Luis Alberto Moreno, head of the Inter-American Development Bank, in the most vulnerable parts of Latin American economies, pushing down oil and commodity prices, halting tourism and sharply reducing remittances.

Latin American governments have become much more indebted over the past decade as economic growth faltered in the wake of the global commodities boom. Gross government debt was 48.9 per cent of GDP in 2009 but that figure had shot up to almost 70 per cent by 2019, according to IMF statistics.

The region’s total external debt more than doubled, from $1.1tn in 2009 to $2.4tn a decade later.

“It would seem that we are in the steepest part of the growth of the pandemic,” the IDB’s Mr Moreno says. “But although it’s true that all countries are trying to flatten the curve, the debt curve for governments and companies and families is also growing along with poverty and unemployment and that leaves some very difficult consequences for the region.”

Latin America is the region hit hardest by the Covid-19 crisis. Chart showing annual change in gross domestic product (%) across emerging markets

Trading blow

Murat Ulgen, global head of emerging markets research at HSBC, says Latin America’s economies were already in a weak position going into the crisis. He blames the sharp fall in total factor productivity — a measure of economic efficiency — in the preceding decade as structural reforms stalled and countries deindustrialised too quickly, increasing their reliance on raw materials exports.

“This put Latin America behind other emerging markets as a starting point,” he says. “Then you had falling commodity prices and collapsing oil prices which hurt the terms of trade of many Latin American countries.”

It adds to the doubts over how quickly the region can recover from the pandemic. Gross government debt is set to exceed 80 per cent of GDP this year in Brazil and Argentina and approach 60 per cent in Mexico, according to Bank of America, levels almost twice as high as during the global financial crisis. The region has low levels of savings, making it heavily dependent on external financing.

This increases its vulnerability to outflows of capital as investors flee riskier nations; the Institute of International Finance predicts that foreign portfolio investors will pull $25.5bn of capital out of Latin America this year, mostly from stock markets.

“This crisis has shone light on a lot of problems which were there and which as societies we haven’t resolved,” says the IDB’s Mr Moreno. Last year’s protests, he adds, happened because of the quality of education, especially secondary education, and the quality of healthcare services. It wasn’t a complaint that there weren’t services, it was a complaint about the quality of them.”

Cemetery workers carry a coffin at the municipal cemetery Recanto da Paz, in Breves, in the Brazilian state of Para
Cemetery workers carry a coffin at the municipal cemetery Recanto da Paz, in Breves, in the Brazilian state of Para © Tarso Sarraf/AFP/Getty

Preserving jobs is a top priority. Iván Duque, Colombia’s president, lists a series of employment protection and economic stimulus measures — from helping companies pay salaries to incentives for the construction industry — his government is rolling out to lessen the pandemic’s economic impact, adding that “efforts like this have never been seen in Latin America in a situation like this”.

But he adds the region has “a middle class in a condition of some vulnerability and we have high levels of informality and that means [the virus] hits us harder”.

‘Up to our eyeballs in debt’

Multilateral financial institutions are doing what they can to help. The IMF has disbursed or committed an extra $50.6bn to Latin America and the Caribbean in flexible credit lines, increases in existing programmes and emergency assistance, while the IDB is lending record sums — up to $15bn to the public side and another $7bn for the private sector.

Peru and Chile have joined Colombia in announcing stimulus packages but Argentina, with borrowing already approaching 90 per cent of GDP and having already defaulted on its foreign debt, has very little room to manoeuvre.

In Mexico, Mr López Obrador has ruled out government help for any but the smallest businesses and has doubled down on austerity, refusing additional borrowing even though debt levels are comfortable by international standards.

In Brazil, the ambitious free market economic reform agenda launched by finance minister Paulo Guedes has stalled.

A patient suffering from coronavirus and diabetes is taken by  paramedics from one hospital to another in Mexico City
A patient suffering from coronavirus and diabetes is taken by paramedics from one hospital to another in Mexico City © Edgard Garrido/Reuters

Uruguay’s Mr Talvi says he and his fellow Latin American foreign ministers have discussed the urgent need for international financial institutions to be ready to “unleash massive assistance for those countries which lose access to credit or to trade financing”.

He warns that the region faces another “lost decade” like the 1980s, which crucified Latin America with falling real wages and spiralling debts until the launch in 1989 of the Brady Plan — mainly for Latin American countries — in which defaulted loans were repurposed as bonds. “We are going to come out of this pandemic up to our eyeballs in debt,” says Mr Talvi.

“We need an instant Brady Plan.”

Additional reporting by Jude Webber in Mexico City and Gideon Long in Bogotá

Extraordinary Q1 2020 Z.1 Flow of Funds

Doug Nolan

Financial crisis erupted in March. The Fed slashed rates at an emergency meeting on March 3rd – and then began aggressively expanding its holdings/balance sheet (creating market liquidity). Even from a “flow of funds” perspective, it was one extraordinary quarter.

Total Non-Financial Debt (NFD) surged a nominal $1.597 TN during the first quarter ($6.379 TN seasonally-adjusted and annualized!) to $54.325 TN.

This was the strongest quarter of NFD growth on record (blowing past Q1 2004’s $1.234 TN).

Indeed, Q1 growth surpassed full-year NFD expansions for the years 2009, 2010, 2011 and 2013.

This pushed one-year growth to $3.271 TN (6.2%), significantly exceeding 2007’s record $2.521 TN expansion.

NFD increased $20.857 TN, or 59%, since the end of 2008.

NFD as a percentage of GDP rose to a record 260%. This compares to previous cycle peaks of 226% (Q4 ‘07) and 183% (Q4 ’99).

Financial Sector borrowings jumped $963 billion during Q1, surpassing the previous record $656 billion from Q3 ’07. This pushed one-year Financial Debt growth to $1.247 TN (7.6%), the strongest expansion since ‘07’s $2.065 TN.

Total Credit (Non-Financial, Financial and Foreign) surged nominal $2.391 TN for the quarter to $77.861 TN, surpassing the previous record from Q1 ‘04 ($1.512 TN). One-year growth of $4.790 TN was the strongest since 2007. Total Credit jumped to 362% of GDP, the high going back to 2010.

Federal Liabilities (excluding massive “contingent”/off balance sheet liabilities) jumped to $22.0 TN during Q1.

At 102%, Federal Liabilities surpassed 100% of GDP for the first time in at least six decades.

For perspective, Federal Liabilities ended the seventies at 50% of GDP; the eighties at 63%; the nineties at 59%; and 2010 at 85%. I would not be surprised to see this ratio approach 150% over the next three to five years.

Outstanding Treasury Securities jumped nominal $500 billion during the quarter to a record $19.518 TN.

This pushed one-year growth to a staggering $1.612 TN (9.0%) and two-year growth to $2.472 TN (14.5%). Treasuries ballooned $13.467 TN, or 223%, since the end of ’07. Treasuries-to-GDP jumped to 91%, more than doubling the 41% at the end of 2007.

The Dept. of the Treasury and Federal Reserve are not the only profligate debt issuers in Washington. Outstanding Agency Securities jumped a record $340 billion during the quarter to a record $9.771 TN. Agency Securities surged $899 billion, or 10.1%, over the past year – just below 2007’s record expansion ($905bn). It’s worth noting outstanding Agency Securities increased $1.866 TN, or 24%, over the past five years.

Washington didn’t merely fail to resolve the GSE issue during the “longest expansion on record.” These institutions were once again exploited to juice the markets and economy.

The government-sponsored enterprises these days essentially have no meaningful amount of capital. Since receivership, hundreds of billions of accounting profits were transferred to Treasury coffers, helping dreadful fiscal deficits appear a tad less dreadful. Payback time starts now. Treasury will be on the hook for what will surely be years of enormous losses.

Combined Treasury and Agency (“Washington”) Securities surged $840 billion during Q1 to a record $29.289 TN, or 137% of GDP. Combined, “Washington” Securities jumped $2.237 TN over the past year and $3.371 TN over two years – accounting for the majority of system Credit expansion.

This is a replay of the “alchemy of Wall Street finance” dynamic from the mortgage finance Bubble period. Endless “AAA” debt securities these days transform increasingly risky end-of-cycle Credit into perceived money-like, safe and liquid instruments (experiencing insatiable demand).

Total Debt Securities jumped $973 billion during the quarter (vs. $357bn from Q1 ’19) to a record $48.362 TN. This pushed one-year growth to an unprecedented $2.912 TN, surpassing previous record growth of $2.679 TN from the 2007 period. Total Debt Securities-to-GDP jumped to a record 225%. This ratio ended the nineties at 162% and the eighties at 75%.

The S&P500 dropped 20% during Q1. Total Equities dropped $12.064 TN during Q1 to $42.460 TN, the low since Q1 ’17. Total Equities dropped to 198% of GDP, down from Q4’s record 251%, yet remained above the cycle peak 181% from Q3 ’07 (and just below Q1 00’s 202%). Total Equities-to-GDP bottomed at 93% during Q1 ’09.

Total (Debt and Equities) Securities dropped to $90.922 TN during Q1. Total Securities-to-GDP fell to 422%, down from Q4’s record 469%. Even after Q1’s decline, Total Securities-to-GDP remains significantly above previous cycle peaks of 379% during Q3 ’07 and 359% in Q1 ’00.

As always, the Household (and Non-Profits) Balance Sheet is an essential facet of Bubble Analysis.

Household Assets dropped $6.464 TN during Q1 to $127.421 TN. With Liabilities increasing $84 billion during the quarter, Household Net Worth fell $6.548 TN to $110.787 TN.

As a percentage of GDP, Household Net Worth declined to 514% (from Q4’s record 540%), while remaining above previous cycle peaks 492% during Q1 2007 and 446% in Q1 ’00.

For comparison, Household Net Worth bottomed at 419% of GDP during Q1 ’09. Household holdings of Financial Assets declined to $87.00 TN, or 404% of GDP (down from Q4’s record 432%).

This compares to previous cycle peaks 376% in Q3 ’07 and 355% during Q1 ’00. It’s worth noting the value of Real Estate holdings increased $433 billion during Q1 to a record $33.950 TN. At 158%, Household Real Estate-to-GDP increased to the highest percentage since Q4 2008.

Rest of World (ROW) holdings of U.S. assets dropped $2.903 TN during the quarter to $31.990 TN, led by a combined $1.651 TN decline in Equities and Mutual Fund holdings. As a percentage of GDP, ROW holdings declined to 149% from Q4’s record 161%. This ratio ended ’07 at 108% and ’99 at 74%. ROW boosted holdings of Treasuries by $118 billion (to a record $6.813 TN) and Agency Securities by $84 billion (to $1.265 TN). Over the past year, Treasury and Agency holdings rose $340 billion and $147 billion.

Bank (“Private Depository Institutions”) Assets gained an unprecedented $1.866 TN during Q1 to a record $21.918 TN. This was more than triple the previous record expansion during Q4 ’08 ($596bn). During the quarter, Reserves at the Federal Reserve increased $926 billion to $2.474 TN. Loan Assets jumped $575 billion, or almost 20% annualized, to $12.302 TN. This was more than double the previous record expansion (Q4 ‘18’s $261bn). Loans gained $1.033 TN over the past year, or 9.2%. The previous record annual Bank Loan growth was 2005’s $690 billion. Q1 saw Bank holdings of Agency Securities jump $189 billion (to $2.823 TN), while Treasuries added $15.0 billion (to $894bn).

On the Bank Liability side, Checkable Deposits surged $519 billion (to $3.157 TN) and Time & Savings Deposits jumped $621 billion (to $13.505 TN). This had Total Deposits expanding $1.140 TN, or almost 30% annualized. Over the past year, Checking Deposits expanded $740 billion, or 30.6%. Savings Deposits rose $1.076 TN, or 8.7%. Total Deposits expanded $1.816 TN y-o-y, or 12.2%. Net Interbank Liabilities jumped $471 billion during Q1 to $489 billion.

Securities Broker/Dealer Assets surged $281 billion during the quarter, the strongest expansion since Q1 ‘07’s $440 billion. Assets expanded to $3.749 TN, the highest level since Q3 ’08. Repo Assets jumped $87 billion to $1.483 TN. Miscellaneous Assets gained $173 billion to $831 billion. On the Liability side, Loans jumped $208 billion (to $1.114 TN). Bond Liabilities rose $83bn (to $257bn).

Total Checking Deposits and Currency expanded an unprecedented $905 billion in Q1 to a record $5.750 TN, with one-year growth of $1.167 TN, or 25.4%. Money Market Fund Assets (MMFA) surged a record $704 billion during Q1 to $4.338 TN. MMFA jumped $1.259 TN over four quarters, or 40.9%. Fed Funds and Security Repurchase Agreements gained $393 billion, or 36% annualized – with one-year growth of $710 billion, or 17.6%.

I received a lot of pushback in 2009 when I argued that QE was spurring growth in bank and money market deposits (“money supply”) then flowing into the markets. It’s become rather self-evident these days.

It’s been a historic global Bubble, with bipolar U.S. and China epicenters. It’s no coincidence, then, that recent Credit dynamics share alarming similarities.

China’s Aggregate Financing (a gauge of system Credit expansion) surged $450 billion during the month of May. This was 86% ahead of May ’19 growth. A booming May put year-to-date (five months) growth in Aggregate Financing at a blistering $2.450 TN. It’s crazy to think how much Chinese Credit will grow this year – Credit of Rapidly Deteriorating Quality. How long can systemic risk continue to inflate parabolically?

Global markets reversed sharply lower this week.

“Risk on” careens to “Risk off” – for global stocks, corporate Credit, EM currencies/equities/bonds and commodities. One Big Unwieldy Speculative Trade. Pundits struggled to explain the abrupt reversal of fortunes. Was it something Powell said? A second wave of COVID infections that might hinder economic recovery? Election anxiety?

Let me suggest Plain Old Speculative Market Dynamics. Daydream, fantasize or hallucinate - if you choose. But this is a fiasco – and rather tangible, at that.

It started years – even decades – ago.

The craziness turned extreme last year, with the Fed aggressively stimulating in the face of highly speculative markets. It was never going to end well.

And when the Bubble began imploding in March, the Fed and global central bankers responded immediately with Trillions of liquidity support. This fueled a rally, short squeeze and reversal of hedges that developed into one dazzling speculative melee.

From my analytical perspective, events over the past few months confirm Bubble Analysis – the Global Bubble Thesis.

This week likely marked the beginning of a painful second leg of the bear market or, at the minimum, the return of wild volatility. There appears to have been both capitulation on the short side and “blow-off” speculative excess for the bulls.

It was almost like 1999 all over again – frenetic retail online trading, penny stock euphoria, derivatives run amuck, fun and games and throw caution to the wind speculative froth.

The Fed owns the frail Bubble – this disastrous mania.

How ironic is it that the more cautious (i.e. realistic) the Fed’s view of economic prospects, the greater liquidity-induced market euphoria propagates delusions of V’s, perpetual bull markets and permanent prosperity?

And of all the nonsense emanating from this historic financial mania, history will trash this foolhardy notion that there is no limit to the quantity of central bank Credit and government debt that can be issued.

Reviewing the Q1 Z1 report, I was thinking this is how things look as a system self-destructs.

Q2 will be worse.

Interview with Economist Nouriel Roubini

"The Stock Market Is Deluding Itself"
Prominent American economist Nouriel Roubini does not believe the global economy will recover quickly. He believes that the dire situation will produce a summer of protest in the U.S. and years of difficulties in Europe as well.

Interview Conducted by Tim Bartz

People waiting at a food bank in Minneapolis: "I fear that the 2020s will be marked by doom and disaster."
People waiting at a food bank in Minneapolis: "I fear that the 2020s will be marked by doom and disaster." / Kerem Yucel / AFP

DER SPIEGEL: Mr. Roubini, the pandemic has brought the global economy to its knees, and millions of people have lost their jobs. Is the crisis as severe as the Great Depression of the 1930s?

Roubini: The crash is even greater than it was then. It took years from 1929 until the full extent of the crisis became visible. Compared to today, it was like a slow-motion train wreck. Now the world economy has collapsed within weeks, and in the U.S. alone, more than 40 million people are unemployed.

Many believe that the economy will pick up again just as quickly, but that is a fallacy.

DER SPIEGEL: You don't believe in a V-shaped recovery despite the huge economic stimulus packages? After all, 2.5 million new jobs were created again in the U.S. in May.

Roubini: Of course, we will see an upswing in the second half of the year. But it will not be a real one, but a delusion.

The economy has fallen so steeply that it is practically inevitable that it will pick up again at some point. But that won't compensate for the crash in any way.

Even at the end of 2021, the U.S. economy will still be below the level of early 2020; too much has broken down.

And the unemployment rate will level off at 16 or 17 percent - during the financial crisis it was only 10 percent. The job creation in May was only 2.4 million after 42 million lost their jobs in the last few months. And the actual unemployment rate is much higher than officially measured.

DER SPIEGEL: The stock market obviously sees things differently, with shares already trading at the same level as at the beginning of the year.

Roubini: The stock market is deluding itself. Investors are betting that there will be further economic stimulus packages and a V-shaped recovery of profits. But for the people here in the U.S., that means nothing.

DER SPIEGEL: Since when have Americans not cared about the stock market?

Roubini: On Wall Street, big corporations set the tone, banks and technology companies in particular. They will survive the crisis because the state will never let them go under. They will kick people out, cut costs and in the end, they will have even more market power than before.

But what we here call Main Street, small- and medium-sized companies, can't do that. They just go bankrupt. I estimate that every second restaurant in New York City will have to close, but McDonald's will survive. But that's not all.

DER SPIEGEL: What else?

Roubini: The richest 10 percent of Americans hold 80 percent of stock market wealth, while 75 percent own no shares at all. There is a study by the Federal Reserve, according to which 40 percent of Americans do not have 400 dollars in cash to be prepared for emergencies.

We are experiencing this emergency now. The system is sick, and people are taking to the streets because of it.

DER SPIEGEL: You mean the protests following the police killing of George Floyd also have a social component?

Roubini: Of course! In the area where I live, the Bowery in Lower Manhattan, three quarters of the demonstrators are white. Many of them are young and belong to the urban "Precariat," the new underclass that has replaced the traditional working class, the "Proletariat,” in advanced service economies.

The Precariat is made up of temporary workers, freelancers, people who work on an hourly basis, gig workers, contractors - even though they often have university degrees. Those who are not in regular full-time employment no longer receive state transfers after three months.

These people can then no longer pay their rent and telephone bills, and electricity and water are cut off. It will be a long, hot summer.

DER SPIEGEL: That will significantly reduce Donald Trump's chances at reelection, won't it?

Roubini: You're right. But Joe Biden will have to win by a very large margin for Donald Trump to leave Washington on his own. But I predict that's not what will happen.

Either Trump will barely hold on to office, even though support among the white working class that put him into office is waning. Or he will lose by a narrow margin, but will not accept the results.

DER SPIEGEL: And you seriously believe that he would then barricade himself in the White House?

Roubini: Of course. Trump does not go to the Supreme Court like Al Gore and request a recount of the votes if the election results are close in some districts. He will blame China, Russia, blacks or immigrants and act like the dictator of a banana republic.

He will call his followers to arms – there are enough armed white fascists running around out there. He reminds them often enough of the Second Amendment, which allows Americans to own weapons.

DER SPIEGEL: A grim scenario. Trump will also likely blame the Federal Reserve for economic developments. He wants to see the Fed lower interest rates even further.

Roubini: The Fed has already done all sorts of things that it didn't have to do. It has saved banks, financial investors, hedge funds and asset managers by flooding the markets with liquidity. That was the right thing to do in the short term to avoid deflation.

But public debt is so high that governments and companies can only refinance themselves if interest rates remain ultra-low. The Fed has to make sure of that by buying bonds and thereby boosting their prices and depressing interest rates. In the long term, it will not get out of the act.

The Fed is in the same situation as all major central banks worldwide.

DER SPIEGEL: You mean the central banks have lost their independence?

Roubini: Absolutely. Look: In December 2018, Fed Chairman Jerome Powell announced that he would raise interest rates and cut the central bank balance sheet by stopping bond purchases.

As a result, the stock market slumped by 20 percent. Powell quickly backed off, and today the Fed balance sheet is twice as big as it was then. In the long run, this will lead to inflation.

DER SPIEGEL: How can that happen when so many people are unemployed, and the economy is not really getting off the ground?

Roubini: Because we will experience a negative shock on the supply side. It may sound technical, but it's easily explained.

DER SPIEGEL: Go ahead.

Roubini: Globalization has kept labor and production costs low for years, if only because of the 2.5 billion cheap laborers from India and China. But globalization had already passed its peak after the financial crisis, and the pandemic has intensified the trend.

We are witnessing renationalization, the disintegration of supply chains, a trade conflict between China and the U.S.

DER SPIEGEL: So you expect prices to increase across the board?

Roubini: Take the example of 5G technology: Nokia and Ericsson are 30 percent more expensive and 20 percent less effective than Huawei. So if a country decides against Huawei for 5G expansion, which there are good security policy reasons for doing, the prices of all kinds of end products, from 5G services to toasters and microwaves with 5G chips, will automatically rise. And that ultimately leads to inflation.

DER SPIEGEL: But then interest rates would have to rise.

Roubini: According to the textbook, yes, but that won't happen. States and companies would otherwise blow their budgets and balance sheets to smithereens.

DER SPIEGEL: Have you been surprised by how much money Europeans are suddenly mobilizing to stabilize their economies?

Roubini: Not really. After all, it's all about keeping the Eurozone together. Without an act of solidarity, Italy in particular, would collapse and leave the common currency zone. Then everything would be over.

DER SPIEGEL: With regard to the 500-billion-euro aid package that Germany and France are hoping to assemble together, German Finance Minister Olaf Scholz spoke of Europe's Hamilton moment, a reference to America's first Secretary of the Treasury Alexander Hamilton, who laid the financial foundation for a U.S. nation. Is Scholz exaggerating?

Roubini: Of course, he is exaggerating. The package is all well and good, but two crucial prerequisites are missing for a European federal state: First, the communitization of liabilities - Italy's debt is still Italy's debt.

And secondly, a common budget of a significant size, i.e. of 20 or 30 percent of the gross domestic product and not, as is now the case, of just 2 percent.

DER SPIEGEL: By German standards, the decisions of the German government are revolutionary.

Roubini: You can't always say no to everything! Berlin cannot be against the fact that the EU budget is growing and that the ECB is playing a greater role and at the same time be surprised when everything goes down the drain. Then Europe would be dead!

Fortunately, Chancellor Angela Merkel realized in time what was at stake. And she is so popular at the moment that she can push these things through. I doubt that this would still be possible under her successor, no matter who becomes the leader of her party and chancellor.

DER SPIEGEL: But the next crisis is already lurking around the corner: Brexit. Will the British again request an extension of the transition period?

Roubini: I speak regularly with British government representatives and have the impression that they are clearly heading for a hard Brexit. London does not want a free-trade agreement like the one between the EU and Canada, the government really wants a clear cut. That is, of course, crazy.

Trucks will pile up at the customs border, Europe's stock markets will fall sharply, the British economy will as well, and the European economy will fall too, albeit not to the same degree.

DER SPIEGEL: Is there anything that gives you hope?

Roubini: Hope? I'd have to think. It was good that the governments reacted so quickly and massively to the pandemic and its consequences. But otherwise? I fear that the 2020s will be marked by doom and disaster. Perhaps the global economy will be more sustainable afterwards. But for now, it will be gloomy.

Nouriel Roubini, 62, is one of the best-known economists in the world. A professor at the Stern School of Business in New York, he is one of the few who predicted the bursting of the U.S. real estate bubble and the resulting financial crisis in 2008. He was also among those who warned early on that COVID-19 would cripple the economy.

The visible hand

Europe’s habit of propping up firms may outlast the pandemic

State-aid rules have been relaxed, and may stay so


IT NORMALLY TAKES the European Commission about six months to review an EU member state’s request to derogate from the rules against subsidising domestic industry. Not these days. Since the outbreak of covid-19 roiled economies everywhere, requests to circumvent “state-aid” rules are often approved in under 24 hours, even on weekends.

A trickle of demands from all over the bloc has turned into a flood. Nearly 200 subsidy schemes and bail-outs worth over €2trn ($2.2trn), equivalent to Italy’s GDP, have been cleared by eurocrats.

The single market at the heart of the European economy is built partly on the premise that national governments do not unduly aid “their” firms. Policies preventing them from doing so date back to the very first flushes of European integration. Now Europe finds itself in uncharted policy territory. Never have the rules been loosened to the extent they have been today. Politicians are brokering aid packages to industry in a way no one in living memory has been allowed to do.

Trouble is: they might get used to it. Even before the crisis, Europe was moving in a dirigiste direction. Now a breach has opened in a set of rules that had curtailed politicians’ penchants for picking winners. When rules were loosened in past crises, notably in 2008, the state-aid regime quickly snapped back to its old self afterwards.

But fewer countries support the principles behind state-aid rules nowadays. So the new relaxed norms may endure beyond the crisis, perhaps permanently. That would mark a new economic era for Europe.

European state-aid rules are a policymaking oddity. American states, for example, can and do try to poach companies from each other with promises of tax breaks, soft loans and the like. Europe went for the subsidy equivalent of a disarmament pact. All aid that isn’t expressly allowed to companies is banned, even to state-owned firms.

Governments are regularly taken to task for everything from granting football clubs subsidised land to giving multinationals sweetheart tax deals. Policing this is one of the real powers wielded by Brussels, where the rules are enforced by the same commission officials who regulate antitrust.

Tensions have long brewed between that bit of the commission, overseen since 2014 by Margrethe Vestager, the competition commissioner, and some member states. France and Germany have repeatedly demanded competition rules be bent to allow the creation of “European champions”. They were furious last year when Ms Vestager blocked the planned merger of the rail bits of Siemens and Alstom.

Merging companies is one way to create champions, but gorging them with state aid is just as effective. That is now allowed, albeit temporarily. Granted, the goal right now is not to create champions so much as to prevent unnecessary bankruptcies and job losses. But if the rules remain eased for too long, the money sloshing to companies will aim less to rescue them in crisis than to boost their prospects afterwards.

Already some countries, notably Spain, have complained that the free-spending regime threatens the single market. That is because a few rich countries are doing most of the spending. Almost half the state aid paid out across Europe is done by Germany, which is big, wealthy and entered the crisis with relatively little debt. Smaller and poorer countries worry that their firms, which have not been so generously aided, will get gobbled up.

Politicians are busy untilting the playing field. On May 27th Ursula von der Leyen, the commission’s president, unveiled a €750bn package of loans and grants that will redistribute money from those with the ability to pay (Germany) to those struggling to (Spain). National capitals will now haggle over a final deal.

Ms Vestager says higher German spending has been on the EU’s wish-list for years. As for long-term risks to the state-aid regime, she emphasises that the easing of the rules is temporary. She has insisted that companies which were in bad shape before covid-19 struck cannot be rescued; troubled firms that get government bail-outs must pay them back. Those that get the most help cannot pay dividends or bonuses until they repay most of the state aid.

Old Brussels hands say the commission has little choice but to give states leeway in the crisis. “Governments will simply ignore EU rules if they don’t flex enough—that’s what the commission wants to avoid,” says one lawyer. Once everyone has bought into the system’s fast-track approval process, the rules can be tightened, for example by demanding that aid to companies is gradually withdrawn.

The aftermath of the crisis of 2008 gives backers of the state-aid regime confidence that such tightening will happen. But this time looks different. A decade ago Europe was in the ascendant, implementing its new fundamental treaty. Aid had gone mainly to unpopular banks seen to have gamed the system, so throttling that aid was politically easy. Fiscal weaknesses had yet to be exposed by the euro crisis.

In 2020, by contrast, bail-outs are seen as necessary and companies blameless. The crisis has amplified voices demanding that supply chains be repatriated to Europe, which would be easier if states could pay more subsidies. Britain, which long backed vigorous curbs on state aid, has left the club.

Southern Europe gets nailed by state-aid rules regularly, and would not mind seeing the back of them. Ireland and the Netherlands have fallen foul of Ms Vestager for giving tax breaks to multinationals, a form of forbidden aid. Poland and Italy like the Franco-German plans to create industrial champions.

Ms Vestager says the concept of a “level playing field”—backed by state-aid rules—remains as important as ever. But concerns that China and America are pampering their own firms with subsidies are widespread. Even before covid-19, Europe had made concessions, allowing industrial projects of the sort politicians favour (such as factories to make high-tech batteries for electric cars) to get government largesse.

A Franco-German deal made possible the whopping package Mrs von der Leyen is now touting. While suggesting that the EU receive huge new powers, Emmanuel Macron and Angela Merkel, France’s and Germany’s leaders, also called for the commission to “adapt” state-aid rules permanently to favour industry. That may prove a difficult recommendation to ignore.


What is the link between inflation and equity returns?

Stocks are a decent inflation hedge in the long run, but over shorter horizons, there is an inverse relationship

IN PLACES WHERE it has been long absent, it is hard to remember what a curse inflation is. In other places, it is hard to forget it. Take Zimbabwe. In 2008 it suffered an inflation rate in the squillions. Prices doubled every few weeks, then every few days.

Banknotes were so much confetti. Some people turned to equities as a store of value. A share purchased on Monday might be sold on Friday. Harare’s stock exchange was almost like a cash machine.

In principle, equities are a good hedge against inflation. Business revenues should track consumer prices; and shares are claims on that revenue. In some cases, they may be the only available hedge. Iran, for instance, has had one of the better performing stockmarkets, because locals have sought protection from inflation. Sanctions make it dangerous to keep money offshore.

Rich-country investors have a different sort of headache. Though the immediate outlook is for inflation to stay low, it could plausibly pick up later on. If it does, edge cases like Zimbabwe or Iran are a bad guide.

The link between inflation and equity returns is not straightforward. Stocks are a decent inflation hedge in the long run. But over shorter horizons, there is an inverse relationship.

Rising inflation is associated with falling stock prices, and vice versa.

Start with the evidence that stocks beat inflation over the long haul. In the most recent Credit Suisse global investment returns yearbook, a long-running survey, Elroy Dimson, Paul Marsh and Mike Staunton show that global equities have returned an average 5.2% a year above inflation since 1900.

You may quibble that the survey covers the sorts of stable places that have had a long run of stock prices in the first place, such as Britain and America. Even so, the finding fits with intuition. When you buy the equity market, you buy a cross-section of a country’s real assets.

Yet stock investors still need to be mindful of inflation. Markets tend to put a lower value on a stream of cash flows when inflation rises; and a higher price on cash flows when it falls. There are competing theories for the inverse relationship; many date from the late 1970s and early 1980s.

A paper written by Franco Modigliani and Richard Cohn in 1979 put it down to “money illusion”: rising inflation leads to falling stock prices because investors discount future earnings by reference to higher nominal bond yields. The correct discount factor is a real yield (ie, excluding compensation for expected inflation).

Other theories said that inflation is merely a reflection of deeper forces that hurt stock prices: an overheating economy; rising uncertainty; political instability.

In the decades since then, inflation has steadily declined. Stocks have re-rated. Investors have been willing to pay an ever-higher price for a given stream of future earnings. You might put this down to the Modigliani-Cohn effect in reverse, since nominal bond yields have also fallen. But so too have long-term real bond yields. The real rate of interest needed to keep inflation stable is lower.

Now for the headache. For the most part, financial markets reflect the view that inflation will remain low. Nominal bond yields are negative in much of Europe and barely positive in America. In stockmarkets, there has for a while been a sharp divide. Companies that do well in disinflationary environments (technology, branded goods) are expensive; businesses that might do better in inflationary ones (commodities, real-estate and banking) have generally lagged behind.

The immediate prospect is indeed for an excess of supply. The unemployment rate in America is close to 15%. Inflation is already falling.

Further out, though, the outlook for inflation is murkier. There is no shortage of pundits who say it is primed to pick up. They have a case.

Globalisation, a key reason for the secular decline in inflation, is reversing. Big companies are likely to emerge from the crisis with more pricing power. The rise of populism in rich countries is hard to square with endlessly low inflation. Fiscal stimulus is in favour. The more government debt piles up, the greater the temptation to try to inflate it away.

For all such speculation, it is far from clear whether, how fast and by how much inflation might rise.

A modest pickup might even be good for stock prices—especially in Europe, where bourses are tilted towards the cyclical stocks most hurt by unduly low inflation.

But it is foolish to believe that inflation will leave your stock portfolio unharmed—and too easy to forget the damage it can do.

Tourism deals lingering blow to global economy

Coronavirus hit to fast-growing sector is set to drag on post-pandemic recovery

Valentina Romei in London

The beach at Terracina, Italy. Coronavirus-related lockdowns have dealt a heavy blow to Europe’s tourism industry
The beach at Terracina, Italy. Coronavirus-related lockdowns have dealt a heavy blow to Europe’s tourism industry © Bloomberg

The blow that coronavirus has dealt to the global travel and tourism industry is set to do lingering damage to the world’s growth, economists warn, as areas that are dependent on visitors for their income struggle to reposition their local economies.

Tourism’s contribution to the global economy has risen over the past decade as the expansion of the middle class in emerging economies, particularly in Asia, translates into a rise in spending on leisure activities, including travel. The growth of low-cost travel has also boosted tourist numbers.

Globally, tourism accounts for one in four of all new jobs created over the past five years, on a net basis, and about 10 per cent of economic output, according to the World Travel and Tourism Council.

“The coronavirus pandemic triggered an unprecedented crisis for the tourism economy, which has significant implications for international service trade, jobs and growth that support many local communities and regional development,” said Lamia Kamal-Chaoui, director of the OECD Centre for Entrepreneurship, SMEs, Regions and Cities.

Although tourism has long been a boon for some advanced economies, such as Greece, Italy and Spain, it has become a particularly important source of growth in recent years for many developing economies.

Column chart of Current $bn showing Asian spending on international tourism has surged

In some parts of the world, including South Asia, southern Europe and Central America, tourism contributes up to 30 per cent of the economy.

But with international tourism this year expected to put in its worst performance since 1950, both in terms of the number of travellers and revenues, that source of growth has turned into a vulnerability.

Globally, the number of foreign visitors fell by 57 per cent in March compared to the same period last year, according to data from the UN World Tourism Organisation (UNWTO) — that means there were 67m fewer tourists. In April, passenger demand plunged 94 per cent compared to April 2019, according to the International Air Transport Association (Iata).

Bar chart of % of GDP* (2019) showing Travel and tourism account for large share of some economies

Economic forecasts for tourism-dependent countries have been revised sharply downwards this year, and now they face losses of up to 10 percentage points of gross domestic product compared to pre-pandemic estimates.

The IMF has warned that tourist-dependent areas such as the Caribbean face their deepest recession in more than half a century.

But as countries scramble to help their devastated tourism industries, some areas have begun to develop potential solutions, starting with domestic tourism.

Bar chart of  showing Tourism-dependent economies hard hit by economic downgrades

The beach town of Sanya, on Chinese holiday island Hainan, points the way. Hotel occupancy rates in Sanya are rising faster than in other Chinese tourist areas, according to data from STR, a hotel research company.

“The suspension of international flights makes Sanya one of the best options for China’s beachgoers,” said Susan Zhang, an official at the Ritz-Carlton Sanya.

Although the hotel’s bookings are still down on normal levels and it is offering promotional discounts to lure customers, the occupancy rate has “at least doubled” since it bottomed out in February when pandemic-related shutdowns in China peaked, she said.

A series of charts, one per region, showing how tourist arrivals fell sharply - between 41% and 64% - across the world

“China has started to see a recovery as lockdowns have lifted and hotels reopened across the country,” said Thomas Emanuel, STR director. “This is being driven by domestic demand, predominantly from the leisure traveller.”

Other countries, including Mexico, are also trying to boost domestic tourism in an attempt to replace the international visitors they have lost.

There are signs it is beginning to work; globally, visits to websites of hotels and other accommodation rose by 11 per cent in the last week of May, compared to the previous week, according to SimilarWeb, a company tracking internet unique visitors — but visits to airlines’ websites were up only 1 per cent. The number of global domestic flights increased more than international flights in May, according to Iata.

“Due to the number of international travel restrictions that remain in place, a domestic trip will be viewed [by many] as a more convenient option . . . More remote and rural destinations are likely to benefit, at least in the first stages of recovery,” said David Goodger, an economist at Oxford Economics who said the pandemic’s impact was “like nothing the modern [travel] industry has experienced before”.

This means regions that rely more on foreign tourism are likely to find it harder to recover, analysts warn.

“Both the US and destinations in Asia enjoy more domestic travel than international, meaning they are better placed to recover than destinations in Europe where international travel accounts for the lion’s share,” Mr Goodger said.

Column chart of % of foreign tourism by destination showing International tourism is largely regional

The next step in recovery is regional tourism, and again Asia is leading the way. A number of east Asian and Pacific countries are negotiating to form corridors or “bubbles” which visitors might be allowed to travel within without undergoing quarantine.

In Europe, there are also hopes for a domestic tourism revival, and the EU is pushing for the return of intraregional travel, which accounts for about 85 per cent of European arrivals.

“We are starting to see some bookings, but the recovery is slow as there are no foreign visitors,” said Marina Lalli, president of Italy’s national association of travel and tourism. “This summer Italy’s tourism will be mainly local . . . We are not expecting international tourist arrivals to go back to 2019 levels until 2023.”

Even if countries succeed in boosting domestic and regional tourism, the travel industry will not regain its former strength in the short term, analysts warn.

The pick-up in domestic tourism helped boost occupancy rates in May compared to April, but hotels are still operating at less than half their capacity in China, one-third in the US and just above one-tenth in Europe, according to data from STR.

That leaves places like Hainan, where tourism has already begun to return, needing to adjust to a smaller number of visitors.

Line chart of Occupancy rate, % showing Hotel occupancy shows signs of recovery in China and US

“Sanya needs to change mindset that the purpose of the tourism industry is to have as many visitors as possible,” said Tang Xiaoyun, deputy director of China Tourism Academy, a think-tank under the Ministry of Culture and Tourism.

The continuing need for social distancing and potential for new cases will have a lasting impact, he said: “Given the lingering concerns of a second [coronavirus] outbreak, [the] local authority needs to control the number of visitors and focus on creating a better travelling quality.”

Additional reporting by Sun Yu in Beijing and John Reed in Bangkok

Companies ditch commercial paper to lock in longer-term debt

Coca-Cola, PepsiCo and Pfizer among groups reducing reliance on short-term funding

Eric Platt and Colby Smith in New York

Coca-Cola has long relied on rolling over short-term debts © Bloomberg

Commercial paper has lost its fizz. Dozens of blue-chip companies including Coca-Cola and PepsiCo, which have long relied on the market to raise cash, are paying off tens of billions of dollars of borrowing in favour of new longer-term facilities.

The withdrawal from the $1.1tn commercial paper market, typically used by companies to finance payroll, inventories and other short-term obligations, came swiftly after fears over coronavirus took hold. Along with the two beverage giants, pharmaceutical group Pfizer, theme park operator Walt Disney and cigarette maker Philip Morris International have issued longer-term debt to pay off commercial paper (CP) borrowing.

In total, more than 40 companies have raised a combined $97bn in debt this year, in part to refinance CP, according to data provider Refinitiv. That marks a record high and comes close to surpassing the $105bn borrowed in all of 2008 and 2009 during the previous financial crisis.

In turn, CP issued by companies outside the financial industry has dropped to its lowest level since 2016, figures from the US Federal Reserve showed last week.

The move by corporate treasurers to secure other sources of funding was prompted by turmoil in the CP market in March, when some investors refused to lend for maturities longer than five days. Companies at first drew down credit lines with banks to bolster their cash reserves, and then began to issue longer-term bonds after a series of interventions from the Fed helped to stabilise credit markets.

Column chart of Value of US corporate bonds issued to refinance commercial paper ($bn) showing Companies have issued a record amount of debt to retire short-term obligations

The Fed’s backstops included the CP market, where it launched a facility to lend to companies on a short-term basis. But advisers on Wall Street warned that another market downturn could cause funding to dry up once more.

“We don’t have the ‘all clear’ signal just yet so the practical path is to go out and obtain [long-term financing],” said Kevin Foley, global head of debt capital markets at JPMorgan Chase.

“[CP] was the first market impacted and companies are not going to look prudent to go right back to it, if you have these other options.”

Disney, which raised $11bn through bond markets in May and had $8.5bn of CP outstanding in late March, said it had judged it “appropriate to term out some debt given the attractive level of rates and the uncertainty that remains in the financial markets given Covid-19.”

Line chart of Percentage of US investment grade corporate bond sales issued to refinance commercial paper, by value (%) showing Use of proceeds: pay off commercial paper

The sharp drop in US Treasury yields has also encouraged companies to shift from CP, which has maturities of up to 270 days, to longer-term debt.

Meghan Graper, head of US investment-grade syndicate at Barclays, noted that several companies that have refinanced CP have secured record-low costs of borrowing in the bond market.

Pfizer’s new $750m five-year bonds carried an annual coupon of just 0.8 per cent, for example. The drugmaker had more than $14bn of CP outstanding on May 1, with an average annual interest rate of 1.43 per cent.

Other highly rated corporate borrowers in the CP market have secured 90-day funds at annualised interest rates of between 0.15 per cent and 0.48 per cent over the past fortnight.

“Overall it is more efficient to finance for two to five years than it is to do so in the commercial paper market,” said Guy LeBas, a strategist at Janney Montgomery Scott.

“With the yield curve so low in absolute terms, from a treasurer’s standpoint, it is a lot safer to secure funding [elsewhere].”