The Economist USA - 28.03.2020

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64 Finance & economics The EconomistMarch 28th 2020


2 risen from $2-3 per kilo to $9-11, which for
some goods is prohibitively expensive.
Land borders are becoming harder to
cross too. Countries from America to Ar-
menia have placed new restrictions on free
movement. In almost all cases there are
meant to be exceptions for people tran-
sporting goods. But haphazard implemen-
tation has led to queues that stretch for
miles. On March 15th the Italian transport
minister had to call her Hungarian coun-
terpart to request that a blockade be re-
moved. Restricted border crossings have in
some cases made it hard for drivers to get to
work. “Everybody wants to do their own
thing,” grumbles Umberto de Pretto of the
International Road Transport Union. “If
road transport stops the world stops.”
Bunged-up borders mean that it gets
harder to refill empty supermarket shelves
as people stockpile food, and to meet rock-
eting demand for medical equipment. Ma-
rio Aronovich, a customs broker in Mexico,
remembers receiving calls when the crisis
started about whether it was possible to ex-
port medical masks from Mexico to China.
Now he is getting calls about trade in the
opposite direction.
So just how big will the drop in overall
trade be? In 2009 declining demand ac-
counted for over two-thirds of the crash in
trade, a far bigger share than the 15-20%
caused by the credit crunch. The extent of
the pandemic-induced slowdown in con-
sumer spending and investment is already
becoming clear. And it has already dented
trade activity badly—a survey of factory
bosses in March suggests sharp falls in ex-
port orders in advanced countries. Simon
Macadam of Capital Economics, a consul-
tancy, has pencilled in a 20% drop in trade

volumes this year. That is bigger than in


  1. The drop in trade could be worse if
    the most pessimistic forecasts of jaw-drop-
    ping double-digit year-on-year declines in
    gdpin some rich countries over the next
    quarter or two come true.
    A lesson from 2009 is that trade
    bounces back. Some of the precipitous
    drop then reflected companies drawing
    down their inventories; that reversed
    quickly enough when things returned to
    normal. Gloomier types point out the co-
    lossal uncertainty about when the rebound
    might come. Trade thrives on trust and pre-
    dictability. Today, with supply chains
    buckling and borders closing, both are in
    short supply. 7


Hitting close to home
United States

Sources: Bloomberg; ShowingTime

40
20
0
-20

-40
Jan Feb Mar

Home viewings,% change from the first week
of the year, seven-day moving average
2019

Ratio of average 2020
debt-to-enterprise
value

Total market
capitalisation,
$bn

50
40
30
20
10
0
Jan Feb Mar

0.90
0.85
0.80
0.75
0.70

Jan Feb Mar

Five largest US mortgage-investment trusts
2020

America’s $19trn commercial and residential mortgage market is jittery as investors
begin to fear that laid-off workers and shut-down firms will struggle to repay their
debts. Plenty of investors—such as real-estate investment trusts—are highly leveraged.
As the value of mortgage-backed securities has dropped sharply they have begun to
face margin calls on their debt from their bankers. Some have warned investors that
they are unable to meet cash calls. Demand for new residential mortgages is likely to
suffer, too. Lockdowns and economic uncertainty have stopped homebuyers looking.

On shaky ground

W


hen americaand its allies wanted to
cheapen the dollar in 1985, their offi-
cials met in the Plaza Hotel in New York.
When they sought to stabilise the currency
two years later, they gathered in the Louvre
Palace in Paris, conversing over turbot
soufflé cardinale washed down with Pu-
ligny Montrachet, according to Funabashi
Yoichi, a former journalist. The dollar is
again a cause of international concern,
strengthening from March 9th to 20th, as
companies, banks and countries scram-

bled for the world’s dominant currency, be-
fore falling a little this week. But if the
world’s policymakers wish to tame it again,
where will they meet? In a time of lock-
downs, any successor to the Plaza and Lou-
vre accords will have a less resonant name.
America’s Federal Reserve has already
tried to alleviate dollar scarcity by reviving
a network of swap lines, which allow other
central banks to borrow dollars in ex-
change for the equivalent amount in their
own currencies, swapping them back again
up to three months later. The Fed eased the
terms of its existing lines with Britain,
Canada, the euro area, Japan and Switzer-
land. It then reintroduced lines with nine
other central banks, including those of
Australia, Brazil, Mexico, New Zealand,
Singapore and South Korea.
Many of these central banks are now
busily furnishing dollars to banks at home.
The Bank of Japan has offered over $156bn
since March 17th. Its counterparts in the
euro area, Britain and Switzerland have
lent over $182bn combined. On March 18th
Brazil’s central bank began offering dollar
loans to financial institutions that could
provide Brazilian government bonds, is-
sued in global markets, as collateral. The
Bank of Mexico said it would begin dollar
auctions. Earlier this month, the Reserve
Bank of India (rbi), which does not have a
Fed swap line, but does have almost $482bn
of its own foreign-exchange reserves, of-
fered $2bn to its banks. It received bids
worth over $4.6bn, prompting it to offer
another $2bn auction on March 23rd.
Could the Fed extend these lines fur-
ther? It has no appetite for assessing which
countries warrant its help, or bearing the
risk that it might not get its dollars back.
Some have therefore suggested it should
team up with the imf. In 2015 Randall Hen-
ning of the American University in Wash-
ington, dc, proposed that the fund could
decide confidentially which of its mem-
bers has the “very strong” policies and in-
stitutions required to qualify for its own
precautionary, strings-free loans. These
countries would then also become eligible
for a Fed swap line. If ever they could not re-
pay, the fund would lend them the money
to do so. Mr Henning calculated that, in ad-
dition to Mexico and South Korea, another
seven emerging markets might qualify, in-
cluding Chile and Malaysia.
If the dollar resumes its upward march,
America’s Treasury could also help weaken
it by buying other currencies, points out
Zach Pandl of Goldman Sachs. But what to
buy? The traditional choices would be the
euro and the yen. But both Japan and the
euro area fear the deflationary impact of a
stronger currency. A better bet, Mr Pandl
argues, might be Mexico’s peso or Brazil’s
real. It’s just a pity officials cannot share a
meal and a bottle of fine wine before they
tuck in to each other’s currencies. 7

HONG KONG
America’s central bank is not the only
one doling out greenbacks

The dollar

The Zoom accord

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