The Times - UK (2020-07-27)

38 2GM Monday July 27 2020 | the times

Business

tion that those funds were on the brink,

but regulators say there would have

been failures. “Central banks prevented

several institutions from going bust,”

Tobias Adrian, financial counsellor at

the International Monetary Fund, said.

Global regulators plan a crackdown

on the lightly regulated “shadow bank-

ing” sector of hedge funds and money

market funds. In its Financial Stability

Report on August 6, the Bank will reveal

its thoughts. “If central banks have to

backstop liquidity in financial markets

— as they do for solvent banks — what

should be the consequences?” Sir Jon

Cunliffe, deputy governor for financial

stability, asked in a recent speech.

Potentially, the pandemic could lead

to reforms that match in scale the

overhaul of banking rules after 2008.

But it will be more complicated this

time because markets, central banks

and governments are locked in a mutu-

ally dependent, fractious embrace.

“The caricature is that the leveraged

players puked up all the bonds, so we

have to have less leverage in the

system,” one hedge fund source said.

“But to motivate non-levered players

you need to create more yield. You then

create higher borrowing costs for

governments. They don’t want that.”

What he was saying is that the

secondary markets in which sovereign

bonds are traded establish the prices

that determine a government’s borrow-

ing costs. Since the 2008 crisis, those

markets have been flooded as public

borrowing has rocketed. In a period of

massive supply, prices stay low only if

demand can match it. That’s where

leverage comes in. As long as

hedge funds can borrow as

much as $99 for every $1

they have, they can buy

bonds at high prices —

keeping yields low — and

turn tiny margins into

meaningful profits.

“Take away the lever-

age and government

yields will go up. Who’s

going to buy all that

debt?” the hedge fund

source said.

It is not only leverage that hedge

funds need. It’s stability, which is found

in the “central bank put”. In the world of

finance, a “put” is a promise that prices

will not fall below a certain level, acting

as a loss limiter. The “central bank put”

is the assumption that central banks

will step in whenever there is a wobble.

On March 12, Ms Lagarde suggested

that they wouldn’t step in, so the

markets tested her. Sure enough,

central banks rode to the rescue.

However, regulators believe that

the “put” is unhealthy because it is an

effective state guarantee that social-

ises losses. Alberto Gallo, a hedge

fund manager at Algebris, said: “The

point in this crisis was not that one

1

Hundreds of thousands of

Britons are cancelling holidays

abroad amid warnings that the

decision to quarantine arrivals

from Spain will lead to a collapse

in overseas travel this summer.

Experts said that the government’s

sudden change to quarantine rules

would have a seismic impact on

the travel industry. Pages 1, 8-9

2

Despite earlier suggestions to

the contrary, alcohol

consumption has fallen during

lockdown, with the undoubted rise

in drinking at home far

outweighed by the temporary halt

to social drinking in pubs, clubs

and restaurants. Overall, people

drank nearly 548 million fewer

litres of alcohol than a year ago,

according to Nielsen, the provider

of consumer data. Page 10

3

The economy will not return

to pre-pandemic levels until

2024 as hopes of a V-shaped

recovery evaporate, the EY Item

Club has warned. The forecasting

body expects a record recession as

the economy contracts by 11.5 per

cent this year, almost as severe as

the Office for Budget

Responsibility’s scenario, followed

by a slow rebound. Page 37

4

Entrepreneurs and small

business owners are thinking

of selling up earlier than they

had planned — and in some cases,

it is claimed, of even leaving the

country — because of worries

over possible tax changes. Rishi

Sunak is considering an overhaul

of capital gains tax. Page 37

5

Ordnance Survey, the

mapmaker whose main

revenues come from providing

geospatial mapping data to

government departments and

private sector partners, increased

turnover to £161 million, a fourth

consecutive record. Page 37

6

The government is facing

calls to allow small businesses

to delay their repayments of

state-backed loans until they make

a profit so that they can avoid

collapse and job losses.

7

A Mastercard executive

allegedly was involved in a

money-laundering operation

at a bank accused of terrorist

financing and organised crime that

had links to Wirecard, the

disgraced German payments

group. Page 40

8

The makers of electric

scooters see their product as

the future of getting around

towns and cities, improving air

quality, reclaiming streets from car

congestion and taking the pressure

off public transport. Critics,

however, see the machines as a

source of urban transport anarchy.

Pages 42-43

9

Hundreds of Travelodge

hotels could be rebranded as

Ibis hotels as the chain’s

landlords seek better terms under a

break clause in leases that was

negotiated with Travelodge’s hedge

fund owners last month as part of

a company voluntary arrangement

that cut the chain’s rent. Page 43

10

A surge in demand for

recipe food boxes has

prompted Gousto, a

British-based business, to create a

thousand new jobs after doubling

sales this year. Page 43

Need to know

Market mayhem leaves huge

In the 23 years that the Bank of

England’s independent rate-setting

committee has existed, it has made

unscheduled policy announcements

on only four occasions. One of those

was after the 9/11 terrorist attacks in

2001, another was in October 2008 in

the financial crisis. The other two were

on March 11 and March 19 this year,

when the monetary policy committee

cut interest rates from 0.75 per cent to a

record low of 0.1 per cent and ann-

ounced £200 billion of quantitative

easing, the largest ever single slug of

money-printing by the UK.

The Bank’s action on March 11 was a

strictly economic response to shore up

growth during the pandemic, but the

the package eight days later, the one

that included QE, was directed at

stabilising markets. As companies and

investors made a “dash for cash” to

prepare for lockdown, they liquidated

any asset they could to get hold of

dollars, bringing the biggest and safest

of markets — the $20 trillion Treasur-

ies market in US government debt — to

the brink of failure.

“We had a pretty-near-meltdown,”

Andrew Bailey, the governor, later told

Sky News.

Until the US Federal Reserve’s

$700 billion of QE to unfreeze its

markets on March 15, central banks had

tried to hold the line. On March 11, the

Bank acknowledged the “extreme”

market uncertainty but responded with

regulatory tinkering. On March 12,

Christine Lagarde, president of the

European Central Bank, invoked moral

hazard, saying that markets should not

rely on central banks for a rescue. “We

are not here to close spreads,” she said.

“This is not the function of the ECB.”

There was an immediate backlash.

Bond vigilantes dumped Italian sover-

eign bonds so fast that the price fell by

a record daily amount. Within hours,

Ms Lagarde made a U-turn and in the

next few weeks central banks came to

the rescue with trillions of dollars of

liquidity for government debt and

other bond markets, saving several lev-

eraged hedge funds that were supposed

to be market-stabilising but were am-

plifying the crisis by fire-selling assets.

Among those caught out was Ray

Dalio’s Bridgewater Associates, one of

the biggest of all. About half of Bridge-

water’s $160 billion of assets under

management were in a fund that

crashed by about 20 per cent. Other

large funds, such as Millennium, Cita-

del, Capula Investment and AQR Capi-

tal Management, were also in trouble

before central bank interventions

righted their ships. There is no sugges-

Regulators face dilemma over how to ensure that

borrowing costs stay low. Philip Aldrick reports

Andrew Bailey, below with Christine

Cut us some slack on loans, say small companies

The government is facing calls to allow

small businesses to delay repayments

of state-backed loans until they make a

profit so that they can avoid collapse

and job losses.

The Federation of Small Businesses

said that the rules of bounce back loans

needed to be made more generous to

lessen the burden on companies

struggling because of the coronavirus

pandemic.

The call for relief on loan repayments

came as companies reported a gloomy

outlook, with a fifth predicting that

business would become “much worse”

over the next three months than it was

in the preceding period, according to a

survey by the federation.

Mike Cherry, national chairman of

the federation, said: “A guarantee that

they won’t have to start making repay-

ments until they’re turning a profit

would give them the confidence to

invest and hire today, rather than

further down the line, when [it] may

prove too little too late.”

More than a million small companies

have borrowed a total of £33 billion

under the bounce back scheme, which

offers loans of up to £50,000 that come

with a 100 per cent state guarantee. The

loans were launched in May after an

outcry about the criteria attached to

the coronavirus business interruption

loans, which made it difficult for small

businesses to qualify.

There are concerns among banks

and government officials about compa-

nies’ ability to repay. At present the

terms include no payments or interest

for the first 12 months and the capital to

be repaid within six years at a govern-

ment-set interest rate of 2.5 per cent.

Some commentators are asking

whether those terms should be relaxed,

or if the Treasury should write off un-

paid loans to avoid small businesses

failing or entering a zombie period of

meeting their debt obligations without

the ability to invest for growth.

The Treasury is in talks with banks

over the issue, but the chancellor is

understood to be reluctant to write off

the debt, as it would mean that there

was not a level playing field with busi-

nesses that had struggled through

without state-backed loans and

because it would add to the govern-

ment’s debt burden.

The Office for Budget Responsibility

estimates that £53 billion will have been

handed to small firms in bounce back

loans, with 40 per cent likely to default.

Katherine Griffiths Banking Editor

£33bn

Total borrowed in bounce back loans

‘It’s like central banks

have told them they will

never have bad weather,

just a couple of days of

rain. But those days turn

out to be a hurricane’