Financial Times UK - 18.09.2019

4 A F I N A N C I A L T I M E S W e d n e s d a y 1 8 S e p t e m b e r 2 0 1 9

I N T E R N AT I O N A L

M I L E S J O H N S O N— ROME

Matteo Renzi, Italy’s former prime min-
ister, is splitting from the centre-left
Democratic party to create a centrist
political movement, shifting the bal-
ance of power inside the country’s frag-
ile two-week-old coalition government.
Mr Renzi said he would continue to
support the PD’s coalition with the Five
Star Movement. But he is expected to
take about 30 lawmakers into his new
party, weakening the influence of PD

leader Nicola Zingaretti, and could top-

ple the government if he withdrew his

support.

Leaving the PD is a gamble for the 44-

year-old senator when his popularity —

and that of the political centre — is low.

Polls show a majority of voters still

split their support between the anti-

immigration League and anti-establish-

ment Five Star, the two parties whose

populist coalition collapsed in August.

“I have decided to leave the PD and

build, together with others, a new house

to do politics in a different way,” Mr

Renzi wrote in a Facebook post that

referred to internal divisions in the

party. “After seven years of friendly fire I

think we should take note that our val-

ues, our ideas, our dreams cannot be the

subject of daily internal quarrels.”

PD figures criticised Mr Renzi, saying

his move would increase the risk of an

election that could usher the League,

under its popular former interior minis-

ter Matteo Salvini, back into power.

Dario Franceschini, PD culture minis-

ter and party grandee, compared Mr

Renzi’s actions to the split between Ital-

ian liberals that allowed the dictator

Benito Mussolini to take power in the

1920s, arguing that his actions would

only strengthen the country’s far right.

But Mr Renzi said he told Prime Min-

ister Giuseppe Conte he believed a new

party would broaden the appeal of the

government. In an interview with La

Repubblica, Mr Renzi said he was not

trying to undermine Mr Zingaretti. “I do

not have a personal problem with Zinga-

retti, and nor does he have one with me.”

Mr Zingaretti said he regretted the

split, calling it “an error”.

Sofia Ventura, a political-science pro-

fessor at the University of Bologna, said

the government’s survival would now

depend in part on Mr Renzi. “But both

parties do not have an incentive to go to

elections, so that could mean it lasts for

longer than people expect,” she said.

A survey of political pollsters con-

ducted by the Corriere della Sera news-

paper predicted a new Renzi-led cen-

trist party could win between 3 per cent

and 8 per cent of votes.

Mr Renzi, who has low approval rat-

ings among Italian voters but retains

influence inside the PD, was the driving

force in urging the party to agree a

tie-up with Five Star following the col-

lapse of the last coalition government.

Enrico Letta, another former PD

prime minister and rival of Mr Renzi,

said splitting the party “was with-

out logic” and called for “unity and

humility”.

Mr Renzi is expected formally to out-

line his new party’s platform at a meet-

ing of supporters and lawmakers next

month. His party will be represented in

Italy’s lower house, while in the upper

house, the Senate, it will sit inside the

so-called mixed group.

A DA M SA M S O N— LONDON

J O E R E N N I S O N , L AU R A N O O N A N A N D

R O B I N W I G G L E S WO RT H— NEW YORK

The Federal Reserve injected billions of

dollars into the US financial system in

the first such intervention in more than

a decade as the central bank sought to

alleviate funding pressures caused by a

sudden scarcity of cash.

The cost of borrowing cash overnight

via repurchasing agreements known as

repos surged between Monday after-

noon and yesterday morning to as high

as 10 per cent, a more than fourfold rise,

according to Refinitiv data.

A senior executive at a large US bank

said the sharp rise in the so-called repo

rate reflected a “pretty sizeable disloca-

tion between funding needs and fund-

ing” in a key portion of the US money

market.

Repos are a vital part of the financial

system because they give companies

access to cash overnight using US Treas-

uries as collateral. Ashish Shah, co-chief

investment officer for fixed income at

Goldman Sachs Asset Management,

described the abrupt tightening of the

US money market as a “big deal”.

“When things like this happen it

increases the uncertainty and leaves

fixed-income markets jittery. And that

is the job of central banks to avoid,” he

said.

The sharp rise in the repo rate created

a predicament for the Fed just as top

policymakers were meeting in Washing-

ton to make a decision on monetary pol-

icy because it pushed up the central

bank’s benchmark interest rate. The

federal funds rate rose to 2.25 per cent,

the very top of the range the central

bank targets, from 2.14 per cent at the

end of last week.

In response, the New York Fed, which

conducts market operations for the cen-

tral bank, launched an operation to

“help maintain the federal funds rate

within the target range”.

The New York Fed made up to $75bn

available through a repo auction in

which the Fed accepts Treasuries and

other securities as collateral, and in

exchange provides cash. The facility had

not previously been used at such a scale

since 2008.

The bank had to cancel the operation

on the first attempt due to “technical

issues”. On the second effort, primary

dealers — big banks that act as trading

counterparties of the Fed — tapped the

facility for $53bn.

The operation appears to have suc-

ceeded in calming the money markets.

The repo rate fell close to zero soon after

the Fed announced its action.

Bank executives and analysts said

several factors were behind the abrupt

rise in the repo rate. Lenders’ reserves

above legally required amounts had

been declining ever since the Fed ended

its bond-buying programme in 2014,

meaning there was less cash they were

willing to lend through repo operations.

The system came under additional

stress in recent days as companies

pulled cash out to pay tax bills. A glut

of Treasuries, which are used on the

other side of the trade, created an imbal-

ance, which sent the repo rate ripping

higher.

Additional reporting by Michael Macken-

zie, Colby Smith and Robert Armstrong

M A X S E D D O N , B E N H A L L A N D
R O M A N O L E A R C H Y K— KIEV

Ukraine’s prime minister has said Kiev
is seeking a “compromise” with an oli-
garch over a $5.5bn banking scandal, a
move that risks alienating western
backers of the government of President
Volodymyr Zelensky.

Oleksiy Honcharuk said Mr Zelensky
wanted a settlement withIgor Kolo-
moiskyover the 2016 collapse ofPrivat-
Bank, Ukraine’s largest lender, which
was nationalised amid fraud allegations.
“I’m completely convinced that we
need to concentrate on growth now and
look for joint solutions instead of spend-
ing our resources on destroying each
other. So I am very positive about any
rhetoric directed towards searching for
a compromise,” said Mr Honcharuk.
The IMF has said backsliding on the
nationalisation would jeopardise
Ukraine’s $3.9bn standby programme
and officials expect it to push for recov-
ery of the $5.5bn spent on the rescue.

Mr Honcharuk said: “Whatever solu-

tion we find, we have to find it together

with the IMF.”

PrivatBank was nationalised in 2016

when a $5.5bn black hole was found in

its balance sheet. Kiev sued Mr Kolo-

moisky and Gennady Bogolyubov, his

partner, accusing them of running a

“Ponzi-like scheme” to launder money

and use the bank’s retail deposit base to

fund their own businesses.

The two deny the allegations and,

with related parties, have launched

more than 600 lawsuits challenging the

nationalisation.

Mr Honcharuk’s comments are likely

to heighten concerns that Mr Zelensky’s

ties to Mr Kolomoisky threaten to over-

shadow his reform agenda and efforts at

detente with Russia.

The billionaire oligarch owns 1+1, the

television channel on which Mr Zelen-

sky shot to stardom playing a fictional

president. Last week parliament

appointed Oleksandr Dubinsky, an MP

who criticised the nationalisation dur-

ing his time as a reporter at 1+1, to head

a commission that will control board

appointments to state-owned banks.

Mr Zelensky, with Andriy Bogdan, his

chief of staff, a former lawyer who acted

for Mr Kolomoisky in the PrivatBank

case, hosted the oligarch in the presi-

dential office last week, a step one aide

described as “disturbing”. The two

denied they discussed PrivatBank.

The meeting came days after police

raided PrivatBank’s offices in Mr Kolo-

moisky’s home town of Dnipro and

searched the home of Valeria Gon-

tareva, former central bank chief, under

a new investigation into the officials

who led the nationalisation.

Ms Gontareva said she and the cur-

rent management of PrivatBank had

been subjected to a campaign of intimi-

dation by Mr Kolomoisky’s allies. “How

is it possible to settle?” she said. “Our

recapitalisation plan was a settlement.

He failed to fulfil his promises.”

Early yesterday Ms Gontareva’s house

near Kiev was set ablaze and destroyed.

Mr Kolomoisky has denied involvement

in any campaign to intimidate her.

Though the bank is owned by the

finance ministry and is within his remit,

Mr Honcharuk said Mr Zelensky and Mr

Bogdan would the lead the case despite

their apparent conflict of interest as

former Kolomoisky employees

“We understood from the very begin-

ning that this is a special issue, so it was

never my responsibility. Mr Bogdan and

the president have handled this issue

from the very beginning,” he said.

Under Petro Poroshenko, former

president, a deal was struck last year in

which Mr Kolomoisky would give up his

stake inUkrnafta, the state oil group, in

exchange for a mutual cessation of legal

hostilities over PrivatBank. The deal

collapsed after Mr Poroshenko’s cabinet

decided that concessions to the oligarch

were untenable in an election year.

Talks resumed after Mr Zelensky

took office this spring but any outcome

was unlikely to require Mr Kolomoisky

to compensate for PrivatBank’s losses,

said a person briefed on the matter.

In April, as Mr Zelensky was on course

to win the election, a Kiev court ruled

the nationalisation illegal. The central

bank is appealing and has said it will

declare the bank insolvent again should

control be awarded to Mr Kolomoisky.

Mr Honcharuk said Mr Zelensky

would avoid interfering with the courts

or central bank while trying to “defend

the interests” of the country.

Fragile coalition

Italy’s former PM forms breakaway party

Renzi to create centrist

movement but is attacked

for risking far-right return

Ukraine

Kiev considers deal with oligarch over $5.5bn PrivatBank scandal

An election billboard for president

Ashraf Ghani’s running mate

Amrullah Saleh looms over the scene

of a Taliban suicide bomb attack

yesterday that killed 26 and wounded

42, the interior ministry said.

The attack targeted a campaign

rally of Mr Ghani and came 11 days

before the country’s presidential

election. The Taliban, whose peace

talks with the US collapsed this

month, have vowed to disrupt the

polls with violence.

Mr Ghani, who was unhurt, was

due to address the rally in Charikar,

capital of central Parwan province,

when the suicide bomber struck.

The attack was one of two claimed

by the Taliban yesterday. In a

separate incident, a man on foot blew

himself up in the centre of the capital

Kabul, killing 22 and wounding 38.

Reuters, Kabul

Afghan blasts

Taliban strike

before polls

Hedayatullah Amid/Epa-Efe/Shutterstock

Repo rate

Fed injects

billions into

system as cost

of borrowing

cash surges

Igor Kolomoisky: denies running a

Ponzi-like scheme to launder money

B R E N DA N G R E E L E Y— WASHINGTON

C O L BY S M I T H— NEW YORK

In his most recent remarks about the

outlook for the global economy, Jay

Powell, US Federal Reserve chairman,

said: “It’s murky out there.”

Markets are expecting a second con-

secutive 25 basis point rate cut at

the end of the policymakers’ two-day

meeting this week. Economic data have

been ambiguous as business investment

and manufacturing have declined, and

Fed officials have denied that they are

paying attention to Donald Trump’s

demands for cuts as deep as 100bp. But

the growing impact of uncertainty on

investment is sure to weigh on the Fed’s

policy decision.

Impact of uncertainty

In the Fed’s public record of its conver-

sations with local business owners,

known as its Beige Book, mentions of

the word “uncertainty” increased from

14 in January to 29 in September.

A September note from the Fed’s

board showed that trade uncertainty

could reduce gross domestic product

growth by as much as a full percentage

point between late 2018 and early 2020.

“This sounds like a fairly significant

impact,” said Tim Duy of the University

of Oregon. “Shaving a percentage point

off of growth would put output below

trend next year.”

Mr Powell, pictured, can now add to

his list of risks yesterday’s spike in US

short-term borrowing costs and Mon-

day’s disruption to oil supplies from the

air strikes in Saudi Arabia. If global

crude prices remain high, he could

emphasise the downside of a drag on

consumption as Americans divert more

of their incomes to pay for petrol. Or he

could focus on the upside for business

investment as US shale producers

respond to increased demand.

Mid-cycle adjustment?

When the Fed cut its benchmark

rate for the first time in 11 years in

July, Mr Powell framed the move

as a “mid-cycle adjustment”. The

description sent markets tum-

bling and he is unlikely to

repeat it tomorrow.

Many investors had hoped

the Fed would commit to a

longer path of accommoda-

tion to fend off any shocks

from the trade war and

slowing global growth.

But according to futures prices com-

piled by Bloomberg, markets still see

only two more cuts by the end of 2020

on top of that priced in this week.

For months Mr Powell and the Fed

have reiterated that the central bank

will “act as appropriate to sustain the

expansion”. Any language that suggests

expansion is at risk will be significant.

Managing disagreement

Two members of the Federal Open Mar-

ket Committee dissented from July’s cut

decision: Eric Rosengren of the Boston

Fed and Esther George of Kansas City.

The number of dissenters and rea-

sons for objecting will be key in

understanding the Fed’s deci-

sion.

Less noticed but as important

are doves’ arguments, who want

cuts. Charles Evans of the Chi-

cago Fed has said infla-

tion has been too

low for too long.

Jim Bullard of the

St Louis Fed cites

trade uncer-

tainty.

M r Po w e l l

has been more

willing than his predecessors to talk

about the lack of consensus and clarity

within the FOMC, and his decision to

hold press conferences after every

meeting has introduced miscommuni-

cation risks. “This guy is difficult to

understand,” said Joe Ramos, head of US

fixed income at Lazard Asset Manage-

ment. “It’s like he’s thinking out loud

every time he speaks.”

Tariffs and inflation

Mr Powell said over the summer the Fed

remained frustrated at missing its infla-

tion target of 2 per cent. But tariffs on

goods from China will be fully imple-

mented by the end of the year and will

make goods more expensive, said Ian

Shepherdson, chief economist for Pan-

theon Macroeconomics. That would

create inflation without growth —

exactly what the Fed wants to avoid.

Mr Powell has said the Fed is not the

best institution to manage a trade war,

but it is responsible for managing infla-

tion, so it will find it hard to avoid tack-

ling the impact of tariffs.

“I would expect growth forecasts for

next year to be cut, and [forecasts for]

unemployment to be raised,” said Mr

Shepherdson.

Fed rates policyPowell’s risk list extends to Middle East tensions

STOCK MARKETSMar 30prev %chgWorldMarkets

S&P 500Nasdaq CompositeFTSEurorst 300Dow Jones IndEuro Stoxx 505902.741500.7220703.38 20659.32 0.213481.672365.935897.551493.752361.133475.270.090.470.200.

FTSE 100FTSE All-ShareCAC 40Xetra DaxNikkei 12256.43 12203.00 0.4419063.22 19217.48 -0.807369.524011.015089.645069.044011.80 -0.027373.72 -0.060.

Hang SengFTSE All World $24301.09 24392.05 -0.37297.99297.730.

CURRENCIES$ per €$ per £Mar 301.0741.249prev1.0751.

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COMMODITIESOil Brent $Oil WTI $Mar 3052.9850.2252.5449.51prev1.43%chg0.

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INTEREST RATESUK Gov 10 yrUS Gov 10 yr 98.87price100.461.212.38yield-0.030.00chg

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CAC 40Xetra DaxFTSE All-ShareFTSE 100 3990.007322.925122.5112312.87 12256.43 0.464011.01 -0.525089.647369.52 -0.630.

NikkeiHang SengFTSE All World $18909.26 19063.22 -0.8124111.59 24301.09 -0.78297.38298.11 -0.

CURRENCIES$ per €$ per £Mar 311.0701.2511.0741.249prev

SFr per €£ per €¥ per $€ index¥ per £111.430 111.29588.767 89.046139.338 139.0350.8551.0711.0690.859$ indexSFr per ££ per $€ per £¥ per €£ index€ per $119.180 119.476104.536 104.636Mar 3177.226 76.7050.8001.2521.1690.9350.801prev1.2441.1640.

Oil Brent $Gold $Oil WTI $COMMODITIES1244.85Mar 3153.3550.461248.8053.1350.35prev0.22%chg0.41-0.

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SEPTEMBER 18 2019 Section:World Time: 17/9/2019 - 19:27 User: ian.holdsworth Page Name: WORLD1, Part,Page,Edition: LON, 6, 1