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EU faces barriers to boosting single currency’s global status

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Brussels faces a steep climb in its effort to boost the international role of the euro as part of its quest to strengthen the EU’s self-reliance, investors and analysts said after the bloc set out new ambitions for the single currency. 

A European Commission paper on Tuesday argued that the EU’s unprecedented €750bn borrowing programme, which will pay for its Covid-19 recovery fund, will add “significant depth and liquidity to the EU’s capital markets”, making them and the euro more attractive for investors.

“For the foreseeable future the EU will be a substantial player in the international markets, and it is clear that this will help us strengthen the international role of the euro,” said Valdis Dombrovskis, commission executive vice-president, as he helped launch the new paper.

But Myles Bradshaw, head of global aggregate fixed income at JPMorgan Asset Management, said he was sceptical that the recovery fund — which is by its nature designed to be temporary — would by itself be a game-changer for the euro’s role. 

“Part of the characteristics of an international currency is a deep liquid bond market that’s easy to invest in. Having a bigger pool of assets is helpful. But there’s so much else that goes with it — and that’s where the euro gets left behind,” Mr Bradshaw said. 

The EU has long wanted to challenge the US dollar’s dominance in cross-border finance and trade, but there has been little progress on this in a range of areas.

The euro’s share of global foreign exchange reserves has fallen from 23 per cent a decade ago to 20 per cent in 2019, while its use in invoicing for eurozone exports and imports has remained steady at around 60 per cent and 50 per cent respectively. 

One of the few areas where it has established a dominant position is the fast-growing green bond market, almost half of which is denominated in euros.

Maria Demertzis, deputy director at the Bruegel think-tank, said that the size of the fresh issuance of euro-denominated safe assets was not by itself enough for the euro to be a “contender” with the dollar. The bloc also had to tackle residual investor doubts arising from the single currency’s “imperfect architecture”, which is based on a union of multiple sovereign states not just one.

The eurozone’s capital markets remain less developed and more fragmented than those of the US, something the commission is seeking to address via its long-running Capital Markets Union plan. Key elements of the monetary union remain uncompleted, including the Banking Union project, which ministers are also seeking to accelerate.

Ms Demertzis encouraged the EU to focus on getting more transactions in euros, instead of dollars, for example in energy invoicing. This is something the commission report highlights as an area of recent progress, as it vows to foster the euro’s status as an international reference currency in the energy and commodities sectors.

Despite scepticism about the euro’s ability to rival the dollar, some EU officials insist the scale of its new borrowing programme has the potential to be a game-changer, alongside other steps to boost the currency’s attractiveness.

Last year’s deal between member states on the recovery fund “is seen in the markets as a potential shift in European integration, not just a one-off event”, said one EU official. “There is an appetite among public and private institutions for something that helps them diversify away from the dollar, and they see Europe eventually having the critical mass for that.”

Kalin Anev Janse, chief financial officer at the European Stability Mechanism — the eurozone’s bailout fund — said the agreement on the recovery fund had sparked greater interest in euro assets among foreign reserve managers. 

Central banks from outside the eurozone have been buying a larger share of ESM debt sold since the summer, according to Mr Anev Janse. “Ten years ago markets were betting on a break-up of the single currency, but today is a completely different crisis, ” he said. “The monetary and fiscal response has been faster this time. Investors have gained confidence that Europe will stick together.”

Common European debt from the commission and European Stability Mechanism represents €450bn today, but this will leap to €1.23tn in five years, driven in large part by recovery fund borrowing, according to ING projections. Factoring in borrowings from the European Investment Bank, the total will reach €1.75tn, according to ING analyst Benjamin Schroeder. 

That figure would put the EU and these agencies among the region’s top debt issuers: Italy currently has €2.15tn of bonds, with France at €2tn and Germany at €1.46tn.

The commission paper was first reported by the Financial Times on Saturday. It also touts the potential introduction of a digital euro by the European Central Bank as a potential boost for the single currency.

Fabio Panetta, an executive board member at the ECB, said in a recent speech that a digital euro could become “an attractive payment vehicle or store of value for non-euro area residents” and therefore boost the currency’s international usage. 

It could also weaken the US dollar’s role as the clearing currency for most international payments if other central banks agreed to process cross-border payments directly by swapping digital currencies, an idea outlined in a recent ECB report.



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Europe

German regulator steps in as Greensill warns of threat to 50,000 jobs

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Germany’s financial watchdog has taken direct oversight of day-to-day operations at Greensill Bank, as the lender’s ailing parent company warned that its loss of $4.6bn of credit insurance could cause a wave of defaults and 50,000 job losses.

BaFin appointed a special representative to oversee Greensill Bank’s activities in recent weeks, according to three people familiar with the matter, as concern mounted about the state of the lender’s balance sheet.

The German-based lender is one part of a group — advised by former UK prime minister David Cameron and backed by SoftBank — that extends from Australia to the UK and is now fighting for its survival.

On Monday night Greensill was denied an injunction by an Australian court after the finance group tried to prevent its insurers pulling coverage.

Greensill’s lawyers said that if the policies covering loans to 40 companies were not renewed, Greensill Bank would be “unable to provide further funding for working capital of Greensill’s clients”, some of whom were “likely to become insolvent, defaulting on their existing facilities”.

In turn that may “trigger further adverse consequences”, putting over 50,000 jobs around the world at risk, including more than 7,000 in Australia, the company’s lawyers told the court.

A judge ruled Greensill had delayed its application “despite the fact that the underwriters’ position was made clear eight months ago” and denied the injunction.

Greensill Capital is locked in talks with Apollo about a potential rescue deal, involving the sale of certain assets and operations. It has also sought protection from Australia’s insolvency regime.

Greensill was dealt a severe blow on Monday when Credit Suisse suspended $10bn of funds linked to the supply-chain finance firm, citing “considerable uncertainties” about the valuation of the funds’ assets. A second Swiss fund manager, GAM, also severed ties on Tuesday. Credit Suisse’s decision came after credit insurance expired, according to people familiar with the matter.

While the bulk of Greensill’s business is based in London, its parent company is registered in the Australian city of Bundaberg, the hometown of its founder Lex Greensill.

In Germany, where Greensill has owned a bank since 2014, BaFin, the financial watchdog, is drawing on a section of the German banking act that entitles the regulator to parachute in a special representative entrusted “with the performance of activities at an institution and assign [them] the requisite powers”.

The regulator has been conducting a special audit of Greensill Bank for the past six months and may soon impose a moratorium on the lender’s operations, these people said.

Concern is growing among regulators about the quality of some of the receivables that Greensill Bank is holding on its balance sheet, two people said. Regulators are also scrutinising the insurance that the lender has said is in place for its receivables.

Greensill Bank has provided much of the funding to GFG Alliance, a sprawling empire controlled by industrialist Sanjeev Gupta.

“There has been an ongoing regulatory audit of the bank since autumn,” said a spokesman for Greensill. “This regulatory audit report has specifically not revealed any malfeasance at the bank. We have constructive ongoing dialogue with all regulators in all jurisdictions where we operate.”

The spokesman added that all of the banks assets are “unequivocally” covered by insurance.

Greensill, a 44-year-old former investment banker, has said that the idea for his company was shaped by his experiences growing up on a watermelon farm in Bundaberg, where his family endured financial hardships when large corporations delayed payments.

Greensill Capital’s main financial product — supply-chain finance — is controversial, however, as critics have said it can be used to disguise mounting corporate borrowings.

Even if an agreement is struck with Apollo, it could still effectively wipe out shareholders such as SoftBank’s Vision Fund, which poured $1.5bn into the firm in 2019. SoftBank’s $100bn technology fund has already substantially written down the value of its stake.

Gupta, a British industrialist who is one of Greensill’s main clients, separately saw an attempt to borrow hundreds of millions of dollars from Canadian asset manager Brookfield collapse.

Executives at Credit Suisse are particularly nervous about the supply-chain finance funds’ exposure to Gupta’s opaque web of ageing industrial assets, said people familiar with the matter.

The FT reported earlier on Tuesday that Credit Suisse has larger and broader exposure to Greensill Capital than previously known, with a $160m loan, according to two people familiar with the matter.

Additional reporting by Laurence Fletcher and Kaye Wiggins in London



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FT 1000: Europe’s Fastest Growing Companies

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The latest annual ranking of businesses by revenue growth. Explore the 2021 list here — the full report including in-depth analysis and case studies will be published on March 22



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EU plans digital vaccine passports to boost travel

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Brussels is to propose a personal electronic coronavirus vaccination certificate in an effort to boost travel around the EU once the bloc’s sluggish immunisation drive gathers pace.

Ursula von der Leyen, European Commission president, said on Monday the planned “Digital Green Pass” would provide proof of inoculation, test results of those not yet jabbed, and information on the holder’s recovery if they had previously had the disease.

“The Digital Green Pass should facilitate Europeans‘ lives,” von der Leyen wrote in a tweet on Monday. “The aim is to gradually enable them to move safely in the European Union or abroad — for work or tourism.”

The plan, expected to be outlined this month, is a response to a push by Greece and some other EU member states to introduce EU “vaccination passports” to help revive the region’s devastated travel industry and wider economy. 

But the commission’s proposed measures will be closely scrutinised over concerns including privacy, the chance that even inoculated people can spread Covid-19, and possible discrimination against those who have not had the opportunity to be immunised.

In an immediate sign of potential opposition, Sophie Wilmès, Belgium’s foreign minister, raised concerns about the plan. She said that while the idea of a standardised European digital document to gather the details outlined by von der Leyen was a good one, the decision to style it a “pass” was “confusing”. 

“For Belgium, there is no question of linking vaccination to the freedom of movement around Europe,” Wilmès wrote in a tweet. “Respect for the principle of non-discrimination is more fundamental than ever since vaccination is not compulsory and access to the vaccine is not yet generalised.”

The travel sector tentatively welcomed the news of Europe-wide vaccine certification as a way to rebuild confidence ahead of the crucial summer season, but warned that regular and rapid testing was a more efficient and immediate way to allow the industry to restart.

Fritz Joussen, chief executive of Tui, Europe’s largest tour operator, said “with a uniform EU certificate, politicians can now create an important basis for summer travel”. But he added that testing remained “the second important building block for safe holidays” while large numbers of Europeans awaited a jab.

Marco Corradino, chief executive of online travel agent Lastminute.com, said he feared the infrastructure needed would not be ready in time for the summer season: “It will not work . . . at EU level because it is too complicated and would not be in place by June.”

He suggested that bilateral deals, such as the one agreed between Greece and Israel in February to allow vaccinated citizens to travel without the need to show a negative test result, had more potential.

Vaccine passport sceptics argue it would be unfair to restrict people’s travel rights simply because they are still waiting for their turn to be jabbed. 

Gloria Guevara, CEO of the World Travel and Tourism Council, said it was important not to discriminate against less advanced countries and younger travellers, or those who simply cannot or choose not to be vaccinated. “Future travel is about a combination of measures such as comprehensive testing, mask-wearing, enhanced health and hygiene protocols as well as digital passes for specific journeys,” she added.

A European Commission target to vaccinate 70 per cent of the bloc’s 446m residents by September means many people are likely to go through summer unimmunised.

While some countries around the world have long required visitors to be vaccinated against infectious diseases such as yellow fever, a crucial difference with coronavirus is that those inoculations are available to travellers on demand. 

Questions also remain about the risk of people who have already been vaccinated passing on coronavirus if they contract the disease.

 





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