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The UK crypto industry received another boost on Thursday as the Financial Services and Markets Act 2023 became the law of the land. The act, a milestone in the UK’s independent financial rulemaking after leaving the European Union, promotes the regulation of cryptoassets in support of their wider adoption.

The Act also introduces new objectives for the UK’s regulatory bodies, including the Financial Conduct Authority and the Prudential Regulation Authority. The reforms aim for a strengthening of regulatory scrutiny and accountability by mandating regular reporting and emphasizing cost-benefit analyses.

The Bill Puts UK Crypto Under the Jurisdiction of Financial Regulators

The UK government hopes that by repealing EU laws, the Act will unlock investment opportunities and improve economic growth. Few people question the need for that to happen. The country, which has the highest inflation in the G7, has struggled to recover from the COVID-19 pandemic.

The UK economy remained stagnant in the first quarter of 2023, with GDP growth of just 0.1%, according to the Office of National Statistics (ONS). Worse still, the monthly estimates reveal a decline of 0.3% March 2023 after an increase of 0.5% in January, and no growth in February.

The bill will also allow the implementation of the Edinburgh Reforms, a package designed to boost the financial services sector. Included in the reforms are widened remits for the country’s financial regulators to focus on growth and international competitiveness.

Under the new regime, cryptoassets such as stablecoins will be under the official jurisdiction of the country’s financial regulators. It also establishes “sandboxes” to enable the safe adoption of emerging technologies like blockchain in financial markets.

In a statement, Economic Secretary to the Treasury Andrew Griffith said that 2023 is shaping up as a “banner year” for financial reforms. He added: “This landmark piece of legislation gives us control of our financial services rulebook, so it supports UK businesses and consumers and drives growth. By repealing old EU laws set in Brussels it will unlock billions in investment – cash that can unlock innovation and grow the economy.”

But with unemployment at a record low of 6.5%, the economy still has significant strengths.

The small dip in output in Europe was more like stagnation, Lagarde said Thursday, and the ECB’s baseline forecast “does not include a recession, but it’s part of the risk out there.”

Inflation in Europe slid again in June but fell too slowly to offer much relief to shoppers grumbling over price tags or to stop more interest rate hikes that will raise the cost of borrowing across the economy.

The annual rate of 5.5% was down from 6.1% in May in the 20 countries that use the euro currency, the European Union statistics agency Eurostat said Friday.

While that is a big drop from the peak of 10.6% in October, persistently high prices in the U.S., Europe and the United Kingdom pushed some of the world’s top central bankers to make clear they are going to keep raising rates and leave them there until inflation drops to their 2% goal considered best for the economy.

Consumers saw relief on energy prices, which dropped 5.6% after last year’s crisis, while food price inflation was up 11.7%, easing from 12.5% in May.

Core inflation, which excludes volatile food and fuel and offers a clearer picture of longer-term price pressures, rose slightly to 5.4% from 5.3% the month before.

The initial outbreak of inflation was fueled by Russia’s invasion of Ukraine, which sent energy and food prices higher. The global economy’s rebound from the COVID-19 pandemic also strained supplies of parts and raw materials.

The European Central Bank — along with its peers around the world — has been rapidly raising interest rates, the chief medicine against inflation. Increases in the ECB’s benchmark rate make it more expensive for people to borrow to buy homes and cars and businesses to acquire new office buildings and factory equipment. That reduces demand, working to drop price levels.

One obvious impact has been in housing, with prices starting to fall after a yearslong rally across Europe as homebuyers avoid asking for mortgages. Those who have to refinance their home loans also are facing the prospect of paying thousands more than they used to.

While inflation fell rapidly as the first rate hikes took hold, going the last mile to 2% may take longer and be more difficult, central bankers say.

ECB President Christine Lagarde warned this week that inflation is turning out to be more persistent than hoped. At the bank’s annual policy conference in Sintra, Portugal, she joined U.S. Federal Reserve Chair Jerome Powell and Bank of England Gov. Andrew Bailey in making clear that rates will go higher and stay there for as long as necessary.

The ECB has raised rates eight times in row from minus 0.5% to 3.5%. Lagarde says the bank’s rate-setting council is likely to hike at least once more at its July 27 meeting, while some members have indicated that rates could keep going up even after that.

High rates have raised concerns about their potential impact on growth, especially because the eurozone economy contracted slightly at the end of last year and the beginning of this year.

Energy and wheat prices have subsided to pre-war levels and supply chain problems have eased, but inflation has kept snaking through other parts of the economy.

Companies selling services instead of goods — a huge swath of the economy including everything from office cleaning to haircuts to medical care — have raised their prices. Hotels and airlines are charging summer travelers more, and workers are pressing for pay raises to make up for their lost purchasing power.

Today, the Commission is proposing to the European Parliament and Council to sign up to a declaration of rights and principles that will guide the digital transformation in the EU.

The draft declaration on digital rights and principles aims to give everyone a clear reference point about the kind of digital transformation Europe promotes and defends. It will also provide a guide for policy makers and companies when dealing with new technologies. The rights and freedoms enshrined in the EU’s legal framework, and the European values expressed by the principles, should be respected online as they are offline. Once jointly endorsed, the Declaration will also define the approach to the digital transformation which the EU will promote throughout the world.

Executive Vice-President for a Europe Fit for the Digital Age, Margrethe Vestager, said: “We want safe technologies that work for people, and that respect our rights and values. Also when we are online. And we want everyone to be empowered to take an active part in our increasingly digitised societies. This declaration gives us a clear reference point to the rights and principles for the online world.”

Commissioner for the Internal Market, Thierry Breton, said: “We want Europeans to know: living, studying, working, doing business in Europe, you can count on top class connectivity, seamless access to public services, a safe and fair digital space. The declaration of digital rights and principles also establishes once and for all that what is illegal offline should also be illegal online. We also aim to promote these principles as a standard for the world.”

Rights and principles in the digital age

The draft declaration covers key rights and principles for the digital transformation, such as placing people and their rights at its centre, supporting solidarity and inclusion, ensuring the freedom of choice online, fostering participation in the digital public space, increasing safety, security and empowerment of individuals, and promoting the sustainability of the digital future.

These rights and principles should accompany people in the EU in their everyday life: affordable and high-speed digital connectivity everywhere and for everybody, well-equipped classrooms and digitally skilled teachers, seamless access to public services, a safe digital environment for children, disconnecting after working hours, obtaining easy-to-understand information on the environmental impact of our digital products, controlling how their personal data are used and with whom they are shared.

The declaration is rooted in EU law, from the Treaties to the Charter of Fundamental rights but also the case law of the Court of Justice. It builds on the experience of the European Pillar of Social Rights. Former European Parliament President David Sassoli promoted the idea of the access to the Internet as a new human right back in 2018. Promoting and implementing the principles set out in the declaration will be a shared political commitment and responsibility at both Union and Member State level within their respective competences. To make sure the declaration will have concrete effects on the ground, the Commission proposed in September to monitor progress, evaluate gaps and provide recommendations for actions through an annual report on the ‘State of the Digital Decade’.

Next Steps

The European Parliament and the Council are invited to discuss the draft declaration, and to endorse it at the highest level by this summer.

Background

On 9 March 2021, the Commission laid out its vision for Europe’s digital transformation by 2030 in its Communication on the Digital Compass: the European way for the Digital Decade. In September 2021, the Commission introduced a robust governance framework to reach the digital targets in the form of a Path to the Digital Decade. In a speech at the ‘Leading the Digital Decade’ event in Sines, Portugal, on 1 June 2021, Commission President Ursula von der Leyen declared: “We embrace new technologies. But we stand by our values.”

The Commission also conducted an open public consultation which showed broad support for European Digital Principles – 8 EU citizens out of 10 consider it useful for the European Union to define and promote a common European vision on digital rights and principles – as well as a special Eurobarometer survey. Yearly Eurobarometer surveys will collect qualitative data, based on citizens’ perception of how the digital principles enshrined in the declaration are implemented in the EU.

The declaration also builds on previous initiatives from the Council including the Tallinn Declaration on eGovernment, the Berlin Declaration on Digital Society and Value-based Digital Government, and the Lisbon Declaration – Digital Democracy with a Purpose for a model of digital transformation that strengthens the human dimension of the digital ecosystem with the Digital Single Market as its core.

Source: https://ec.europa.eu/commission/presscorner/detail/en/ip_22_452

Thanks to a blowout earnings report and a big car order by Hertz, Tesla’s market cap surpassed $1 trillion on Monday—and CEO Elon Musk has emerged as the richest person in the history of the world.

Forbes estimates Musk’s net worth to be $271.3 billion as of the market’s close on Monday—up some $41.7 billion from Friday’s close. For that, he can thank a nearly 13% jump in Tesla stock plus more than 16 million new stock options, worth $16.1 billion, awarded following Tesla’s latest earnings report.

Musk is in uncharted territory, headed toward $300 billion. For comparison, Amazon’s founder and former CEO Jeff Bezos became the richest person to ever appear on The Forbes 400 ranking of America’s richest people earlier this month, topping the list with an estimated $201 billion fortune. His net worth climbed as high as $212 billion when Amazon’s stock peaked in July—a full $59.3 billion less than Musk is worth now. Microsoft mogul Bill Gates briefly surpassed $100 billion in April 1999, during the dot-com bubble’s apex. Adjusted for inflation, that’s just over $165 billion today. When Forbes first began tracking billionaire wealth, in 1982, the richest person in America was shipping magnate Daniel Ludwig, worth $2 billion, or about $5.5 billion in today’s dollars.

Musk’s 23% stake in Tesla (discounted for loan obligations) constitutes the bulk of his fortune, but he also holds a minority stake in the privately held rocket company he founded in 2002, SpaceX. The business was most recently valued by investors at $74 billion, following a February funding round.

You won’t find much real estate or many other valuable assets in Musk’s portfolio. Despite his remarkable wealth, the South Africa-born billionaire has been leading a relatively austere lifestyle. In the spring of 2020, he pledged to ditch the bulk of his physical possessions, including a half-dozen California mansions. As of June, Musk’s primary residence was a “foldable, prefabricated” rental house, the size of a studio apartment, in Boca Chica, Texas, where SpaceX produces its Starships. (Musk may be settling down in Texas for good; In early October, Tesla announced plans to move its headquarters from Palo Alto to Austin.)

Musk’s net worth has soared to new heights as politicians have taken aim at billionaire wealth. On Monday, he decried the latest tax proposals that Democrats hope could help finance their spending plan, which would reportedly require billionaires and those who earn income exceeding $100 million for at least three consecutive years to pay taxes annually on the increased values of their stocks and bonds. That would be particularly onerous for Musk, who holds much of his vast fortune in Tesla’s publicly traded shares.

“Eventually, they run out of other people’s money and then they come for you,” he wrote in a tweet on Monday night, after his net worth rose more than $41 billion in a single day.

Source: www.forbes.com/sites/elizahaverstock/2021/10/26/elon-musk-nearing-300-billion-fortune-is-the-richest-person-in-history/?sh=4c27fe4d1933

U.S. Treasury Deputy Secretary Wally Adeyemo said he expects strong backing from G7 peers for Washington’s proposed 15%-plus global minimum corporate tax, which should help solidify support in the U.S. Congress for domestic corporate tax legislation.

“My sense is that you’re going to see a lot of unified support amongst the G7 moving forward,” Adeyemo told Reuters on Monday after France, Germany, Italy and Japan made positive comments about the Treasury’s proposal.

That support may be voiced at an in-person meeting of G7 finance ministers in London on June 4-5, Adeyemo said.

Optimism about a long-sought comprehensive deal for how to tax the largest multinationals and digital services companies has increased since the Treasury last week said it would accept a global minimum tax rate of 15% or higher.

The rate is well below the Biden administration’s proposed 21% minimum rate for U.S. companies’ overseas income and its 28% proposed domestic corporate tax rate.

The Financial Times on Thursday reported that G7 countries are close to agreement on the corporate taxation of multinational firms. While the talks are taking place among nearly 140 countries through the Organization for Economic Cooperation and Development (OECD), G7 countries — the United States, Japan, Germany, Britain, France, Italy and Canada — have a strong influence over multilateral decisions.

The reaction from G7 chair Britain, which currently has a 19% corporate tax rate, has been more guarded. Asked if Britain would support Washington’s 15% minimum proposal, Prime Minister Boris Johnson shifted the focus to taxation of large tech companies such as such as Alphabet Inc and Facebook Inc.

“Reaching an international agreement on how large digital companies are taxed is a priority, and we welcome the U.S.’s renewed commitment to reaching a solution,” Johnson said.

The U.S. global minimum tax proposal is expected to be a key topic of discussion at a preliminary virtual G7 finance leaders meeting on Friday.

DOMESTIC TAX LINKAGE

Adeyemo, who is involved in the OECD tax talks, said he expects a broad international commitment of 15% or more to build support in Congress for a U.S. corporate tax increase by narrowing the gap between U.S. and overseas rates.

In 2017, the Trump administration and Republicans in Congress cut the U.S. corporate tax rate to 21% and instituted a minimum tax rate on overseas income from intangible sources of 10.5%. Business groups including the U.S. Chamber of Commerce have opposed any increases in U.S. tax rates, arguing they would put U.S. firms at a disadvantage.

“If we can get the world to say that they’re willing to do at least 15%, it gives us the ability to come back to the international conversation once we’ve finished the domestic piece.”

Senate Finance Committee Chairman Ron Wyden said he was encouraged by Treasury’s progress in the negotiations.

“A global agreement could support necessary reforms to U.S. tax laws, ensuring our multinational corporations are incentivized to invest in the United States and pay their fair share,” Wyden said.

Negotiators in the OECD tax talks have been aiming for an agreement in principal this summer.

By the time of a G20 finance leaders meeting in Venice in July, there should be a good sense of unity around a global minimum tax structure, Adeyemo said. He added that there would be many technical details to work out, so a final agreement may have to wait until G20 leaders meet in Rome at the end of October.

Source: https://www.reuters.com/business/finance/g7-is-close-agreement-taxation-worlds-largest-companies-ft-2021-05-24/

Despite lockdown surge the firm’s Luxembourg unit made a €1.2bn loss and therefore paid zero corporation tax.

Fresh questions have been raised over Amazon’s tax planning after its latest corporate filings in Luxembourg revealed that the company collected record sales income of €44bn (£38bn) in Europe last year but did not have to pay any corporation tax to the Grand Duchy.

Accounts for Amazon EU Sarl, through which it sells products to hundreds of millions of households in the UK and across Europe, show that despite collecting record income, the Luxembourg unit made a €1.2bn loss and therefore paid no tax.

In fact the unit was granted €56m in tax credits it can use to offset any future tax bills should it turn a profit. The company has €2.7bn worth of carried forward losses stored up, which can be used against any tax payable on future profits.

The Luxembourg unit – which handles sales for the UK, France, Germany, Italy, the Netherlands, Poland, Spain and Sweden – employs just 5,262 staff meaning that the income per employ amounts to €8.4m.

Margaret Hodge, a Labour MP who has long campaigned against tax avoidance, said: “It seems that Amazon’s relentless campaign of appalling tax avoidance continues.

“Amazon’s revenues have soared under the pandemic while our high streets struggle, yet it continues to shift its profits to tax havens like Luxembourg to avoid paying its fair share of tax. These big digital companies all rely on our public services, our infrastructure, and our educated and healthy workforce. But unlike smaller businesses and hard-working taxpayers, the tech giants fail to pay fairly into the common pot for the common good.

“President Biden has proposed a new, fairer system for taxing large corporations and digital companies but the UK has not come out in support of the reforms. The silence is deafening. The government must act and help to grasp this once-in-a-generation opportunity to banish corporate tax avoidance to a thing of the past.”

Paul Monaghan, the chief executive of the Fair Tax Foundation, said: “These figures are mind-blowing, even for Amazon. We are seeing exponentially accelerated market domination across the globe on the back of income that continues to be largely untaxed – allowing it to unfairly undercut local businesses that take a more responsible approach.

“The bulk of Amazon’s UK income is booked offshore, in the enormously loss-making Luxembourg subsidiary, which means that not only are they not making a meaningful tax contribution now, but are unlikely to do so for years to come given the enormous carried forward losses they have now built up there.”

The Amazon EU Sarl accounts filed in Luxembourg show 2020 sales rose by €12bn from €32bn in 2019. The accounts, that extend to just 23 pages (compared with hundreds of pages for large UK companies), do not break down how much money Amazon made from sales in each European country.

However, Amazon’s US accounts show that its UK income soared by 51% last year to a record $26.5bn (£19.4bn) as people at home during the coronavirus pandemic lockdowns turned to it for online shopping as high street stores remained closed for most of the year, while homeworking drove increased use of its cloud software, Amazon Web Services.

While Amazon celebrated the rise in revenue collected from UK customers, it did not state how much corporation tax it paid in the UK in total last year. The company, which has made its founder and outgoing chief executive Jeff Bezos a $200bn fortune, paid just £293m in tax in 2019 despite the company collecting UK sales of $17.5bn that year.

The £19.5bn that UK customers spent at Amazon in 2020 is approximately double the takings at Marks & Spencer, the 137-year-old retailer, and underlines how the Covid-19 pandemic is revolutionising the way we shop and threatening the future of the high street. Last week Amazon reported its largest ever quarterly profit of $8.1bn on sales of $109bn.

An Amazon spokesperson said: “Amazon pays all the taxes required in every country where we operate. Corporate tax is based on profits, not revenues, and our profits have remained low given our heavy investments and the fact that retail is a highly competitive, low margin business.

“We’ve invested well over €78bn in Europe since 2010, and much of that investment is in infrastructure that creates many thousands of new jobs, generates significant local tax revenue, and supports small European firms.”

Doug Gurr, the recently-departed managing director of Amazon.co.uk, has explained that: “The Amazon.co.uk website is operated by Amazon EU Sarl, a Luxembourg-based entity, which is a European headquarters of Amazon.”

Just over 600,000 people live in Luxembourg but many of the world’s biggest companies have headquarters in the low-tax country.

Amazon arrived in Luxembourg in 2003, and within a few months secured a confidential agreement with the country’s tax authorities.

Bob Comfort, Amazon’s head of tax until 2011, told a Luxembourg newspaper that Jean-Claude Juncker – then the country’s prime minister and a former president of the European Commission – had personally offered to help Amazon.

“His message was simply: ‘If you encounter problems which you don’t seem to be able to resolve, please come back and tell me. I’ll try to help.’” Comfort was later appointed Luxembourg’s honorary consul to Seattle, the location of Amazon’s US headquarters.

Last month Joe Biden tabled plans at the Organisation for Economic Co-operation and Development, a club of mostly rich countries, for sweeping changes to the global tax system, including a minimum corporation tax rate in an attempt to stop multinational companies exploiting loopholes in the system. Germany and France have backed the plans but the UK has remained silent.

Washington had long resisted calls for the global treaties that reformers argued were needed to ensure that powerful multinational companies pay their fair share of taxes.

Under the US president’s proposals, large technology companies and corporations would be forced to pay taxes to national governments based on the sales they generate in each country, irrespective of where they are based.

A global tax floor would also be agreed. The US has suggested a rate of 21%, although this is higher than in several jurisdictions – including Ireland, Hungary and the Caribbean – and could be a stumbling block.

Bezos, the world’s richest person, welcomed Biden’s proposals and said Amazon was “supportive of a rise in the corporate tax rate”.

Amazon is not alone in creating complex corporate structures to avoid tax. The big six US tech firms – Amazon, Facebook, Google, Netflix, Apple and Microsoft – have been accused of avoiding $100bn of global tax over the past decade, according to a report by the campaign group the Fair Tax Foundation. All have said that they pay the correct amounts of tax.

The report singles out Amazon as the worst offender. It said the group paid just $3.4bn (£2.6bn) in tax on its income so far this decade, despite achieving revenues of $961bn and profits of $26.8bn.

The Fair Tax Foundation said this meant Amazon’s effective tax rate was 12.7% over the decade when the headline tax rate in the US had been 35% for most of that period.

Amazon said the report’s “suggestions are wrong” and the company had “a 24% effective tax rate on profits from 2010-18”.

Source: https://www.theguardian.com/technology/2021/may/04/amazon-sales-income-europe-corporation-tax-luxembourg

Britain’s departure from the EU has so far thrown up more challenges than opportunities for the country’s finance industry. Boris Johnson’s government failed to ensure that financial services were an integral part of Brexit talks and the ensuing trade deal. The result has been a trickle of business away from the City of London, with the fear that it will become a steady stream. With hopes fading for a free-trade deal in financial services with Brussels, the Square Mile urgently needs to think of new ways to retain its pre-eminence as a financial centre.

One obvious avenue is Britain’s thriving financial technology, or fintech, sector. The UK has a strong record in spawning and fostering these companies — fintech contributes £11bn to the economy — but it could do much more. Brexit gives the UK a chance to change its financial regulation to make itself even more attractive to fintech entrepreneurs and enterprise capital. In doing so it would be fighting the battles of tomorrow, rather than battling to preserve a former glory.

A government-commissioned report by Ron Kalifa, a former chief executive of Worldpay, has set out a range of proposals with the aim of sparking a “digital big bang”. The five-point plan covers areas such as regulation, investment and skills. Some of the recommendations are both common sense as well as overdue. Among these is the creation of a tech visa to allow access to global talent. One of the industry’s concerns since the 2016 Brexit vote has been that Britain’s departure from the EU would end the free movement of workers. The chancellor said on Friday the government is ready to launch a fast-track scheme but it should go further and ensure it also offers a pathway to citizenship to those deemed to be eligible. The review also identified 10 fintech “clusters” around the UK that, it says, need to be fostered, with a three-year strategy to support growth. The approach is the right one and would help to underpin the broader “levelling up” agenda from Birmingham to Belfast.

Other more radical proposals will require careful implementation but deserve support. Loosening London’s listing rules to allow dual-class share structures is one. The city’s global leadership as a fintech hub has not fed through to the stock market. The London Stock Exchange lacks the technology stars that dominate the US public markets — which embraced dual-class shares during the 1980s. Founders naturally want to retain a stake in their business in the early years after going public. It is sensible, therefore, for London to go down this path, although safeguards such as imposing time limits or restrictions on what the shares can vote on will be vital.

In a similar vein, it makes sense to loosen rules to allow pension funds and insurers to invest in more risky assets. Even before Brexit, the argument for less stringent rules to allow a larger investment in a broader range of asset classes was strong. Danish pension funds, for example, have benefited from their early support for offshore wind projects which were deemed too risky by many others. Any changes, however, should be carefully calibrated to ensure appropriate transparency and safeguards are in place. Ministers will need to strike a shrewd balance in order to maintain the competitive strengths that flow from good governance while fostering an environment that attracts entrepreneurs. Implementing Kalifa’s reforms will also only go so far; New York still benefits from higher valuations and a deeper pool of liquidity. London and the rest of the UK will need to keep fighting to gain any competitive edge they can.

Source: https://www.ft.com/content/0c59befd-0f4f-4c55-9d12-b15f74497121

Source: https://www.bbc.com/news/world-europe-54522299

The European Union’s chief Brexit negotiator rejected the U.K.’s latest proposals for financial firms to do business with the 27-nation bloc after Brexit, accusing Britain of trying to keep as many of the benefits of the single market as it can.

Michel Barnier dismissed Britain’s desires, which he said would let firms keep operating from the City of London, with employees flying in and out of the EU for short business trips. The proposals could even “create a significant risk” of avoiding regulation altogether.

“There is no way member states or the European Parliament would accept this!” Barnier said on Tuesday in the speech to the Eurofi financial conference. The U.K. “would like to make it easy to continue to run EU businesses from London, with minimal operations and staff on the continent.”

The U.K. and EU have made next to no progress in negotiations over their future relationship — which includes an accord on financial services — despite talking since March. A fresh round of discussions started on Monday, with both sides vowing to move forward in an attempt to get a deal before October, two months before Britain’s final parting with the bloc.

Meantime, the so-called equivalence process through which the EU can open access to London firms has run into trouble, Barnier said. Under the EU’s equivalence rules, foreign firms can be given access to the bloc only if officials in Brussels think the rules are tough enough in the companies’ home state.

“I know that many hope our equivalence decisions will provide continuity,” Barnier said. “Many believe that ‘responsible politicians’ on both side of the Channel should make this happen — but things have to change. The U.K. and the EU will be two separate markets, two jurisdictions. And the EU must ensure that important risks to our financial stability are managed within the framework of our single market”.

While the two sides committed to make progress in their equivalence assessments by this month, Barnier said the U.K. has answered only 4 of 28 EU questionnaires on regulations. “These assessments are particularly challenging,” Barnier said.

Britain has consistently argued that the regulations start at the same place in both jurisdictions, which should make the equivalence process simpler. “The U.K. has been able to complete our own assessments on time and we are now ready to reach comprehensive findings of equivalence as soon as the EU is able to clarify its own position,” a U.K. Treasury spokesperson said.

Source: https://www.bloomberg.com/news/articles/2020-06-30/eu-finance-negotiator-rejects-u-k-plans-for-post-brexit-banking

The European Central Bank intensified its response to the coronavirus crisis by cutting the cost of funding for banks, while urging politicians to provide more fiscal support.

Hours after data showed the worst three-month contraction in a quarter-century of statistics, President Christine Lagarde warned that the euro-area economy could shrink as much as 12% this year.

“Continued and ambitious efforts are needed, notably through joint and coordinated policy action, to guard against downside risks and underpin the recovery,” she said in a virtual press conference on Thursday. “An ambitious and coordinated fiscal stance is critical, in view of the sharp contraction.”

She spoke after policy makers reduced the cost of their emergency loan program for banks, and unveiled a further facility to inject liquidity into the outbreak-stricken economy.

The ECB said the lowest interest rate on a program that gives banks incentives to lend to companies and households will fall to 50 basis points below the deposit rate, currently at -0.5%. Interest on the new, non-targeted facility will be 0.25% below the main refinancing rate that presently is zero.

Officials kept their pandemic purchase program at 750 billion euros ($815 billion), which together with earlier programs, means it will buy more than 1 trillion euros of debt through the end of this year.

Most economists predict the ECB will bump that up later this year. Lagarde said the central bank is “fully prepared” to increase or extend the program if needed.

Bond investors largely signaled satisfaction with the move, with Italian yields falling after initially briefly jumping.

“For today, it’s enough,” said Carsten Brzeski, an economist at ING in Frankfurt. “So much has been announced in the past six weeks.”

Lockdowns to curb the spread of the coronavirus have sent unemployment soaring across the region and burdened the currency area’s economies with massive costs.

Figures earlier Thursday showed European output shrank the most on record during the first quarter, a period only partially blighted by coronavirus lockdowns. Countries such as Italy, Spain and France, with limited room to spend their way out of the crisis, saw contractions of around 5%.

With more pain to come, demands by the euro area’s most vulnerable nations for a joint fiscal response will only grow louder. So far, most government action has been at the national level.

Squabbling Leaders

Leaders have asked the European Commission to come up with a broader proposal by May 6, though its unclear how to resolve disagreements on whether aid should take the form of grants or loans. Likewise, Germany and the Netherlands have led opposition to joint debt over fears they’ll end up with much of the bill.

The squabbling has unnerved investors, who fret that heavily indebted nations such as Italy will be tipped into a deeper crisis. The country’s credit rating was unexpectedly cut by Fitch this week.

The response contrasts with other major economies where fiscal support has been stronger. Federal Reserve Chairman Jerome Powell warned on Wednesday, after maintaining his institution’s own emergency settings, that this is “not the time” to worry about the U.S. debt burden.

Michael Pyle, global chief investment strategist at BlackRock, finds the contrast telling. He says the ECB’s move on Thursday only amount to “incremental steps in the right direction.”

“When we compare what we’re seeing out of the Fed and U.S. policy makers more broadly, the scale in response is much different,” he told Bloomberg Television. “We’re going to need to see quite a bit more, looking ahead.”

The ECB already eased the terms of its bank-lending program at its March policy meeting. It also recently loosened standards on the collateral it’ll accept for refinancing.

Source: https://www.bloomberg.com/news/articles/2020-04-30/ecb-intensifies-crisis-response-with-new-loans-after-gdp-crash