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ApprovedBusinessBusiness and finance

A new class of startup is upending America’s consumer-goods industry

Tommy John’s got the consumer covered

IN MANY ways, Tommy John, a startup based in Manhattan, resembles a tech company straight out of Silicon Valley. On its website the venture-backed firm touts its innovative materials and patented designs. When recruiting talent, it describes itself as “disruptive” and “revolutionary”. But Tommy John does not deal in computer hardware, software or any other kind of technology. It makes men’s underwear.

Following the example of successful e-commerce brands such as Warby Parker, a glasses firm, and Casper, a mattress-maker, a growing number of startups are reimagining everyday household items—from pants and socks to toothbrushes and cookware. These “direct-to-consumer” (DTC) companies bypass conventional retailers and bring their products straight to customers via their online stores. They began several years ago to catch the attention of venture-capital (VC) firms, which have poured in more than $3bn since…Continue reading

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Who needs America?

REVIVING the original Trans-Pacific Partnership (TPP), a trade deal between 12 countries around the Pacific Rim, is technically impossible. To go into force, members making up at least 85% of their combined GDP had to ratify it. Three days into his presidency, Donald Trump announced that America was out. With 60% of members’ GDP gone, that deal was doomed.

But on November 11th, another began to rise in its place, crowned with a tongue-twisting new name: the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP). Ministers from its 11 members issued a joint statement saying that they had agreed on its core elements, and that it demonstrated their “firm commitment to open markets”. The political symbolism was powerful. As America retreats, others will lead instead.

The CPTPP is still far from finished, however. This inconvenient truth is unsurprising. Resuscitating the deal without its biggest member was always going to be hard. Without America, uncomfortable concessions made in the old TPP…Continue reading

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ABP, a Dutch pension giant, is more admired abroad than at home

EUROPE’S largest pension fund, a scheme for Dutch public-sector workers called ABP, is much feted abroad for its efforts in “sustainable” investing. At home, however, where it provides pensions to one in six families and manages nearly one-third of pension wealth, it is suffering a crisis of confidence.

By international standards, Dutch pensions are extremely generous overall, offering 96% of career-averagesalaries (adjusted for inflation), compared with an OECD mean of 63%. And they are solid. Thanks to mandatory, tax-deductible saving, the Dutch have stored up a collective pension pot of nearly €1.4trn ($1.6trn), roughly double GDP. Mercer, a consultancy, marks the country as second only to Denmark in a global ranking of schemes.

Yet Dutch people’s faith in their pensions has sunk as low as their trust in banks and insurers. In March a political party for older voters, 50+, won four seats in the Dutch parliament, largely thanks to its promise to “stop the pension raid”. ABP’s own members mark it at just…Continue reading

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The rules on allocating take-off and landing slots favour incumbents

LAST year nearly 3.7bn passengers took to the sky on commercial jets. Few would have given much thought to exactly why their flight was scheduled at the time it was. Even fewer know about the tussles between regulators and airlines over how landing and take-off slots are allocated.

For the past 70 years the business of thrashing out timetables at international airports has been the job of the Slot Conference, a semi-annual meeting of airlines and airport co-ordinators run by the International Air Transport Association (IATA), an airline trade group. The 141st meeting, held last week in Madrid to set next summer’s schedule, attracted over 1,300 representatives from 250 airlines and nearly 300 airports around the world. Sitting around tables (with one for each country’s airports) in a massive hall, airlines negotiate and reschedule their slots to maximise their network’s efficiency. It is like “speed dating for airlines”, says Lara Maughan, the conference…Continue reading

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Timelier provisions may make banks’ profits and lending choppier

IN THE first quarter of 2018 thousands of banks will look a little less profitable. A new international accounting standard, IFRS 9, will oblige lenders in more than 120 countries, including the European Union’s members, to increase provisions for credit losses. In America, which has its own standard-setter, IFRS 9 will not be applied—but by 2019 banks there will also have to follow a slightly different regime.

The new rule has its roots in the financial crisis of 2007-08, in the wake of which the leaders of the G20 countries declared that accounting standards needed an overhaul. Among their other shortcomings, banks had done too little, too late, to recognise losses on wobbly assets. Under existing standards they make provisions only when losses are incurred, even if they see trouble coming. IFRS 9, which comes into force on January 1st, obliges them to provide for expected losses instead.

Under IFRS 9 bank loans are classified in one of three “stages”. When a loan is made—stage one—banks must make a…Continue reading

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What annual reports say, or do not, about competition

What explains the remarkable strength of corporate profits and the sluggish growth of real wages in recent years? One explanation is that industries are getting less competitive. Work by The Economist found that two-thirds of American industries were more concentrated in the hands of a few firms in 2012 than in 1997.

Research by AXA Investment Managers Rosenberg Equities into the language used in American annual reports points in the same direction. Sherlock Holmes famously talked of the significance of the dog that did not bark in the night. It may be similarly important that companies refer to rivals much less than they did; usage of the word “competition” in annual reports has declined by three-quarters since the turn of the century. Business is less cut-throat than it used to be.

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The rich get richer, and millennials miss out

Early contender for the 2047 list

BUOYANT financial markets meant that global wealth rose by 6.4% in the 12 months to June, the fastest pace since 2012. And the ranks of the rich expanded again, with 2.3m new millionaires added to the total, according to the Credit Suisse Research Institute’s global wealth report.

The report underlines the sharp divide between the wealthy and the rest. If the world’s wealth were divided equally, each household would have $56,540. Instead, the top 1% own more than half of all global wealth. The median wealth per household is just $3,582; if you own more than that, you are in the richest 50% of the world’s population.

America continues to dominate the ranks of millionaires with 43% of the global total. Both Japan and Britain had fewer dollar millionaires than they did in June 2016, thanks to declines in the yen and sterling. Emerging economies have been catching up in the millionaire stakes; they now have 8.4%…Continue reading

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Fuelled by Middle East tension, the oil market has got ahead of itself

ONLY one thing spooks the oil market as much as hot-headed despots in the Middle East, and that is hot-headed hedge-fund managers. For the second time this year, record speculative bets on rising oil prices in American and European futures have made the market vulnerable to a sell-off. “You don’t want to be the last man standing,” says Ole Hansen of Saxo Bank.

On November 15th, the widely traded Brent crude futures benchmark, which had hit a two-year high of $64 a barrel on November 7th, fell below $62. America’s West Texas Intermediate also fell. The declines coincided with a sharp drop across global metals markets, owing to concern about slowing demand in China, which has clobbered prices of nickel and other metals that had hit multi-year highs. (In a sign of investor nervousness after a sharp rally this year in global stock and bond markets, high-yield corporate bonds also weakened significantly this week.)

The reversal in the oil markets put a swift end to talk of crude shooting above $70 a barrel, which had gained strength after the detention in Saudi Arabia of dozens of princes and other members of the elite, and increasing tension between the Gulf states and Iran over Yemen and Lebanon. The International Energy Agency (IEA), which forecasts supply and demand, said on November 14th that it doubted $60 a barrel had become a new floor for oil….Continue reading

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Flannery unveils his strategy to revive GE

“NUMBER one, cash is king…number two, communicate…number three, buy or bury the competition.” These rules were laid out by Jack Welch, a brash but brilliant former boss of General Electric (GE). The American industrial conglomerate, founded by Thomas Edison, has operations ranging from health care and aviation to lighting and energy. During Mr Welch’s tenure, from 1981 to 2001, his company’s market value rose from about $15bn to over $400bn. Today, it barely tops $150bn. Having fallen by more than two-fifths this year, GE is the worst-performing stock in the Dow Jones Industrial Average, a composite index that has risen by nearly a fifth since January 1st.

Jeffrey Immelt, Mr Welch’s amiable successor, violated all three rules. To be fair, he did steer GE through a sharp downturn in aviation following the September 11th 2001 terrorist attacks and unwound its risky financial arm after the global financial crisis. But on his watch GE’s core power business deteriorated to the…Continue reading

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What five years of Abenomics has and has not achieved

IN TOKYO’S Iidabashi district, north of the Imperial Palace, young salarymen and women gather after work to enjoy grilled chicken and a drink at Torikizoku, a chain of budget restaurants. They tap out their orders on touch-screen terminals, which the company has installed on many tables in an effort to economise on waiters, whose wages are hard to contain. Last month the company was forced to raise its price by over 6%, to ¥298 (about $2.60) plus tax, for two skewers of locally reared chicken yakitori. It was the firm’s first price increase in 28 years.

Chicken skewers are not commonly seen as a macroeconomic indicator. But Torikizoku’s decision exemplifies the underlying logic of “Abenomics”, a campaign to revive Japan’s economy, named after Shinzo Abe, its prime minister. His economic strategy aimed to stimulate spending and investment through vigorous monetary easing. That would create jobs, driving up wages. Higher wages, in turn, would push up prices. Success would be measured by the defeat of deflation, which had…Continue reading

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Allergan’s unusual legal tactic attracts political scrutiny

“BRAZEN” and “absurd”: Allergan certainly drew a reaction from American lawmakers when it transferred its patents for Restasis, a dry-eye drug, to the Saint Regis Mohawk Tribe in September. Last week a congressional committee held a hearing on the deal, which, if recognised as valid, risks undermining the American patent-review system.

As entities granted sovereign status, Native American tribes enjoy legal immunity and so, Allergan hopes, can ward off challenges to the patents by rival drugmakers. The tribe, which is based in New York state, wants to reduce its reliance on revenues from its local casino. It received $14m when it acquired the patents, and will relicense them to Allergan for a yearly fee of $15m.

Tribes are targeting other industries, too. The Mohawk tribe holds patents for SRC Labs, a tech firm, and says it expects to earn a “significant amount of money” by suing other firms for infringement. It has already sued Amazon and Microsoft. Another patent-holding company, owned by three Native…Continue reading

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Indian firms make the best of coerced do-goodery

CHARITY begins at home—or, if you are an Indian boss, in the boardroom. Since 2014 firms there by law must spend 2% of profits on corporate social responsibility (CSR), loosely defined as doing good in the community. After some griping, businesses are trying to make the best of their obligation, while keeping politicians happy by funding their pet projects.

The idea of compulsory charity had a mixed reception. Ratan Tata, who heads the charitable trusts that own much of Tata Group, India’s biggest conglomerate, was among those likening it to another tax on business. In fact, the law is more a nudge than an edict. Only large companies—those with domestic profits consistently over 50m rupees (about $780,000), or 5bn rupees in net assets, or turnover over 10bn rupees—are affected, and they can opt to give nothing, as long as they explain why.

In practice, most comply, at least in part. A study of listed firms by CRISIL, a credit-rating agency, found that over 1,100 firms…Continue reading

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Toutiao, a Chinese news app that’s making headlines

WHEN rumours swirled in August that Baidu, a Chinese online-search giant, was buying Toutiao, the scrappy news-aggregation platform reportedly quipped in response that reports had mistaken the buyer for the seller. The firm is proud with good reason. Toutiao’s growth since its launch in 2012 has been stellar: it says it has already drawn 700m users to the personalised newsfeeds on its smartphone app. Its valuation has shot up, to $22bn in its latest funding round (see chart).

Toutiao’s parent company, Bytedance, is definitely a buyer now. This month it snapped up Musical.ly, a lip-syncing video platform that has captivated American teens, for a reported $1bn. It looks like a good match. Musical.ly, based in Shanghai, is the first Chinese firm to build an app that has been so admired in the West; Bytedance, which has developed sophisticated artificial-intelligence (AI) technology to customise Toutiao’s newsfeeds, can provide it with winning algorithms.

Those algorithms are…Continue reading

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What is the purpose of tax reform?

IF MAKING America great again is the aim, you could do worse than bring back the economic growth rates of the late 1990s. President Donald Trump’s team reckons that the Republican tax plan making its way through Congress will do just that. “We are creating a model that creates economic growth in this country,” says Gary Cohn, the director of Mr Trump’s National Economic Council. Kevin Hassett, who runs the Council of Economic Advisers, reckons the bill should push growth above 4% per year.

Such heights are not beyond the realm of possibility, but if America reaches them tax reform will have little to do with it. That is not because of the specifics of the plan. Rather, it reflects an underappreciated reality: tax reform can accomplish many things, but raising long-run growth is not generally among them.

Most assessments of the Republican tax proposals, like most analyses of most tax plans, conclude their effects on growth will be small. The Penn Wharton Budget Model, a non-partisan public-policy initiative,…Continue reading

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ApprovedBusiness and financeFinance and economics

Criticism of index-tracking funds is ill-directed

INDEX funds were devised in the 1970s as a way of giving investors cheap, diversified portfolios. But they have only become very popular in the past decade. Last year more money flowed into “passive” funds (those tracking a benchmark like the S&P 500) than into “active” funds that try to pick the best stocks.

In any other industry, this would be universally welcomed as a sign that innovation was delivering cheaper products to the benefit of ordinary citizens. But the rise of index funds has provoked some fierce criticism.

Two stand out. One argues that passive investing is, in the phrase of analysts at Sanford C. Bernstein, “worse than Marxism”. A key role of the financial markets is to allocate capital to the most efficient companies. But index funds do not do this: they simply buy all the stocks that qualify for inclusion in a benchmark. Nor can index funds sell their stocks if they dislike the actions of the management. The long-term result will be bad for capitalism, opponents argue.

A second…Continue reading

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A German hardware giant tries to become an ultra-secure tech platform

Bosch mobilises

BOSCH is everywhere. It has 440 subsidiaries and employs 400,000 people in 60 countries. Its technology opens London’s Tower Bridge and closes packets of crisps and biscuits in factories from India to Mexico. Analysts call it a car-parts maker: it is the world’s largest, making everything from fuel-injection pumps to windscreen wipers. Consumers know it for white goods and power tools synonymous with “Made in Germany” solidity.

The company itself prefers to be called a “supplier of technology and services”, or “the IoT [internet-of-things] company”. On a hill overlooking Stuttgart, robotic lawnmowers whizz around its headquarters and a window displays dishwashers and blenders. Inside are signs of a company in transition: posters call on staff to rip off ties, celebrate “error-culture” and “just do it” opposite a quote from Robert Bosch, the founder: “Whatever is made in my name must be both first-class and faultless.”

The 130-year-old giant’s…Continue reading

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Japan’s top two lavatory-makers are at last making inroads overseas

WHEN staff at the Louvre in Paris head to the bathroom, the toilet lid opens as they approach, a warm seat heats their derrières, and, once done, their nether regions are washed and dried precisely. Selling the equipment is a coup for Toto, Japan’s biggest producer of “shower toilets”.

Toto and its rival Lixil carve up the Japanese market for fancy, multi-function loos between them. At home they have market shares of 60% and 30% respectively, according to Nomura Securities, a brokerage. Yet they have struggled to win foreign bottoms over to luxuries enjoyed in Japan for many decades.

Today 26% of Toto’s and 30% of Lixil’s revenues come from abroad (much of it from products other than shower toilets). The Japanese market is profitable, but their loos are already ubiquitous there (including in public facilities, from Tokyo’s metro system to remote hiking trails); the majority of domestic sales come from the renovation of private homes and hotels. And whereas Japan’s population is…Continue reading

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Trouble for the AT&T-Time Warner deal

In the eye of a storm

THE titans of media in America have decided this is an opportune moment to join together in mega-mergers, the better to take on the giants of Silicon Valley. The problem for them is that the Department of Justice (DoJ), and President Donald Trump himself, are less keen.

On November 8th reports surfaced that the DoJ is preparing to block a proposed $109bn acquisition by AT&T of Time Warner, owner of CNN, HBO and the Warner Brothers film studio—a deal that was announced a year ago and which had been expected to win approval by the end of 2017. The DoJ have reportedly told AT&T executives that to get the merger through they would have to sell off assets: either Time Warner’s Turner Broadcasting division, including CNN, which Mr Trump has repeatedly attacked as “fake news”, or DirecTV, the wireless giant’s satellite-TV business. Randall Stephenson, AT&T’s chief executive, said on November 8th he would not sell CNN to…Continue reading

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Publishers are wary of Facebook and Google but must work with them

IN RECENT months Google and Facebook have made changes that may escape the notice of most of their billions of users, but not of news organisations. Facebook began displaying the logos of publishers in some of its posts, so readers can identify the news source. And Google for the first time gave publishers the ability to control how many times the search engine’s users can visit news sites free of charge. Both will directly help papers to sell subscriptions.

To critics of the social-media giants, that might look like wolves offering to help the sheep while still feasting on the herd. The business of both Facebook and Alphabet, parent of Google and YouTube, is to occupy people’s time and attention with their free services and content, and to sell ads against those eyeballs. For them, quality journalism is just another hook.

Facebook calls its “News Feed” offering its most important product, but in recent years it has tweaked the feed in ways that de-emphasise actual…Continue reading

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America’s Republicans take aim at mortgage subsidies

IN THE 1980s Margaret Thatcher and Ronald Reagan were both proud of their efforts to expand home ownership. In Britain, Thatcher presided over a fire sale of state-owned homes to tenants. In America, Reagan deregulated financial markets and expanded mortgage lending. At the time both countries provided generous mortgage-related tax breaks, making it easier to flog homes to the masses.

Britain’s 1980s housing boom turned to bust; the mortgage subsidies that helped to fuel it were abolished. America still subsidises mortgages to the tune of $64bn a year, by allowing homeowners to deduct interest costs from their tax liabilities. But a tax plan unveiled by Republicans on November 2nd proposes to limit the subsidy.

Twelve European Union countries also include some form of mortgage-interest deduction (MID) in their tax code. The average European subsidy, however, is around a tenth of America’s—about 0.05% of GDP. The Netherlands is much the most generous, at 2% of…Continue reading

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Regulators begin to tackle the craze for initial coin offerings

“I’M GONNA make a $hit t$n of money on August 2nd on the Stox.com ICO.” Written in July on Instagram, these words made Floyd Mayweather, a boxer, the first big celebrity to endorse an “initial coin offering”, a form of crowdfunding that issues cryptographic coins, or “tokens”. Stox, an online prediction market, went on to raise more than $30m, some of which seems to have gone directly into Mr Mayweather’s pocket. Other VIPs, including Paris Hilton, a socialite, followed suit and endorsed ICOs. But this source of easy cash may now be drying up: on November 1st America’s Securities and Exchange Commission (SEC) warned that such promotions may be unlawful, if celebrities fail to disclose what they receive in return.

The endorsements and the SEC’s attempt to rein them in are the latest episodes of token mania. Virtually unknown a year ago, ICOs are now more celebrated than initial public offerings (IPOs), the conventional way of floating a firm. Over the past 12 months…Continue reading

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Activist shareholders take on the London Stock Exchange

Rolet: who knows?

ACTIVIST hedge funds like Elliott Management, Cevian Capital or The Children’s Investment Fund (TCI) are famed for pushing for change at the companies they buy into. A favoured tactic is to install a new chief executive at a floundering firm. So it is odd to find a fund lobbying for an existing boss to stay on, as TCI has done in a spat with the London Stock Exchange (LSE).

In over eight years at the LSE, Xavier Rolet has transformed it from a share-trading venue to a clearing and data-services powerhouse, through acquisitions such as Russell, an index-maker, and a majority stake in LCH, a clearing-house. His hope of merging with the LSE’s big German rival, Deutsche Börse, fell through, largely because of Britain’s vote to leave the EU. But Mr Rolet remains widely respected. So eyebrows were raised when the LSE’s announcement on October 19th that Mr Rolet would leave in 2018 gave no reason.

In a fiery letter penned on…Continue reading

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The Paradise Papers shed new light on offshore finance

THIS week was uncomfortable for a host of well-heeled figures. In the frame were U2’s Bono, America’s commerce secretary, Wilbur Ross, and Britain’s Queen Elizabeth, as well as some of the world’s most valuable companies, including Apple and Nike. All these, and many more, feature in the “Paradise Papers”, a trove of more than 13m documents, many of them stolen from Appleby, a leading offshore law firm. The International Consortium of Investigative Journalists (ICIJ) and its 95 press partners, including the BBC and the New York Times, began publishing stories based on the papers on November 5th. Dozens appeared this week, with more to follow after The Economist went to press.

The ICIJ’s last big splash, the Panama Papers in April 2016, shed light on some of the darkest corners of offshore finance. In contrast, many of the activities highlighted by this leak are legal. But they would be widely seen as flouting the spirit of national tax laws by exploiting the gaps that open…Continue reading

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ING, a Dutch bank, finds a winning digital strategy

GERMANY’S third-biggest retail bank has no branches. It is also Dutch. And it is highly profitable. ING-DiBa, an online bank owned by ING, the Netherlands’ biggest lender, looks after €133bn ($154bn) of deposits for over 8m customers. In a fragmented market—most Germans entrust their savings to small, local banks—that means a share of around 6%. ING-DiBa’s lack of branches keeps costs down, allowing it to resist charging for current accounts and offer savers a tad more than rivals, despite a recent cut; and it has won a name for good service in a country not renowned for it. While other banks struggle after years of ultra-low interest rates, ING-DiBa thrives. Its return on equity exceeds 20%.

ING as a whole is in fair shape, too. On November 2nd it reported net third-quarter earnings of €1.4bn, slightly more than a year earlier. The group’s return on equity was a healthy 11%, nearly two percentage points up. Since 2014 the number of “primary” customers (with an active current account and another product) has…Continue reading

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3G Capital, magicians of the consumer industry, need to learn a new act

OCCASIONALLY a business idea emerges that is so simple you cannot believe it works. Consider the five founders of 3G Capital, an investment firm. Warren Buffett co-invests with them and calls them “among the best businessmen in the world”. They use debt to buy consumer-product firms, then they revamp their brands and slash costs. In total, since 1997, they have launched $470bn of deals, through 3G Capital or earlier entities (for simplicity this article lumps these all together and calls them “3G”). That makes 3G the second most acquisitive organisation in modern history. It sells every Budweiser slurped, Whopper burger munched and bottle of Heinz ketchup squirted on the planet.

Yet despite its superb long-term record, 3G is losing steam. In the past two years its total portfolio has lagged slightly behind the S&P 500 index, Schumpeter estimates. Its two biggest firms, AB InBev, a beer giant, and Kraft Heinz, a food company, have returned 6% and 16% respectively, well behind…Continue reading

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Venezuela seeks the restructuring of its massive foreign debts

Maduro has a cunning plan. Maybe

INVESTORS have long seen a default on Venezuelan sovereign debt as a question of when, not if. Its bonds have been priced at levels implying imminent bankruptcy, but somehow the cash-strapped oil exporter has stayed afloat. Until now. On November 2nd Nicolás Maduro, the country’s authoritarian president, announced that he would order a “refinancing and restructuring” of foreign debt worth about $105bn. The prices of government bonds fell by up to half. Markets braced themselves for one of history’s most complex sovereign-debt renegotiations.

Mr Maduro’s brief statement was cryptic as to the concrete steps he will take. He invited “everyone involved in foreign debt” to talks in Caracas, the capital, on November 13th. Many creditors want a neutral venue. Moreover, Mr Maduro appears to have pre-emptively dashed any hope of a voluntary agreement by naming his vice-president, Tareck El Aissami, as head of his debt-restructuring committee. America’s Treasury…Continue reading

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The New York Fed’s president announces his retirement

APPLICATIONS sought for leading Wall Street post. Perks: lovely office in Italianate palace; large staff. Duties: important role in setting interest rates (some vaguely defined other responsibilities). Requirements: eligibility for highest-level security clearance; tacit support in Washington, DC. Desirable but optional: broad knowledge of banking.

This week the New York Federal Reserve Bank announced that its president, Bill Dudley, will retire next year. He will leave a mixed legacy. He is thought to have given important help to Janet Yellen, the outgoing chair of the Federal Reserve. But he also presided over a steep decline in his institution’s influence over the banks that used to revere and fear it.

Located in America’s financial centre, the New York Fed has powers not vested in the country’s 11 other reserve banks. Its president has a permanent seat on the Fed committee that sets interest rates. Its trading desk puts board policies into effect. And it is the regulator responsible for many of the world’s largest…Continue reading

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A massive trove of data on offshore transactions is leaked

IN APRIL 2016, the International Consortium of Investigative Journalists (ICIJ) dropped a bombshell. Its articles about the “Panama Papers”, a leaked trove of documents which had been stolen from Mossack Fonseca, a Panama-based law firm, sent shock waves round the world—felling the leaders of Pakistan and Iceland, leading to multiple arrests and pushing several countries to tighten laws related to offshore financial dealings. The revelations also caused a further hardening in public attitudes towards offshore finance, which had been souring since the global financial crisis.

Now the ICIJ and its 95 media partners around the world—including the BBC and the New York Times—are back with another cache of pilfered files, this time dubbed the “Paradise Papers”. This latest batch of revelations, the organisation’s sixth substantial leak investigation, began on November 6th and will be rolled out over a week. It shines light on offshore transactions linked to hundreds of wealthy clients of Appleby, a Bermuda-based law…Continue reading

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