BusinessDay 15 Feb 2018

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Thursday 15 February 2018 FT FINANCIAL TIMES C002D5556 BUSINESS DAY A1 World Business Newspaper Iran holds 100 traders and freezes accounts in dollar crackdown Brussels eyes corporate tax to fill 15bn Brexit hole in EU budget Juncker’s warning to member states sets scene for hard bargaining in negotiations JIM BRUNSDEN AND MEHREEN KHAN Brussels is urging EU leaders to consider radical options such as raiding corporate tax receipts and money raised from selling carbon emission permits to fill a €15bn a year budget hole left by Brexit. The departure of the UK, the EU’s third-biggest net contributor to the budget in 2019, coupled with the need to find more money for priorities such as border control and joint defence, mean negotiations are likely to be even more poisonous than previous EU tussles over money. Jean-Claude Juncker, the president of the European Commission, warned EU governments, whose leaders will discus the issue next week, that they faced stark choices over how to finance the bloc’s next budget, which runs from 2021 to 2027. “I think the member states are going to have to rethink things,” Mr Juncker said. “Some member states don’t want to pay more but they want to do more. Other member states want to receive more,” he said. The most novel idea for fresh revenue-raising in Wednesday’s 22-page commission paper would involve siphoning a portion of corporate tax receipts from national treasuries to the EU’s common pot. The plan is linked to EU proposals to harmonise how nations calculate companies’ taxable profits but does not involve imposing a single EU corporate tax rate. The commission believes the levy could bring in between €21bn and €140bn over the seven-year life of the budget. Another plan involves raiding the money that governments collect from Asset managers worry safeguards are being eroded, leaving them more When European bond investors tired of private equity firms and the law firms they employ watering down key protections in junk-rated debt, they turned to the Association for Financial Markets in Europe. Influential asset managers such as AllianceBernstein and Schroders wrote a public letter to the board of are sensitive to changes in interest rates and are believed to benefit in a higher rate environment as it tends to boost their net interest margin — the difference between the rate banks charge for loans and the yield they pay on deposits — a key driver of profits. Meanwhile the Dow Jones Industrial Average, which had declined as much as 0.6 per cent, was up 0.1 per cent to 24,670.21 and the Nasdaq Composite, which had declined as much as 0.5 per cent, climbed 0.9 per cent to 7,071.29. Markets initially turned lower after data this morning showed that inflation surpassed expectaissuing CO2 permits to airlines, energy companies and other polluters. The permits are issued under the EU’s Emission Trading Scheme, but fees generated from the cap-and-trade system for curbing emissions are collected by member states. Brussels estimates it could raise between €7bn and €105bn. A further option involves using the profits the European Central Bank generates from printing money, a revenue known as seignorage. This could raise up to €56bn over the next seven years. The budget is financed through a combination of direct national contributions and what is known as “own resources”, a reference to income from sources such as customs duties and a share of value added tax receipts. But Brussels has longstanding ambitions to use a wider variety of tools to raise EU-wide revenue and increase the overall size of the budget. It is hoping that Brexit provides an opening to convince sceptical governments. “The commission is fully committed to modernising and streamlining [the budget] where possible,” the document says. “However, a willingness to look with an open mind at the resources needed to turn new priorities into tangible results will also be required.” A number of countries including the Netherlands and Austria are vehemently opposed to increasing national contributions and want the common pot of cash to shrink, not grow, after Brexit. The 2014-20 budget totals about €1tn. In terms of cuts, the paper looks as options ranging from no change to slashing spending by 30 per cent in areas such as the common agricultural policy and the EU’s sprawling system of regional aid funds. Tensions over junk bond covenants start to boil over ROBERT SMITH Page A3 AFME’s high-yield division — the closest thing the $400bn European junk bond market has to an industry trade body — expressing their dismay. These investor members of AFME took particular aim at the deteriorating quality of covenants — important clauses that restrict companies from taking reckless actions such as raising too much debt. That was in 2015. Today the quality Continues on page A2 Defiant Jacob Zuma denounces ANC action to remove him South African president refuses to quit on eve of no-confidence vote in parliament South African president Jacob Zuma defiantly rejected an order by the African National Congress to resign, insisting he had done nothing wrong and describing the ruling party’s demands as “very unfair”. “I need to be furnished on what I have done [wrong] and unfortunately that hasn’t been done,” Mr Zuma told South Africa’s state broadcaster on Wednesday. Asked if he would resign, Mr Zuma said: “No, the manner in which it has been taken, there is too much of a rush.” In a long, rambling interview, he added that he was open to further discussions. “We are being plunged into a crisis that I feel some of my comrades may regret,” he said he had told ANC officials. Mr Zuma’s first public comments in more than a week came as efforts to remove him from office intensified. He spoke shortly after the ANC announced it would back a no-confidence vote in parliament on Thursday as it moves to force the scandal-tainted president from office. The unprecedented decision by the ANC to support a motion put for- Wall St reverses losses as financials, tech rise US stocks were back in the black by mid-morning, all but shaking off jitters brought on by data that showed a stronger-than-expected rise in inflation earlier on Wednesday. The S&P 500, which had declined as much as 0.5 per cent, was up 0.3 per cent to 2,672.29. Financials and technology both led the benchmark index higher, up about 0.7 per cent each, while real estate and utilities — sectors that act like bond proxies — led the declines, down 1.5 per cent and 0.9 per cent, respectively. Banks Investing: Activism enters the mainstream Jean-Claude Juncker will tell leaders of EU governments that they face stark choices © AP JOSEPH COTTERILL MAMTA BADKAR Page A4 ward by the opposition comes after Mr Zuma defied his party’s order to go. In another sign of how the net is closing on Mr Zuma and his allies, officers of the Hawks, a police anti-corruption unit, raided the home of the Gupta business family on Wednesday. The Guptas, who are long-term friends of the president and developed close business ties with one of his sons, are at the centre of graft allegations. Anger about corruption and the Guptas’ alleged influence has been one of the main factors behind the ANC’s push to remove Mr Zuma and make way for Cyril Ramaphosa, the deputy president. The dawn search of the Guptas’ Johannesburg residence underlined the collapse of Zuma’s influence since Mr Ramaphosa defeated the president’s preferred candidate to become leader of the ANC in December. Mr Zuma was accused of using the Hawks and state prosecutors to intimidate his political foes, while in effect allowing allies to act with impunity. A spokesman for the Hawks said three people were arrested in the raid and two others were due to turn themselves in. Ajay, Atul and Tony Gupta are accused of using their friendship with Mr Zuma to win state contracts and influence political appointments. A former deputy finance minister alleged that members of the family offered him the Treasury’s top job and R600,000. The Guptas and Mr Zuma have repeatedly denied any wrongdoing. Local media reported that at least one Gupta brother and a family associate were arrested. But a family lawyer told Reuters none of the brothers had been detained. The ANC formally ordered Mr Zuma to resign on Tuesday, but the president has yet to respond. Although no party member has ever refused an order by the ANC to leave a state post, the instruction has no legal force because Mr Zuma was elected by parliament. Mr Zuma said he had offered party officials a timeframe to step down in June and Mr Ramaphosa had accepted it. But he said that in subsequent discussions ANC leaders, including the deputy president, had changed the deal. “It’s the first time I feel a decision is not right and I disagree with it. If you want to recall, then you recall,” he said, using the ANC term for sacking party members from state posts. “It is being forced on me now . . . I think it’s a kind of an ANC where I begin to feel there’s something wrong here.” tions for a second straight month, triggering nervousness the uptick in price pressures could force the Federal Reserve to accelerate its pace of tightening. However, investors appeared to shake off those concerns by late morning trade. Meanwhile, the yield on the US 10-year Treasury, was up 4.2 basis points to 2.871 per cent, while that on the more policy sensitive 2-year was up 4.7 basis points to 2.151 per cent. Yields move inversely to price. Elsewhere, the dollar index, a gauge of the buck against a basket of peers, was down 0.5 per cent to 89.33.
A2 BUSINESS DAY C002D5556 Thursday 15 February 2018 FT NATIONAL NEWS Greece’s new bond issue trading underwater amid wider market turmoil Eurozone periphery debt hit by wider market moves KATE ALLEN Investors who bought Greece’s latest bond last week are already nursing paper losses. The seven-year bond priced at a yield of 3.5 per cent on Thursday, but the €3bn paper is now trading at 4.19 per cent. Yields rise when prices fall. The timing of the deal was hit by market turbulence last week, with Greece naming bookrunners on the Monday but, after markets shifted on Tuesday, it waited until Thursday to price. The yield on Greece’s 10-year debt has also risen, up 80 basis points in the past week to 4.47 per cent. To be fair to Greece, the uptick in its yields does not reflect a fundamental change of views in the market about its prospects. Rather it is simply the casualty of the sell-off in global sovereign bonds in recent days, in response to strengthening economic signals. Spain’s 10-year bond yield has risen 13 basis points in the past week, to 1.51 per cent, for example. But with other countries’ yields also moving upwards, the risk premium investors pay for Greek debt is still low in historical terms. Greek 10-year yields are 374 basis points over the equivalent German bond, which is effectively the eurozone’s risk-free rate. The spread is around the same level seen in mid-December, before the recent market moves. Greek bonds are less frequently traded than those of other eurozone sovereigns, meaning price movements can be more pronounced. “Greece has underperformed [in the secondary market],” one sovereign deals banker said. “But it is really not that much when you recall that Greek debt has tightened by hundreds of basis points in the last year.” Tensions over junk bond covenants start to boil... Continued from page A1 of these covenants in a market tapped by the likes of French telecoms conglomerate Altice and UK sports car maker Aston Martin is even worse. Asset managers such as pension funds are worried that whittling away these safeguards will leave them more exposed to losses when the credit cycle turns. And in a sign of the tensions straining the market, these asset managers are leaving AFME’s high-yield division in droves. Mainly funded by banks and law firms, the industry trade body had previously let investors join free of charge in order to foster a dialogue with the buyers of the debt. But after AFME said in October that would it start charging membership fees to investors, the majority of high-yield investors are exiting, according to people familiar with the matter. The new £7,500 annual fee for investment firms is a fraction of the amount charged to banks and law firms, but several investors told the FT that they were unwilling to pay given the lack of improvement on covenants in an increasingly overheated market. “[Investors] vent after something particularly egregious happens and then we hear some nice words about how everyone is going to play ball in future,” says one high-yield fund manager who declined to be named and whose firm is leaving. “But nothing ever changes.” While AFME has no regulatory oversight, this month it published industry-wide guidelines designed to “maintain and improve business practices” in the junk bond market. AFME’s chief executive Simon Lewis noted the new membership cost provides access to both the highyield and securitisation divisions of the trade body. “The investor membership category has been on a complimentary basis since AFME was formed in 2009, so we decided it was fair to introduce a modest annual membership fee for the services provided,” he said. “AFME very much values the participation of its investor members and we of course want to engage with as many of those members going forward as possible.” Over the past two years, protections in bond deals used by private equity companies to fund their takeovers have weakened dramatically, according to data from research firm Debt Explained’s “Aggressive Covenant Term Scoring” system. “The deterioration of covenants is really being driven by private equity sponsors and their law firms,” says Thomas Ross, a bond portfolio manager at Janus Henderson. “Often the banks themselves are not actually aware of some of the nastier terms in the deals they are selling.” Flush with cash after record fund raisings, private equity firms have sought increasingly aggressive debt terms to maximise their potential future profit from corporate buyouts at the expense of bondholders. US president Donald Trump’s stimulus is robbing Washington of latitude to counter the next recession © AP Where is the Tea Party when you need it? Republican hawks are no longer exercised by yawning federal deficits EDWARD LUCE The Tea Party is dead. Donald Trump just staged the funeral rites. The rebellion against public spending lasted less than a decade. Having repeatedly threatened a US default during Barack Obama’s presidency, Republican hawks have meekly switched to the “deficits don’t matter” school. Democrats lack any such stomach for brinkmanship. They are too ambivalent to stand in the way of Mr Trump’s bonanza. What would liberals call their fiscal rebellion? The soya latte with a dusting of hazelnut party? In contrast, Mr Trump stands for nothing but red ink. He inherited a US fiscal deficit of $587bn in 2016. By next year it will have doubled to $1.2tn — or more than 5 per cent of gross domestic product. If the tax cuts passed in December are made permanent, which is likely, America’s budget deficit will exceed $2tn in less than a decade. US public debt, meanwhile, will soar to its highest levels since the second world war, at more than 100 per cent of GDP. Normally it would take a deep recession to do this to public finances. But Mr Trump and the ex-Tea Party are pulling it off in the midst of strong growth. Barack Obama inherited a ballooning deficit in 2009 after the financial meltdown. He passed a $835bn stimulus to help rekindle a nosediving economy. That helped the US to recover faster than almost any other western country. It was counter-cyclical, as fiscal policy ought to be. When the private sector is saving, the public sector should spend — and vice versa. The Tea Party had it the wrong way round. It was born in early 2009 in opposition to Mr Obama’s stimulus and a modest plan to help bail out people who could no longer afford to pay their mortgages. It then paralysed fiscal policy for Mr Obama’s remaining time in office. For eight years no federal budget was passed. Last week’s $320bn spending boost came with the first new budget since 2010. At several points the Tea Party held the US sovereign ceiling hostage to spending cuts, triggering a downgrading of America’s credit rating. It also produced the so-called sequestration — a cap on spending that was finally lifted last week. As a result, the US recovery was more tepid than any in its postwar history, though less tepid than that of the eurozone, which was held back by its own balanced budget Tea Party in the form of Germany. We are eight years into the US business cycle, which is close to the historic average. It will end sooner or later. Now was the time to rebuild America’s firepower. Yet the Tea Party chose this moment to surrender its rectitude. In December, Congress passed a tax cut that will add $1.5tn to US public debt. There were a couple of good things in the bill, including a cap on mortgage interest deduction. But the tax cut was unfunded and misdirected. It will widen America’s yawning income inequality. Once the temporary middle-class tax cuts expire, the lion’s share of the gains will go to the top 1 per cent. Mr Trump’s Republicans are thus tempting fate on three fronts. First, they are goading the US Federal Reserve to raise interest rates faster than it otherwise would. The market is already pricing in three rises this year. That will look conservative if Mr Trump’s tax and spending stimulus leads to signs of overheating. Doubtless Mr Trump will want Jay Powell, the new chair of the Fed, to leave the punchbowl in place while the party is going. But Mr Powell must establish his credentials with the markets. If Mr Trump interferes with the Fed’s independence it could cause another equity market sell-off. Second, the Trump stimulus is robbing Washington of latitude to counter the next recession. It is worse than it looks. Unlike the last time round, the Fed’s scope to bail out the economy is limited. It cannot cut interest rates much from their present level of 1.5 per cent — even if it adds another percentage point to the rate before the next recession. Nor does the Fed have much room to keep the markets afloat if there is another meltdown. At almost $5tn, its balance sheet is bloated. One of Mr Powell’s priorities is to wind it down. Public spending would have to take up more of the slack. But Mr Trump is busy reducing America’s margin for error. Which brings us to the third danger — the dollar’s status as the world’s reserve currency. A former French president once described the dollar’s role as an “exorbitant privilege”. But there is no law that makes the dollar’s primacy eternal. It is based on global confidence. Mr Trump is taking big risks with that trust. It is a pity the Tea Party expired just when it might have been useful. Trump lawyer paid porn star out of his own pocket Michael Cohen says $130,000 ‘private transaction’ unconnected to US president DEMETRI SEVASTOPULO Michael Cohen, a lawyer for US President Donald Trump, has admitted paying $130,000 to a porn star named Stormy Daniels who claimed to have had an affair with Mr Trump in 2006. Mr Cohen, a former top Trump Organization executive who remains a personal lawyer to Mr Trump, told the Financial Times that he used his own money to pay Stormy Daniels, whose real name is Stefanie Clifford. He said it was a “private transaction” that had no connection with the Trump Organization or the Trump presidential campaign. Mr Cohen, a hard-hitting lawyer known to some as “Fido”, has previously denied that Mr Trump had a sexual relationship with the porn star. His statement, which was first reported by the New York Times, was the first admission that anyone connected to the president had paid any money to Ms Clifford. The Wall Street Journal reported last month that Mr Cohen made the secret payment to Ms Clifford as part of a deal that barred her from discussing the relationship, which allegedly occurred in 2006 — the year after Mr Trump married his wife Melania. “In a private transaction in 2016, I used my own personal funds to facilitate a payment of $130,000 to Ms Stephanie Clifford. Neither the Trump Organization nor the Trump campaign was a party to the transaction with Ms Clifford, and neither reimbursed me for the payment, either directly or indirectly,” he said. “The payment to Ms Clifford was lawful, and was not a campaign contribution or a campaign expenditure by anyone.” The payment was reportedly made after Ms Clifford began talks with ABC television to make an appearance to discuss Mr Trump who was then the Republican candidate. Common Cause, a watchdog group, asked the Federal Election Commission and Department of Justice, to investigate whether the payment had broken campaign finance laws. Mr Cohen said the allegations in the complaint — that he had facilitated an “excess, in-kind contribution” — were “factually unsupported and without legal merit”. He stressed that he was a long-term lawyer to Mr Trump who would always try to help his client. “Just because something isn’t true doesn’t mean that it can’t cause you harm or damage,” Mr Cohen said. “I will always protect Mr Trump.”
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