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Monetary policy and the Treasury, trust and the Troika and spotlight on the Senate Parliamentarian

Policy preview: monetary policy and the Treasury
Indications of government policy do not always come from ministers briefing journalists or from whispers in Whitehall – occasionally they come via the civil service’s job board. To that effect, earlier this month HM Treasury posted a call for applicants for a new role as the department’s Head of Monetary Policy. While the posting may seem anodyne, it in fact raises serious question about how Prime Minister Boris Johnson and Chancellor of the Exchequer Rishi Sunak view the independence of the Bank of England.

Monetary policy is traditionally the remit of central banks. Economic orthodoxy for most of the last century has held that central banks’ ability to set monetary policy independently of the government is crucial to ensuring the long-term economic stability. The thinking has long been that if governments had the ability to set interest rates, they would be motivated to do so in a myopic manner designed to boost their electoral performances, such as by slashing interest rates to stimulate growth ahead of elections.

The breakdown in the relationship between unemployment, interest rates, and inflation – which has failed to run at an average of 2 percent or higher in developed economies despite over a decade of near-zero interest rates – has left many economists scratching their heads. However, so long as serious deflation is avoided, there are not many political opponents of low inflation. Yet concerns abound about how the poorly understood nature of this relationship is impacting monetary policy, most clearly evidenced by the conclusion issued by the Independent Evaluation Office on 13 January that the Bank of England did not have an explanation for how its quantitative easing policy worked, hindering its ability to build “public understanding and trust” in the programme.

Given the centrality of quantitative easing to not only the UK’s response to the COVID-19 pandemic and its economic impact but that of every other major central bank, renewing research efforts regarding monetary policy is indeed something that the Treasury and other Finance Ministries should prioritise. While the QE that followed the global financial crisis failed to result in inflation, the government has a responsibility to not just assume it will continue to have a non-inflationary impact.

The pandemic portends a crisis driven by a downturn in the real economy, whereas the post-2009 economic impact was demonstrative of the financial economy’s ability to precipitate a crisis in the real economy. Modelling how monetary policy may respond – in the face of renewed inflation or if it continues to remain absent – will be central to developing the government’s decision on whether austerity or continued deficit spending is preferable in the pandemic’s aftermath. The Bank of England’s independence will not go away, but with monetary policy to set to remain the driving tool in shaping the economy, the Treasury official tasked with interpreting its impact will prove extremely influential.

Dollars and sense: trust and the Troika
The global container shipping industry stands in a remarkably healthy position as the rollout of a number of vaccines means there is an end to the COVID-19 pandemic on the horizon. After being caught up in market turbulence as the virus spread across the world in the first quarter of 2020, shipping rates recovered substantially in the second half of 2020. As an billions faced unprecedented lockdowns, one common theme emerged – they still wanted to consume even if they could not venture out or splurge on services.

The resulting demand has proven a boon to the shipping industry, which had faced a torrid decade in the aftermath of the global financial crisis. Global trade peaked as a share of GDP in 2008 and has not recovered even as the world appeared to have put the worst impacts of the global financial crisis behind it before the pandemic and the industry was hampered by overinvestment on extremely large container ships that proved less adaptable to the new economic paradigms that emerged. Dozens of major businesses filed for bankruptcy, leading to industry-wide consolidation.

Some 85 percent of global container shipping is now controlled by three shipping alliances. Maersk and Mediterranean Shipping operate an alliance responsible for roughly one-third of container shipping. China Ocean Shipping Company, France’s CMA CGM and Taiwan’s Evergreen make up another alliance, responsible for nearly another third. The tie-up between Hapag-Lloyd and Ocean Network Express, Yang Min and Hyundai Merchant Marine controls another 20 percent.

If the promise of vaccines bears fruit, these firms stand to benefit further. Little new investment into container shipping has been made from outside these alliances as financing has proven hard to come by and the capacity glut caused by the long time-horizon of ship-construction has only begun to fade away.

Meanwhile the demand for shipping is likely to grow further as manufacturers seek to prioritise optionality, constructing multiple supply chains to hedge against the risk of further trade wars. While such a scenario should spell a return to boon times for the industry, the sector’s consolidation raises the spectre of renewed scrutiny.

In 2017, the US Department of Justice launched an antitrust probe into the global shipping industry. It quietly dropped the investigation in 2019, a result of political pressure and concerns that action could further strain the impact of trade tensions. While such a new probe is not likely until the pandemic is in the rear-view mirror, expect regulators in Washington and elsewhere to re-examine the industry’s competitiveness over the coming years.

Power play: spotlight on the Senate Parliamentarian

The post of US Senate Parliamentarian rarely garners significant attention. The officeholder’s role is to interpret the Senate’s own standing rules as well as its ethics and practices. Only six people have held the post since it was introduced in 1935. The incumbent, Eizabeth MacDonough, has held the post since 2012 when she replaced Alan Frumin, under whom she had previously served as senior assistant parliamentarian. The 50-50 divide between seats held by Republicans and those held by Democrats in the Senate, however, will see the role take on a significance not seen in the 20 years at least until the 2022 midterm elections.

MacDonough is not seen as party-political. Appointed by then-Senate Majority Leader Harry Reid, a Democrat, she was retained in the post by Mitch McConnell after Republicans took the Senate majority in 2014.

MacDonough may have successfully navigated the increasingly poisonous political environment in the Senate in recent years, but her largest challenges are still to come. Perhaps the parliamentarians’ most influential role relates to the interpretation of the so-called Byrd Rule, a longstanding Senate convention that allows certain bills to be approved by a simple majority rather than the 60-vote threshold required to overcome a single senator’s filibuster. Legislation is only eligible for passage under the simple majority if its primary impact is on government outlays, typically over the next ten years, rather than policy.

MacDonough faced a handful of rebukes from those on the Republican party’s right wing in recent years as they sought to repeal the Affordable Care Act through such a simple majority, which she ruled against. However, the ruling that most portends events in the coming Congress was the approval, then denial, of a motion brought by Republican Senator Josh Hawley last June. She initially ruled in favour of a move that he had brought requiring a Senate vote on withdrawing from the World Trade Organzation last June, although it rested on a technicality. Yet two weeks later she reversed her position, after the senior Republican and Democratic Senators on the Senate Finance Committee shared a new analysis of the move.

Hawley has since become a household name in the past month for his vocal endorsement of attempts to stop the certification of Joe Biden’s win in the November 2020 election. He has refused to apologise for his perceived role in fomenting unrest at the Capitol on 6 January, having welcomed the crowd as it gathered outside Congress. Hawley and his allies are likely to further seek to challenge the Senate’s established practices, and potentially seek to politicise the parliamentarian’s role. The fact Democrats lack a substantive majority, relying on incoming Vice President Kamala Harris, to serve as the tie-breaker will only heighten the importance of MacDonough’s interpretations of the Byrd rule and other Senate procedures.

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The other transition deal, stage set for surge of sovereign lawsuits and the man reshaping Treasury’s tools

Policy Preview: The UK’s other transition deal
On 14 December, the UK Government released its much-awaited Energy White Paper, laying out a simultaneous pledge to seek a net-zero basin for the UK Continental Shelf by 2050 and the pioneering of “a new British industry dedicated to (carbon) capture and return under the North Sea”. No mean feat by any measure, and the debates on how to achieve this remains very much under wraps. Yet, the paper did give the Government one deadline, agreeing a ‘North Sea Transition Deal’ in the first half of 2021.

A more bankable date arguably is 1 November 2021, when the UN Climate Change Conference in Glasgow kicks off – a key event that Prime Minister, Boris Johnson, believes can be used to recast his global image. Regardless of timing, however, what the White Paper and other recent government statements have made clear is that the transition – deal or no deal – will be painful.

One area of hope has been the Government’s spending plans, particularly the £1 billion fund Johnson announced last month for establishing carbon capture, utilisation, and storage (CCUS) facilities in four “SuperPlaces” (the Government’s term). However, only one will be in Scotland, the hub of the UK’s existing offshore energy industry. The outlook for support for legacy industries there is poor. The White Paper explicitly states that, “Government support is in the context of our net zero target”. The only policy directly tied to the offshore fields is Government’s commitment to seeking the North Sea Transition Deal include an end all routine flaring by 2030.

The sole opportunity it discusses in depth, is making the UK oilfield services sector a leader in the decommissioning of offshore facilities, positively spinning the expectation the UK will “become the largest decommissioning market globally over the next decade”. Greenfield development is not on the cards, and just two days prior to the paper’s launch Johnson laid out plans to end state export financing for new crude oil developments. Nonetheless, the paper claims to recognise that any North Sea Transition deal will be a ‘quid pro quo’ between industry and Government.

Previous Conservative governments have already cut oil and gas taxes, including effectively eliminating the petroleum revenue tax and slashing the supplementary charge (SR) in 2015 and 2016, but there is little room to go. Cutting the SR would be ineffective at stimulating investment in the current environment. The white paper indicates that only non-fiscal support will be on offer, and that this will only be for those transitioning heavily away from their previous area of business. Whether the Government can extract such a hefty quo for such a potentially meagre quid, remains to be seen, however.

Dollars and sense: stage set for surge of sovereign lawsuits
The difficulty of pursuing foreign governments in domestic courts has long been a major hindrance to developing hard currency capital markets for emerging markets. But the idea of sovereign immunity in such spats has been steadily eroded – while over the last eight years, ever-riskier countries have been able to borrow dollars, euros and pounds out of London and New York. Infamously recalcitrant Argentina even issued a 100-year dollar bond in 2017, only to default again earlier this year. Sovereign credit markets have nonetheless remained frothy, with investors scouring opportunities for any real yield as Western interest rates are expected to remain at or near zero.

Advances in the enforceability of funds owed by uncooperative government creditors are rare, but often quite meaningful. The intervention of the late Judge Thomas Griesa in a group of hedge funds attempts to secure payment from Argentina following a previous dispute kept Buenos Aires frozen out of Western markets for years.

Many bond investors argued that the ruling strengthened emerging country debt markets. However, for non-bond investors, the ability to recover funds from governments when financing agreements go awry is more limited. Such investment disputes are typically heard by arbitration panels rather than by New York State and UK judges, as is the case with most bond spats.

Yet a recent legal settlement involving Guatemala has likely shifted matters slightly in such investors’ favour. On 3 November Guatemala missed a payment on a US$700m bond. Although it transferred funds for the payment to its custodian, Bank of New York Mellon, the bank told bondholders it was barred from making payment due to a restraining notice issued by the New York State Supreme Court. The court issued the order in response to a request from Florida-based firm TECO Energy, which secured a US$35.5 million judgement in its favour from the World Bank’s arbitration institute.

Guatemala protested the court’s order but by 24 November agreed to pay TECO, although it has not exhausted all appeals, even with the spat in its eleventh year. Put simply, Guatemala wished to avoid any blot on its heretofore spotless bond payment record lest it affect its ability to tap capital markets in the future. The process TECO took was rather simple by the standards of sovereign litigation. It secured an order from a D.C. court upholding its arbitral victory, then registering that with New York State Supreme Court, resulting in the restraining notice.

While there are very few countries in default on their foreign bonds at present, Guatemala is one of many countries entangled in lengthy arbitration disputes. We expect the New York State Supreme Court will soon face a barrage of applications for restraining notices from investors hoping to mimic TECO’s success.

Power play: the man reshaping Treasury’s tools
US President-elect Joe Biden’s nomination of Adewale ‘Wally’ Adeyemo as Deputy Treasury Secretary signals the agency’s international role is only likely to grow more activist. Adeyemo has a low public profile, but is a stalwart of the Democratic elite. He most recently served as the first President of the Obama Foundation. Before that as Deputy Chief of Staff to Treasury Secretary, Jack Lew, before concurrently serving as Elizabeth Warren’s Chief of Staff at the Consumer Financial Protection Bureau and as Deputy National Security Advisor, holding the International Economics Brief. Towards the end of the Obama Administration, he also served as lead negotiator for the Trans-Pacific Partnership and as presidential representative to the G7 and G20.

Adeyemo is tasked with overseeing a review of sanctions policy and will oversee the elements of the US Treasury that relate to its role in international affairs. If confirmed by the Senate, Adeyemo will essentially be the Biden Administration’s point man for ‘geo-economic’ policies, or the use of economic policies to affect geopolitical goals.

Adeyemo’s experience and writings provide an indication of the course he is likely to take. In the negotiations for the TPP, it was Adeyemo who focused on the inclusion of currency manipulation rules, though this was largely abandoned even before US President, Donald Trump withdrew the US from the negotiations. He was a key figure in shaping sanctions both while serving under Lew at the Treasury and in liaising the effort to respond to Russia’s invasion of Ukraine in 2014 in his dealings with the G7 and G20.

Both in and out of the White House, he has also focused on China, and been an advocate of the argument that the biggest threat to Beijing’s rise is its still-maturing financial market. During his 2016 Senate confirmation hearing, he took a relatively soft line on China when asked about his view on the role of the Committee on Foreign Investment in the United States (CFIUS). But the Trump Administration has since thrown up far more barriers to Chinese investment, and it is unlikely the Biden Administration will reverse many of these, if any. Biden’s nominee for US Trade Representative, Katherine Tai, further supports the belief that the Biden Administration will continue to take a hard line on Chinese investment. Adeyemo will ultimately determine how the Treasury supports such policies.

Do not expect any major surprises from Adeyemo’s sanctions review. The new Administration is not going to reverse the Trump Administration’s acceleration of sanctions. It will instead adjust its focus, from unilaterally blacklisting individual firms to working with allies to target China’s relations with the global financial system. Policy will be slow to emerge, and measured, but Adeyemo’s focus will be on limiting China’s ability to become a lynchpin of the global financial system. Given Beijing’s expansive lending abroad in recent years, however, the effort will prove extremely challenging.

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