Focus: Corporate debt and negative interest rates

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Updated 21 May 2020

Focus: Corporate debt and negative interest rates

What happened:

The US Senate has unanimously passed a bill calling for foreign companies to be barred from listing on US exchanges if they have not complied with the US accounting board’s audits for three consecutive years and/or are owned or controlled by a foreign government. The bill is aimed at Chinese companies and could lead to the delisting of Alibaba, Baidu and the likes. (The woes and NASDAQ delisting request of the Chinese coffee company/coffeehouse chain Luckin are not helpful in that context.)

It was noteworthy that both Republicans and Democrats supported the bill, which now has to pass the House of Representatives. The US China relationship seems to have morphed into a core theme of the US presidential election, with both the Trump and Biden campaigns trying to outdo each other in anti-Chinese rhetoric.

The dollar was caught between downward pressures driven by huge stimulus packages and the debate over negative interest rates and upward pressures fuelled by geopolitical tensions.

British pharmaceutical company AstraZeneca has received more than $1 billion from the US Biomedical Advanced Research and Development Authority (BARDA) for its research and development of a COVID-19 vaccine in conjunction with the University of Oxford.

European Purchasing Manager Index (PMI) numbers came in better than expected, but still paint a dismal picture. A PMI below 50 represents an economic contraction, whereas a number greater than 50 represents economic expansion. The euro area PMI in May came in at 28.7 for services and at 39.1 for manufacturing. In Germany the respective numbers were 31.4 and 36.8. France came in at 29.4 for services and 40.3 for manufacturing. The tendency for manufacturing indices to perform better than services PMIs reflects the fact that people are hesitant to use services while COVID-19 represents a threat. This is a trend we have seen in China, which was the first to come out of lockdown. It also indicates that economies which rely on services most may have a slower path to recovery.


The debate on negative interest rates continues: The Eurozone, Japan Switzerland and Norway are firmly in negative territory. Central banks in the UK and New Zealand are considering them reluctantly while the US Fed firmly rejects them. On one hand, negative rates are particularly challenging in countries where banks constitute the major monetary transmission mechanism, because they undermine the traditional banking business model. On the other hand, negative interest rates come in handy for highly leveraged governments and companies. There is also the argument supported by US president Donald Trump that negative interest rates help exports by lowering currency exchange rates.

We have seen companies issuing both investment grade and high yield debt. The rationale went beyond a commercial argument of refinancing debt at lower interest rates.

Both the ECB and the Fed are purchasing corporate bonds with their quantitative easing policies. The Fed has even ventured into junk bonds, if they are issued by so called fallen angels (companies that were investment grade before the pandemic). The ECB may eventually follow suit.

A key argument for companies issuing debt goes beyond the advantage of refinancing at lower rates and willing central bank buyers: Most issuers needed to shore up liquidity to get over the hump of forced lockdowns.

Where we go from here:

The German government and Lufthansa are said to be close to agreeing a €9 billion ($9.9 billion) rescue package for Lufthansa, securing the German government 25 percent of equity plus one share, giving the government a controlling minority. This may divide Europe into two camps: government -controlled airlines such as Air France/KLM and Lufthansa versus the free market airlines such as the IAG group, Ryanair and EasyJet. The latter are essentially penalised for having gone into the corona-crisis better capitalised.

US first time jobless numbers will be released later on Thursday.

China is moving to incorporate Chinese security laws into the Hong Kong’s Charter, a move which is bound to further exacerbate US–China tensions.


— Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources.
Twitter: @MeyerResources

UAE position on Palestine in line with Arab consensus, says diplomat

Ali Abdullah Al-Ahmed. (Photo/Twitter)
Updated 18 min 1 sec ago

UAE position on Palestine in line with Arab consensus, says diplomat

  • Emirati envoy: Israel deal ‘puts two-state solution back on the table’

PARIS: French President Emmanuel Macron hailed in a tweet the “courageous decision” of the United Arab Emirates to sign a peace treaty with Israel, and expressed his wishes that it will contribute to a just and lasting peace between Israel and the Palestinians.

Ali Abdullah Al-Ahmed, the Emirati ambassador to France, told Arab News-French edition that the decision of the Israeli government to annex Palestinian territory had already been taken and had preoccupied the international community since the signing of the Oslo agreement, and until a few years ago this problem was the keystone of the two-state solution.

Al-Ahmed said: “If the Israeli government executes its plans to annex the Palestinian territories then this means that the two-state solution should be forgotten and that we will be back to the situation that prevailed 30 years ago.”

However, he added that “we are convinced that this trilateral agreement between the UAE, Israel and the US as a principal actor, especially with the strengthening of the US presence in our region, will contribute in enhancing peace, security and stability in the region.”

Regarding Israeli declarations that annexation will only be suspended and not canceled, Al-Ahmed said: “There are no relations that begin in an ideal way, yet a step was made today when the Israeli government agreed to freeze annexation. It is definitely not a final solution, we will see what will comes next.”

However, the Emirati diplomat said: “The kick off of relations between the UAE and Israel opens the gates, and what will follow will not be confined to the political level but will equally cover the economic, technological and academic levels. It is highly possible that the tempo of the development of these relations will be faster. We will see.”

For Al-Ahmed, the return of the two-state solution to the negotiating table is undoubtedly an accomplishment. With regards to the rejection by the Palestinian authority of this agreement, the ambassador said: “It would have been more feasible for the Palestinian authority to thank the Emirati diplomacy, after all the decision of the UAE is a sovereign one that was already preceded by Egypt, Jordan and the Palestinians themselves.

“We do not negotiate in the name of the Palestinians and it is not up to us to do so. However, our position regarding the Palestinian cause is in line with the Arab consensus regarding Jerusalem and other parameters of Arab unanimity, we adhere to them and we do not relinquish them,” the Emirati ambassador added.

On whether the Emirati embassy in Israel would be located in Jerusalem. Al-Ahmed said: “We are in the beginning of establishing diplomatic relations, however, we will see how all this will progress in the coming days. We are still in the phase of telephone contacts through which the kick off of diplomatic relations that will determine all the details depends. The UAE has put conditions on this agreement and the US has accepted to put the two-state solution back to the table of negotiations.”

On whether the agreement between the UAE and Israel means that the Arab peace plan or peace initiative of late Saudi King Abdullah bin Abdul Aziz is no longer valid, Al-Ahmed said: “Surely not, as the King Abdullah initiative is based on the two-state solution, which is the essence of the initiative.”

On whether the Emirati-Israeli agreement aims at enhancing US President Donald Trump’s re-election chances, Al-Ahmed said that US voters are unconcerned with foreign politics, and this is well known, and that had the US not been the guarantor of this agreement, it would have never been achieved.

If the agreement was aimed at confronting Iran and Turkey in the region, Al-Ahmed said that diplomatic relations between the two countries have many factors, including social, political, and cultural ones, and that the UAE is convinced that Israel can benefit a lot from Arab countries, for the UAE can benefit from relations with Israel.

“We have already cooperated on the medical scientific level regarding the coronavirus pandemic, especially between Emirati and Israeli companies in matters of pharmaceutical research.”

Regarding the Arab country that will come next, the Emirati ambassador believes that if Israel wants to live in peace in the Arab region, and if the Arab states want a prosperous economy, then there should be agreements with other Arab states which serves the interests of both parties.